The End of Venezuela?

Geopolitical strategist, Peter Zeihan, posted this yesterday morning. 

 

United States forces have captured the president of Venezuela, Nicolas Maduro, in the capital of Caracas.  Peter suggests that this event marks the beginning of the disintegration of what is left of the country... 

 

 

I got all sorta questions.

 

If you watched Telemundo last night - Venezuelans were celebrating.  They appeared ecstatic that Maduro is gone.  How could that possibly mean the beginning of the end?   If Peter believes Venezuela was already a dead state and where civilization is going to disintegrate, then wouldn't this action be a positive one as it provides Venezuelans an opportunity to turn things around?  It might be more like the beginning of Venezuela as a functional state.  

 

The military operation was nothing less than a spectacular tactical success.  Yet, what is the strategy to follow?  Is there a plan, some sort of architecture to manage an orderly transition?​  Or will this be a nation building mission with a vague and nebulous end result?  

 

Venezuela could install opposition leader and Nobel Peace Prize winner Maria Corina Machado; whom Maduro didn't allow to take office and Trump has also dismissed out of hand. 

 

It will be interesting to see where things are in one month, three month and six month intervals. 

 

And ask yourself this.  What gives the United States the authority to attack another country and remove their leadership?  

 

Who is next?

 

Mexico or Greenland? 

 

You Read It Here First

 

Yup, sometimes the king of bad predictions finds a truffle.  I wasn't wrong after-all.

You read it here first

I suppose we'll have to see what comes on Sunday, Monday and thereafter. 

 

They stole our oil, and we'll be selling large amounts of oil to other countries.

- Donald J. Trump  

Price At The Pump

While out running errands today I gassed-up the Missus' Honda and paid a whopping $2.299 per gallon for unleaded regular.  Full disclosure, I used a BP/AMOCO rewards card saving 15 cents a gallon at the pump and also good for all sorta cash back on other purchases like groceries, Fleet Farm, restaurants or Costco stuff.  The card is free and everyone should have an rewards program in their gas fueling protocol to bring the everyday price per gallon even lower.

You're probably thinking, why are prices lower anyway?  It depends who you talk to.  If you speak with an economist the answer is supply.  The world oil market is awash in crude oil and as a consequence the price at the pump has fallen.  If something were to change; either on the supply side or on the demand side it will impact the price for good or bad.  

If you talk to a MAGA idolater it is because the president controls the price at the pump.  Just like magical wishful thinking the president can dial it up or down at will.  I'm not making this up.  I can think of six people I am acquainted-with on a personal basis who believe this like it was an article of faith.  Oh well.

The bottom line is this is a great time to be a consumer and not so much if you operate an oil services company or energy company.  Persistent low prices over extended periods of time create a disincentive to exploration and drilling which catches-up to supply, eventually.  

Learn more about the risks and opportunities here...  

Intentions

Sniff, sniff.  Do you smell what I smell?  

Yup. 

Profits.  

Venezuela is teetering at the brink and there is money to be made.

The first whiff of this has been what's going on for quite some time in the markets with Venezuelan bonds.  Prices of Venezuelan debt securities; including bonds that have been in default since 2017 have doubled in price since the start of the year.  Because they're garbage that's not saying much, yet Wall Street is betting that the Trump administration may be successful in ousting Nicolás Maduro and replacing his government with one likely headed by - drum roll please - opposition leader and Nobel Peace Prize winner Maria Machado.  If successful, this could possibly right the Venezuelan economic ship, lead to debt restructuring and a big payout to bond speculators.

The second whiff is that this is more about oil and little to do with drug smuggling.  All of this business of targeting purported narco terrorist drug running boats like a video game is another Trumpian bright shiny object.  Both a distraction and mechanism to apply pressure on Maduro.  Evidence of this you ask?  First-off, fentanyl is made with precursors from China and having been manufactured in Mexico comes to America by land borders; namely Mexico.  Secondly, cocaine comes from Columbia, Peru and Bolivia as a consequence of coca leaves being grown in Andean nations.  Venezuela has little to do with either fentanyl or cocaine.  And if the Navy interdicted and boarded the boats, summarily executed everyone on board and then sank the boats, bodies and cargo the net result is unchanged.  The hi-tech, standoff nature of these strikes doesn't reduce the horror of the policy.  

It is wrong.

The third whiff is that Donald Trump doesn't want to be bothered by many things including affordability issues for working families and cares little about the drug trade.  Evidence of the latter is his absolute pardon of former Honduran President Juan Orlando Hernández.  You know, the guy tried in an American court and sentenced last year to 45 years in U.S. prison for helping drug traffickers to safely move hundreds of tons of cocaine north through his country to the U.S.  Yes, that guy, the Cocaine Kingpin and wing man to the Sinaloa Cartel's leader Joaquín Guzmán Loera, alias 'El Chapo'.  Consider what my Libertarian survivors at the Cato Institute have to say on the subject.

I'm not particularly fond of conspiracy theories but much of this isn't passing the smell test.  What I know for sure is that Donald Trump has spent a lifetime running various hustles, grifts and scams; and the position of the Office of the President is a once in a lifetime opportunity to enrich himself and his family.  Consequently, a pardon to anyone may result from millions upon tens of millions to hundreds of millions of dollars washed by means of untraceable Trump Meme Coin, bond profits as a result of regime change and future oil revenues as the cherry on top.  

Winning the drug war and building Latin American democracies have nothing to do with it.  Our government has a long and sordid history of failing at both.

To be fair, I also have a sketchy record of predictions; nevertheless, Latin American leaders such as Columbia's President Gustavo Petro suggest that - Oil is at the heart of the matter.  And Venezuela possesses the world's largest proven oil reserves.

Data shows estimates of proven oil reserves for 2025  

Source: Oil & Gas Journal

Moreover, Trump's candidness is usually a clear insight into his intentions.  In September of 2016 nominee Donald Trump said repeatedly the United States should take Iraq's oil as the spoils of war.  

At a 2023 political rally Donald Trump lamented in a speech that his first administration had been close to 'taking over' Venezuela for its oil reserves.  Venezuela. How about we're buying oil from Venezuela?  When I left, Venezuela was ready to collapse.  We would have taken it over.  We would have gotten all that oil.  It would have been right next door.    

Trump's administration has previously used sanctions on the Venezuelan state oil company -  Petróleos de Venezuela - (PDVSA) as a tool to apply pressure, at times revoking or reissuing licenses for U.S. companies like Chevron to operate there.  Naturally, internal political instability, mismanagement, international sanctions along with the built-in inefficiencies of a state-run enterprise in a socialist country has resulted in wide-reaching problems requiring complex arrangements with foreign firms like Chevron to operate joint ventures under restrictions imposed by both Venezuela and the U.S.  

Notably, U.S. refiners are expertly-equipped to process Venezuela's heavy, sour crude and the country's location makes it a strategically valuable resource as with the passage of time our own domestic production will likely level-off.

And because I hold any number of energy producers as a direct shareholder, including Chevron, this tangent has caught my interest.  Besides, if Venezuela cannot someone has to do it. 

The Trump administration has officially framed its actions - including a military build-up that includes moving roughly fifteen percent of our Navy to the Gulf of Mexico - as an effort to stop drug trafficking and illegal migration from Venezuela.  This complex mix of national security concerns are likely superseded by the President's own comments and equally complex economic interests related to Wall Street and Venezuela's oil wealth.  

Seems to me that at first blush MAGA world seems to have embraced and endorsed regime change and the profits that will undoubtedly follow by means of military force; or at a minimum, the threat thereof.  

Who knew?

I'm willing to be wrong about all of this.  Time will tell.....

Break Even

Oil markets are once again gripped by volatility as OPEC+ proceeds with its third production hike in as many months—adding 411,000 barrels per day in July—while prices linger near $65 per barrel.

Here’s an examination of the economics of U.S. shale.

It’s not as simple as Drill Baby Drill.

First-off, government doesn’t drill for oil and gas; energy companies do.

Secondly, government doesn’t set the price of a barrel of oil; world markets do.

And because business has to turn a profit it is important to focus on the price levels needed to keep existing wells running and justify new drilling. 

Is It Only The Economy, Stupid?

A variation on the title of this post was coined by strategist James Carville as a missive to campaign workers leading up to Bill Clinton's successful 1992 presidential campaign against incumbent George H. W. Bush.  I've written about the subject many times over the years.  Is it only about the economy?  Or is there more?  I would postulate that it is the economy and much  more.

Tomorrow Donald J. Trump will be sworn-in as America's 47th President.  Who, in the lead-up to the festivities, would tell you that he alone can fix our country's hellscape of lawlessness, disorder, economic collapse, inflation, energy dependence, mobocracy, crisis and chaos.

Perhaps you share that view.  Not me; I would submit that by any rational measure of the condition of the United State of America the president-elect will be taking over a country in rather decent condition. Let's take a walk thru the relevant numbers.

Contrary to what the president-elect will tell you drug overdose deaths are down and the manufacturing sector has created more jobs than at any time in the last decade and a half.  Although some prices remain stubbornly high; inflation is down significantly.  Inasmuch as federal largess under both Trump and Biden contributed to the expansion of the money supply Trump now shoulders the burden to reduce the cost of my groceries.  Fair is fair. 

December delivered an overall blowout jobs report and wages are up and continuing to rise, all the while unemployment is at levels before the COVID shitshow hit the fan.  Domestic energy production of crude oil and natural gas are at record levels and we are now the global leader in production and export of crude oil.  Meanwhile, a gallon of regular unleaded, around here anyway, will set you back less than $2.50.  We are awash in an embarrassment of energy and production.

Nevertheless, it goes beyond the economy.  Illegal immigration is belatedly, but at long last down and we've found ourselves with the lowest violent crime rates in fifty years.  No American military forces are in a hot war elsewhere in the world and Trump's go-to Gold Standard for how he's doing - the stock market has set a new record for the past two years.  Finally, Americans have shown signs of coming around to actually recognizing and accepting the reality that conditions on the ground are pretty darn good.   

I'll bet you a steak dinner that in reasonably short order President Trump will take credit for the strong economy he is about to inherit.  That's because as I gaze across my landscape I don't see a hellscape; I see prosperity and the best economy on the planet.  If you think I'm making this up out of thin air; fight me.

Do not get the impression I am diminishing the reality that not each and every single last American, shares the same upwardly economic prosperity and living conditions.  Poor people and economically disadvantaged families are real.  Nor am I blind to politics.  It is certainly in Trump's self-interests to paint as bleak a landscape a possible for his base.  Nothing new under the sun there.

As Trump assumes office there are no shortage of challenges ahead.  Russia, China and Iran are failing states.  Russian and North Korean military personnel allegedly execute Korean wounded to erase evidence of North Korean involvement in the war against Ukraine. Ugh.

Here at home, domestic terrorism has, again, reared its head.  There is funding the budget and passage of a reconciliation bill, the DOGE, the debt ceiling, tax policy, Social Security and Medicare.  Will there be a comprehensive immigration policy?   99 cent a dozen eggs?

Placing a higher value on action I try to tune-out the talk.  Consequently, I'm looking forward to detailed policy to materialize.  You know, policies which will improve your and my prosperity and general lot in life.  And maybe make the world a safer place.

Donald Trump has been dealt a solidly good hand and I'm looking forward to being witness to how he plays it.

Bring it on.....

Inflation By Any Other Name

This subject has come-up here from time-to-time and I have tried my darnedest to remain circumspect, intellectually honest, good-humored and resist any snarky impulses to poke fun of individuals who seemingly believe that presidents posses cryptic powers to turn inflation on, and off, like a switch.  When it comes to lazy economic thinking the struggle is real.  Thankfully, understanding inflation is not rocket science.  If you have a basic grasp of the interplay between excess liquidity (M2) and demand economics it is not very complicated.  But I digress.

Inflation figured significantly in both the run-up and results of last month's presidential election.  In his interview with Kristen Welker several weeks ago president-elect Trump said: I won on two things; I won on the border and I won on groceries.  And at the RNC convention of last summer Trump declared he would:  End the devastating inflation crisis immediately.  Trump took credit for low inflation in his first term of office; he might take the blame for price inflation in his second term.  Time will tell.

As an old guy I am mildly bemused at the notion that younger voters have no institutional memory of inflation, soaring energy costs and the accompanying astronomical interest rates, of the late 1970s and early 1980s.  By those hardcore economic standards today's historically low inflation, low energy costs and interest rates are the modern equivalent of lotus eating.  Nevertheless, the president-elect has promised to bring inflation down and if he doesn't the voters might become restive. He's certainly got his work cut out for him as there's not much a chief executive can do to immediately influence forces at play in an economy as large and complex as ours. 

Complicating this already challenging task is the potential interplay of tariffs and immigration policies. Consider this.

Tariffs are a tax.  If I own an import-export business and import an item subject to a tariff or duty I have to pay the US Treasury the tax due upon receipt.  The country of origin does not pay the tax - the importer does.  To cover the tax I'll mark-up the price of the imported item when it lands with a distributor.  As a consumer purchases the item from a retailer it is that buyer who ultimately pays the mark-up.  Consequently, tariffs can contribute to inflation as the price of retail goods rise. Trump's challenge is the use of tariffs as a negotiating tactic or to surgically target specific imported goods.  It's a high wire balancing act.  

Almost two million undocumented workers are integrated into our food supply chain.  Another 30% of construction workers are immigrant labor - documented or not.  Immigrant labor is a significant contributor to what we pay for everything from fruits and vegetables at the grocery to a replacement roof.

My hope is that the Trump administration finesses this stuff.  Get too aggressive on immigration and tariffs and prices could rise.  Fail at one or the other and you tread at your own peril with an economy-stalling bout of deflation.  If only there was a magic switch in the White House bunker.

Trump naturally supports the sweeping reform of government regulation.  Furthermore, efforts to re-shore manufacturing to our hemisphere implies efficiencies, retraining a labor force and other productivity gains.  This shrinks inflation pressures but takes time to trickle down in a network economy.  Because 70% of our economy is driven by consumer spending these gains would be modest at best.  

Last, but not least, there is: drill, baby, drill.  Trump has promised to increase domestic energy production by lifting environmental restrictions and fast-tracking permitting.  It isn't clear to me precisely how this will dramatically reduce inflation and shrink the price of my groceries; nor has the former president elaborated.

Transportation costs already benefit from lower energy pricing because domestic energy production has been at record levels for years.  Several weeks ago I filled-up the Honda with regular unleaded and paid less than $2.50 a gallon.  Prices fell further over the busy Christmas Holiday travel season.  Go figure.

I own shares of energy and related companies and in a world where CEOs answer to shareholders; further retail price reductions will be challenged by sustaining record profitability, dividends and share prices.   Besides, oil is a fungible commodity, traded in dollars.  Accordingly, global markets play an outsized role in pricing.  My sense is that lower energy costs are largely baked-into the cake so we'll have to see how this plays-out.  What I know for sure is government doesn't drill for oil and gas.  (Like I said, the struggle is real.)

In closing, inflation is relatively easy to explain; it is far more difficult to bend to your political will.  It is possible that the in-coming president is beginning to wrestle with boastful promises made during his campaign.  As I said to a pal several months ago:  I'm looking forward to detailed policy which will improve my prosperity and general lot in life.

Meanwhile, all of our major appliances have been replaced, a new water heater installed, a new car for me, new car for Jill and a contract for a replacement metal roof on the house in 2025.  If tariffs materialize I think we may have dodged the major impact of any Trump tax increases.  Only time will tell....

Edit To Add:

Got home around noon following an overnight road trip and topped-off the tank of the Missus' new Honda.  Local pricing for regular unleaded:  $2.479....

Fact Checking

We have more liquid gold under our feet than any other country by far.  We are a nation that has the opportunity to make an absolute fortune with its energy.

- Donald Trump

Not true.  This lie is easily disputed.

If you visit the Energy Information Administration, at 44 billion barrels of proven oil reserves we rank 10th.  Venezuela, Saudi Arabia, Iran, Canada and Iraq rank (in that order) in the top five.

As a recovering financial advisor I happen to follow this sector closely and in a shameless plug for the blog encourage you to search for posts in the subject of energy markets.  Go to the Labels on the left margin of the homepage and click on Energy Markets.  Or use the search tool in the upper left corner for subject matter.

Cheers! 

Bounce Off The Bottom

Are you better-off today than you were four years ago?

This photo is making the rounds on social media as evidence that gasoline prices were cheaper during the Trump administration four years ago.

I recently paid $4.15/gallon for non-ethanol premium for our small engine stuff; so factually the photo is correct.  What isn't told is that this was in the midst of the COVID recession the last year of the Trump presidency.  There was ample supply and nobody was traveling.  Gas and diesel prices cratered along with everything else.  Including the financial markets, employment numbers and the national economy. Inasmuch as this was a global phenomenon blaming Trump for any of this is a specious supposition.

While Trump didn't cause the pandemic, in my personal view his mishandling of the government response to the pandemic certainly contributed to a sharp, short-lived recession and likely contributed to his reelection loss in November of that year.

To be clear, I think presidents get too much blame for bad economies and take too much credit for strong economies.  Truthfully, it is a heavy lift for a president to move something as complex as the US economy. For the record, supply/demand markets determine gasoline prices. Not presidents.  If you believe otherwise I've got a bridge to sell you.

I am better-off today than four years ago.

Peace.

Slippery Milestone

A milestone was reached a couple of weeks ago.  

The US has surpassed the production rate of 113 million barrels per day (BPD) of crude oil, setting a record for the highest production level of any country.  Moreover, in the near-term this trend is expected to continue.

Yup, you read that correctly.  For the moment, we produce more crude than any other nation on the planet.  

Sure, the Saudis could open the taps and turn this all on its head; but that is unlikely to happen as global oil prices continue to afford the House of Saud plenty of profits. 

At risk of straying into Social Identity Theory (BIRG) how does it feel to be Number One? 

As a consequence we export a barrel of crude oil too.  (Pun intended).

US crude oil exports established a record in 2023, averaging 4.1 million barrels BPD, breaking the previous record set in 2022.  In the waning days of the Obama administration the previous ban on most crude oil exports was lifted and with the exception of a hiccup in 2021, the export of crude from the US to the rest of the world has increased every year. 

It is important to note that government does not drill for oil or gas.  Business does.  Technology advances in fracking and horizontal drilling have vastly increased productivity thus enabling businesses in the oil patch to bring more wells on-line all the while maintaining production of existing wells.  Furthermore, most of our domestic production is light, sweet crude; which happens to be a favorite of export markets.

Where does our export oil go?  Since Russia's unprovoked invasion of Ukraine most of it winds-up in Europe.  China was in second place last year with imports doubling those of 2022.  Export sanctions have forced Russia to sell their oil on the world market at a significant discount.  Consequently, US exports to India have fallen by about half as India increased their imports of lower cost Russian crude.

You're probably wondering with all of the record-setting domestic production why hasn't the price of a gallon of gas fallen to $1.50?  The short answer is that oil is a fungible commodity, traded globally and in dollars.  Fungible items are basically interchangeable (you cannot tell one county's oil from the other just by looking at it).  Other commodities, shares of stock, options and dollar bills are all examples of fungible goods.

Because oil is traded globally it is priced according to worldwide supply and demand.  If oil producing nations want to drive the price up; they reduce the supply.  In the unlikely event they want to bring the price down; they increase supply.  

You're probably thinking; "why don't we keep it all to ourselves and have cheap gas and diesel to ourselves?"  The answer is oil does not belong to the government.  We live in a capitalist economy and anybody crazy enough to do that would drive the oil companies out of business turning trillions of dollars of businesses into pumpkins and mice.

That's what Venezuela did.  And we know how that ended.

You're welcome....

 Sources: EIA and Petroleum Supply Monthly

Economics 101

This photo has recently been observed floating in the Face Book cesspool of lazy economic thought.  Because today happens to be March 25 I thought it worthy of sharing.

Judging from the individuals posting, sharing or re-posting this image; the implication is if only the Former Guy was at the helm retail fuel prices would be at these levels.

Ahem.  

These were at those levels four years ago as a consequence of being in the throes of a COVID recession.  Our country's GDP was cratering.  The major market indices were at levels half where they are today.  Unemployment was soaring and small business bankruptcies reaching levels unseen since the Great Depression. 

I happen to believe that presidents get too much blame for bad economies and take too much credit for strong economies.  Truthfully, it is a heavy lift for a president to move something as complex as the US economy.  Nevertheless, if you believe in market economics and do not indulge yourself in magical wishful thinking it's rather simple.

No traveling + minimal demand + increased supply = low prices 

I'll remember that in November.

And be careful what you ask for.  You might just get it.....

It's The Economy, Stupid - New Year Edition

By any traditional measures our economy is firing on all eight cylinders.  Unemployment is at a fifty year low, wages (adjusted for inflation) are higher than they were before the pandemic, job satisfaction is up  and last month the Federal Reserve left interest rates unchanged and signaled that with inflation subsiding we may see three rate cuts in 2024.  It looks like there is little if any chance of a recession, with an economic soft landing instead.

So why is public opinion on the economy not reflecting all of this wonderful news? 

Conventional wisdom would suggest that people are grumpy about the economy even with the economic winds at their backs.

The best guess is that consumer sentiment over the economy has soured mostly as a consequence of high prices.  While inflation has slowed prices have not come down significantly.  We've seen a wee bit of a drop yet all you have to do is look at the tape total following a trip to the grocery store and it all makes perfect sense.  I also think there is some psychology in play as a consequence of social media trolls and garden-variety confirmation bias.  There is an election looming after all.

Consider this.  Only a couple short years ago, when inflation reared its ugly head and prices began to spike, consumer sentiment plunged in the opposite direction.  In 2022 the mood of the people, as measured by the University of Michigan Surveys of Consumers, was as bad as it could possibly be.  The Consumer Sentiment Index set a record  fifty year low!  That is a big deal.

With a drop of that magnitude it's difficult to gauge if folks were shell-shocked, confused or just plain pissed-off.  As with the case of the bogus $20 Big Mac was misinformation causing perception to replace reality?  Had people lost their minds?

Ordinarily, a strong economy bodes well for an incumbent president.  In this case consumers may be recovering from the sentiment hangover.  If economic grumpiness is the new normal this does not bode well for Biden's reelection prospects.

Maybe as we've embraced post-pandemic life our world has fundamentally changed somehow.  Maybe it is the cumulative impact of many things - supply chain interruptions, labor shortages leading to hiring disruptions, longer waits for a contractor, higher mortgage rates, increased cost of diesel, fertilizer, used cars, new cars, real estate and construction has put large numbers of people into a mind-numbing economic funk?   I cannot put my finger on it.

Nevertheless, gasoline prices have come down considerably ($2.34 Friday at the new Kwik Trip in Sturgeon Bay), the stock and bond markets have out-performed, my real estate taxes are affordable and have barely increased, interest rates are forecast to fall, the prospects of a recession seem to have been a mirage, my personal consumer confidence is strong and for everyone else is likely improving every month since hitting rock bottom.  The previously worrisome Consumer Sentiment Index is steadily rising. The economy is strong.  I have no major grievances.  If Joe Biden is reelected not much will change for me.  If Donald Trump is elected it is highly likely I'll continue to prosper and have beaucoup blog material.  Besides, any president's immediate influence on an economy as large as ours is overstated.  

So, we'll have to see how 2024 unfolds.  For this blogger the glass is half-full.

Fill 'er-up!

Found in my pocket there is this from a recent fill-up in Lake Geneva.

$2.649 a gallon for regular unleaded.

Further evidence that government does not build pipelines.

Government does not drill for oil.

Presidents do not set the price of a gallon of gasoline.

Business and markets make this happen.  Capitalism.

Should've waited.  Six cents cheaper at the BP eleven miles down the road.

Raising a toast to capital markets and a robust economy.....

 

What's-Up With The Price At The Pump?

Greetings!

I bring you glad tidings of supply-demand economics and an admonition to steer clear of magical, wishful thinking and disinformation found in the Face Book cesspool of lazy economic thought.  

Consider the cost of a gallon of petrol nowadays – $4.64 at the Shell station in Sturgeon Bay yesterday.  That's come down a bit lately, yet remains almost a couple of bucks higher than what it was a year ago.  Filling your tank is even costlier in some parts of the country (be grateful you do not live in LA County).  

On Face Book it is frequently implied that our presidents establish the price of gasoline. I wonder - is there a big switch in the White House basement bunker that POTUS flips to peg the price at the pump?  We all know that isn't true.  Here at least.  

It was true in a place we call Venezuela.  This country happens to be a major oil-producing nation and the government subsidized the price of gasoline (and a lot of other things) to curry favor with the populace.  But I think we all know how that socialist worker paradise turned-out.  Sadly, a nation awash in oil and the entire shebang collapsed.  The lesson is to be careful what you ask for.  But I digress.

I understand that economics is sometimes hard to wrap your mind-around.  Back when I had a day job as a wealth manager and trusted financial advisor I made a very good living making complicated economic and financial subject matter understandable for the average person.  Here’s a simple explanation to keep the facts straight.  

There are only a handful of contributors to the price of a gallon of gasoline – with the largest contributor being crude-oil prices. Presently at 60% - the largest driver of the cost of a gallon of gasoline is the price of crude oil.  This is compared to 25% in April of 2020.  My recollection is that this was when the pandemic crushed the cost of crude as demand fell along with that of other goods and commodities.   

 

Other contributors to the cost of a gallon of gasoline include (in this order) refining, state and federal taxes and distribution and marketing. 

Crude oil is a dollar-denominated commodity that trades on the global market.  The price of crude is considerably higher today than a year ago and higher still than two years ago. So, if you’re pining for the days of yore when gas was really cheap you need to consider your willingness to revisit a period of Covid restrictions, lock downs, a global collapse of travel, tens of millions of unemployed and a tanking economy that contributed to the collapse of crude oil prices. My recollection of that hot mess is still quite fresh and I want nothing to do with it.

 

Complicating matters is the Russian invasion of Ukraine.  On their own, wars generally rattle commodity markets.  As a major oil producer the economic sanctions placed on Russia have further sent more than a few shock waves thru the energy markets.

 

Finally, the OPEC+ nations have deliberately kept their production levels at, or close to, the levels negotiated by the Trump Administration  a couple of years ago.  This was done to rescue our own domestic oil producers staggered by the drop in oil prices.  If OPEC increased production (supply) prices would likely drop.  The Biden Administration is going to pay a call on the Saudis to see if hearts and minds might change on the matter of increased production.  Good luck with that.  If I was a member of an exceedingly profitable cartel I'd be disinclined.  Time will tell.

 

Enough said about the cost of crude.      

 

The second contributor to the recent rise in gasoline prices is growing demand as workers have returned to the office, resumed daily commutes and a weary population embraces a post-Covid world and is traveling.  We embarked-upon a marathon road trip in April and while I didn't particularly care for the high price of gasoline the Missus and I really didn't give a rat's ass.  We had places to go and people to see.  We also caught Covid - but I digress, again.

 

Just this past Friday I had to go to town to run an errand and I was witness to an extended wait to cross the four lane highway.  The northbound traffic was a solid and seemingly endless parade of campers, trailers, boats, kayaks, car-top carriers, bike racks and travelers sporting out-of-town vehicle tags. While some of you readers may have grumbled over the wait; I saw room taxes, vacation spending, restaurant meals and winery visits.  All of it principally fueled by an increased demand for gasoline.  Don't take my word for it though tourism trade on the peninsula continues to set new records for visitor taxes.

 

If you were to talk to the people over at AAA they would tell you that the post-Covid pent-up demand of American motorists continues to set record highs.  And with no slack in fuel consumption (get ready for this) demand is going to keep gasoline prices elevated.  

 

The question of the day is this: Have you curtailed your vehicular use as a consequence of the price at the pump?  I haven't.  And most of my contemporaries haven't either.  Welcome to the demand side of the economic equation.

 

The third (and smallest) contributor to rising prices is another of those nagging supply-chain issues.  Gasoline inventories are ample at the present moment - although refinery capacity struggles from time-to-time.  

 

Addressing one last bit of FB chicanery is that the price at the pump has nothing to do with canceling the permits for the Keystone XL pipeline.  The second Keystone pipeline. That project was conceived by a Canadian company to move low-grade tar sand crude to the gulf coast for export overseas.  And after more than a decade of controversy wasn't even slated for completion until sometime late in 2023.  As a general rule gasoline is not refined from tar sands due to the extraordinary costs.  Besides, the first Keystone pipeline has delivered over 3.3 billion barrels of crude oil since 2010.  It was never shut-down and continues to meet domestic and global energy needs.  To be clear, Biden energy policy might have a long term impact on energy prices.  Presidents can, and do, impact energy costs over the long term by means of policy.  Biden hasn't done much of anything anyway and when the GOP regains control of congress he's stuck.  For the present, current pricing is impacted principally by the global market price of crude and strong consumer demand. 

One final thought. There is a silver lining here if you look for it. Plenty of our countrymen work in the oil patch. A couple of years ago petroleum engineers and refinery workers were being furloughed in record numbers. Today domestic producers have recovered and are humming-along trying to keep-up with demand. That’s a good thing and a contributor to a healthy economy.  And for us retirees who belong to the investor class - energy and related shares are rocking the nest egg.

I don't want to minimize the reality that energy executives are loath to increase production (supply) while they are reaping record profits.  Their duty is to shareholders and employees first.  Markets drive pricing.  That's how business works in a capitalist economy. 

Raising a toast to the 2022 road trip wherever it may take you.

 

Bonus:

 

The Ukraine War, a New Flashpoint and the End of Europe's Energy Innocence

 

Trump Gas

A curious thing happened on the way to the gas pump recently.  A friend of mine messaged me this:

Still missing my Trump gas!  I'm sure Biden gas gets better mileage. 

This is not the first time my pal has voiced this lamentation and fondness for low-price Trump Gas.  Between you and me I think he's twisting my tail.  Giving me a friendly poke and trying to get a rise out of me.  I'm not a Biden guy.  And I was never a Trumper so I'm not gonna take the bait.  But I understand my buddy's sentiment.  We went on a marathon road trip a couple of months ago.  In this order, lodging and gas were the principle expenditures.  We burn only non-ethanol premium grade gasoline in all of our small engines and a trip to town to refill four gas cans set me back $80.  Heck.  Even I like Trump Gas.  But I digress.  

As a recovering financial guy I am both bemused and chagrined from time-to-time by magical wishful economic thinking that seems to find a home on social media; particularly as it relates to the subject of rising gasoline prices. I have FB friends, a minority of which, believe that If only Donald Trump were in the White House a gallon of gasoline would set you back $2.25, give or take.  I'm not making this up.  It is like an article of faith.

If we go back only a few years the price of crude oil and gasoline tanked in early spring of 2020 as the impact of the pandemic laid waste to the global economy AND PEOPLE STOPPED TRAVELING.  Before the Covid crisis 100 million barrels of oil each day fueled global commerce.  As demand fell off of a cliff that dropped by more than 35 percent. Price followed.

Leading up to this was the Saudi-Russian crude oil price war that began a month earlier on March 6, 2020.  Without knowing it in the moment the decision of these OPEC members to blow the lid-off production levels couldn't have come at a worse time.  It was ominously prescient as a novel virus from Wuhan Province had already quietly infiltrated the world population.

Meanwhile, never one to shrink from taking credit where he didn't earn it, Donald Trump had been boasting that he was giving all Americans a tax break with lower oil prices.  In fairness, this is what Trump does.  Cheap Trump Gas = more money in your pocket!  No disagreement from me but sometimes you need to beware of getting ahead of your skis.

For the energy sector all of the elements for a perfect storm were now in place.

In April 2020 the oversupply of oil led to an unprecedented collapse of oil prices forcing the contract futures price for West Texas Intermediate crude (WTI) to plummet from $18 a barrel to around -$37 a barrel.  

Yes, minus $37.  Prices went negative for a brief period of time.

As the coronavirus recession took hold the oil markets imploded from the Saudi-Russian surge on the supply side and the bottom falling-out of the demand side.  American oil companies were furloughing petroleum engineers at a record pace and thousands of additional jobs were being eliminated.  Facing the worse economic downturn in more than a generation even wells were abandoned.  

While consumers were enjoying savings at the pump with Trump Gas - oil patch states like Texas, North Dakota, New Mexico, Oklahoma, Colorado and Alaska  were staring down a calamity of ginormous job losses along with associated tax revenues.  Faced with a re-election campaign, a teetering economy and a perfectly nasty collapse of the domestic oil industry President Trump made the decision to enter the fray and pull his bacon out of the fire with some sort of deal. 

Trump's deal was for OPEC to scale-back their production that year.  This afforded domestic oil producers some welcome breathing space preventing a wholesale collapse of the industry. 

Here we are today. 

It seems like forever (to me at least) since the shit hit the fan.  A pandemic, a deep self-inflicted recession, bad decisions, an election, vaccines, a recovery, hindsight and a population's desire for a return to normalcy while learning to coexist with viral variants.  Not so surprisingly, US crude production has largely returned to pre-pandemic levels.  We remain a net exporter of crude oil to the world.  What has not changed is OPEC production.    

You don't have to take my word for any of this as there is a terrific summary here at Fortune .com that lays it all out for you. 

Donald Trump's deal got OPEC to slash production.  And for the present, that deal remains in place insofar as OPEC production of crude.  A recovering world economy has brought demand back to pre-Covid levels.  And as a consequence of rising demand; absent a growth in supply, prices have risen.  That is what happens in supply demand markets.  OPEC members are reaping record profits.  Can you blame them?

The war in Ukraine has rattled the world oil market causing global prices for crude to soar further complicating and compounding the situation.

I can appreciate consumer frustrations over soaring energy prices and the desire for simple explanations.  If you are a die-hard Trumper Biden is responsible for this.  Inexplicably, he did it deliberately.  The reality is more nuanced.   

Increased Demand + Restricted Supply = Increased Prices 

Some of you aren't going to like reading this but OPEC continues to hold-up their end of the  Trump-negotiated deal. 

There's probably a wee bit of price gouging going-on.  You read it here first you say?  Ha Ha.  It happens.  Although you'd be hard-pressed to locate an oil company executive willing to admit to it.  Domestic energy producers and refiners are reaping record profits.  Can you blame them?  

Given the market conditions in the spring of 2020 my advice would have been to buy on the dip and in particular to increase positions in struggling energy sector shares.  But what do I know?  I'm just a recovering financial guy.

In current news, on Thursday of last week, following furious lobbying on the part of the administration, the group of oil-producing states known as OPEC+ (13 countries that are members of the Organization of the Petroleum Exporting Countries plus 10 non-OPEC countries) agreed to boost production by 648,000 barrels a day beginning in July and again in August.  This may seem like a big deal but I'm here to tell you it's lip service.  I could be wrong but I don't believe it will have any meaningful impact on the retail price of gasoline.

During the election campaign Candidate Biden vowed to turn Saudi Arabia into a "pariah state" as a consequence of the grisly murder of Jamal Khashoggi.  Of course, this was long before rising fuel prices became a contributing factor to soaring inflation and Democratic chances in the midterm elections.

The Saudis are not our friends; nevertheless, President Biden will be paying Mohammed bin Salman a call to smooth things-over.  I wonder if anyone is going to say "pariah" out loud.

In conclusion, we can debate government policy and the impact it has on energy markets all day long.  Everything in the paragraphs above covers a period only slightly longer than a couple of years.  That is very short term in the economic world thereby amplifying the roller coaster effect.  In the financial world I learned that most consumers focus only on the roller coaster ride and sometimes you have to talk them off the ledge.  For the more thoughtful of my readers we need to bridge the over-simplified notion of magic Trump Gas.  A more impactful debate might be the veracity of government intervention in the markets, how loose monetary policy is a primary contributor to inflation, shutdowns, bailouts, handouts, politicizing public health, stimulus and other crazy-ass meddling.  That could take all month long.

Stay-tuned......

Energy Independent?

A funny thing happened on the way to the FB page in the last couple of days. There has been a marked increase in chatter about how Donald Trump made us energy independent and how Joe Biden erased it. Once again I am reminded that FB is a fertile petri dish for lazy partisan economic thought. And Zuckerberg doesn’t much care about which side of partisan divide you dwell. It’s all click bait. *Disclaimer: I own FB stock. Please, PUHLEASE, click to your heart’s content.

 

I spent almost four decades making arcane economic concepts easy for lay-people to grasp and understand. I was good at it, built a successful investment advisory business, made a lot of friends and retired. I am told I even saved a marriage. My business partners continue the line of succession today along with the fourth generation of many of the very first clients. But I digress. The point of this post is that if I had clouded my professional judgment and advice with partisan rancor I would have been out of business in fairly short order. So I am going to put my advisor hat back on for a spell as this is the stuff retired financial silverbacks love to expound-upon. It’s free too as I’m no longer licensed to bill you for it. You can stop here or choose to keep reading. You pick. I recommend you share this with your own trusted financial advisor for a second opinion. Indulge me the access to your valuable bandwidth.

 

The truth of the matter is that in the natural order of the oil business we import oil from other countries each and every day. Unlike rare art works or collectibles oil is a fungible global commodity. It is universally interchangeable and trades freely between willing buyers and willing sellers. If we import a million barrels of oil and export a million barrels of oil our net dependence or independence remains unchanged. Nobody will give a tinker’s damn.

 

It is a fact that in 2019 the net imports for crude oil flipped from positive to negative. By that measure alone (excluding natural gas, coal and renewables), we became “energy independent” insofar as oil consumption is measured. Donald Trump was president when this happened for the first time in October 2019.

 

This trend towards independence began under George Bush II, continued under Barack Obama, Donald Trump and now Joe Biden. The policies of the former and current presidents bear no direct responsibility for this trend.

 

Hydraulic fracking is responsible for this. Yup, fracking.

 

It is instructive to know that it was under Obama that legislation was passed into law allowing producers to sell crude oil for export. Heretofore, only refined products like gasoline or diesel and kerosene could be exported. Opening-up the markets for domestic producers of crude oil was a pretty big deal as it allowed access to global consumers for front line drillers and not just refiners. This both extended and expanded the fracking boom.

 

It is no great secret that Biden has embraced policy that could negatively impact domestic oil supplies in the future. However, the surge in pricing that we were witness-to last year was largely a consequence of a COVID-induced drop in production (supply) that began in the spring of 2020 long before Trump left office. The 2020 drop in production was initially five percent. In the eyes of most people 5% might not seem like much but it happens to be more than three million barrels per day (BPD). Consumption (demand) during the pandemic recession declined by 3% and as a consequence our energy independence began to shrink.

 

So, the short answer is that we maintained a margin of energy independence (albeit smaller) going into 2021. Demand fully recovered last year while production continued to lag with the following result: Smaller Supply + Increased Demand = Higher Prices.

 

By the close of 2021 production reached 11.7 million BPD. While this was still a million BPD below 2019 levels it was a million BPD higher than levels at the close of 2020. This was evidence of a recovery.

 

As further evidence of a turnabout the number of rotary oil rigs began to recover. At the close of 2019 there were approximately 700 operational domestic rigs. In 2020, that number had fallen somewhere below 200. Oil field services giant Baker Hughes recently reported that the rig count has rebounded to close to 500. As a leading indicator of the strength of the domestic oil business a recovering rig count is exceedingly encouraging.

 

So where does that leave us?

 

At the beginning of the year I blogged about this and my expectation was that as the supply/demand gap closed between production and consumption our independence would recover and consumer prices would moderate.

 

The good news is that according to the US Energy Information Administration  and data just in within the past week; we continue to remain net negative (independent) with regard to imported oil. 

 

 

Does this mean we do not import oil? 

 

Nope. As I pointed out in the third paragraph (above) the nature of the oil business is that you always import oil. The important end-result is net negative. And for the record most of our imported crude comes from our friendly neighbors to the north. Our neighbors also export refreshing Canadian lager to US markets but that is an altogether different discussion.

 

The net negative situation is a good thing as this “independence” most importantly protects us from supply shocks. Furthermore, we retain profits here and they do not go to vain and unholy middle eastern despot kingdoms. Instead they contribute to our own GDP and US prosperity. When energy prices go up it is domestic producers of crude oil, their workers and oil patch states like Texas, North Dakota, New Mexico, Oklahoma, Colorado and Alaska that are winners. This is a good thing.

 

Yet let’s be clear; energy independence as described here does not magically translate to low prices. Anybody that tells you otherwise is peddling economic pornography or hocus-pocus. Go back to paragraph three (above) and be reminded that oil is a globally-traded commodity and is freely-priced. Like all global commodities it is subject to price shocks as a consequence of geopolitical events.

 

No president of any party has the ability to dial-up or dial-down commodity prices any more than they have the power to fix the price of a share of Apple stock. Don’t take my word for it though; Hugo Chavez tried that years ago and look where it got Venezuela. A vast failed socialist state.

 

If energy prices spike as a result of war and the disruption of European energy supplies it will likely not have outsize influence on our longer term overall growth. Nevertheless, you and I will not be happy with the price at the pump. And Old Joe Biden will be blamed for this.

 

Because that’s the way politics works, not the way market economics works.

 

PS – If anyone wants to blame any of this on shutting down Keystone XL – fight me.