Tuesday, June 26, 2012

Back down the rabbit hole.

For the past couple of days I've been trying to figure out if I thought the report I read on Friday about gas being 3 bucks a gallon by the end of summer could be true. Even though I've said time after time that gas would never hit 5 bucks a gallon, this report shocked me. I expected a decline. Just not like this. Not this fast. And I never thought it would touch 3 bucks again.

Even though I was betting on deflation more - I would have given even odds I was wrong and the inflationists were right. If gas prices hadn't choked off the early year enthusiasm, I think we could have seen a more inflationary environment. But Wall Street walked the price up too fast, and people couldn't adapt because their wages hadn't risen enough.

A couple of days ago Mr S. and I were talking about the report when he said - when President Money Bags first took office gas was around 2.35 a gallon. Oh yeah - I replied. After I thought about it more, I remembered this was at a time when we were going through massive deflation. Which is what I've been worried about the whole year. Collapsing prices. I mean, with what is going on in Europe, how can you not expect prices and demand will collapse? Huge swaths of Europe are sitting at almost 25% unemployment.

But, there shouldn't be anyone alive that doesn't like low gas prices. Right? It's like money from heaven. The cost of everything goes down. However, so do wages. When we were in deflation, pretty much everyone in the valley was taking temporary pay cuts.

This also makes Government Money Bags feel the need to print money to keep their target inflation goals. And remember, when we were in deflation - China stepped up to buy a bunch of our debt.  I doubt China will be there this time as the lender of last resort. They are busy lying about their own economy. I mean, when you read that coal is stacking up over there - it makes you a little nervous. Especially when I see an increased drum beat that a new recession will start in the fall. Coincidentally when gas prices are suppose to be urber low.

I hadn't really looked at the oil inventories in a while, because I'd given up thinking rising inventories had any affect on the price. I mean, I can count on one hand how many times the whole year inventories have fallen. But I guess the excess just got so great, they couldn't keep ramping it up.

The other thing I finding interesting is - for all the reduction in gas prices - I don't see the freeways that full on the weekends. Which is disposable travel time. As a matter of a fact, this weekend I was all over The Valley, and was pretty shocked at how empty the freeways and roads were.

US crude oil inventories rise by 2.9m barrels - June 25 2012
US crude oil inventories fall 0.2m barrels - June 13, 2012
US crude oil inventories fall 0.1m barrels - June 6, 2012
US crude oil inventories rise by 2.2m barrels - May 31, 2012
US crude oil inventories rise by 0.9m barrels - May 23, 2012
US crude oil inventories rise by 2.1m barrels - May 16, 2012
US crude oil inventories rise by 3.7m barrels - May 9, 2012
US crude oil inventories rise by 4.0m barrels - April 25, 2012
US crude oil inventories rise by 3.9m barrels - April 18, 2012
US crude oil inventories rise by 2.8m barrels - April 11, 2012
US crude oil inventories rise by 7.1m barrels - March 28, 2012


  1. I've got to admit, I'm a bit flummoxed by the decline in price. If I had a giant tanker in my backyard, I'd be pumping it full of gas right now. I wouldn't read too much into the deflation numbers. Feels a bit too much like a head fake to me. I bet we hit $5.01 before we hit $2.99. In the meantime, the price of a heifer at the Fresno auctions is up 10 - 12% ($88 - $91 per 100 lbs) and Costco has increased the cost of fryer chickens by 15% ytd. My brother and I have a bet on whether or not they'll raise the $1.50 price on their all beef hot dogs with a coke by the end of the year. If they do, he owes me one. You're welcome to get in on the action if you like.

  2. "I bet we hit $5.01 before we hit $2.99."

    Well, I certainly would agree with that. I mean - who knows!? Conventional logic would say you are right. If for nothing else, we are in hurricane season. Maybe we will be lucky again this year. But it's been a really long time since we've been smacked.

    I like your Costco data points. These days you can't have enough of them. I've been seeing other stuff from discount stores, and I can't tell if it's a normal thing, or an unusual thing. All deflationary.

    I'll wager a hotdog.

  3. The Costco data point was interesting because for years, they've been selling the chickens at or below cost in order to attract members. Ultimately it may have been the higher gas prices that broke the camel's back, but now that they've abandoned the .99 per lb price point, I doubt they'll go back. The impact of their chicken war has been brutal on traditional grocers as they've been limited in what they can charge. Almost the very next day after Costco raised prices, I saw Sav-mart go from 1.09 per lb. to 1.59 and Safeway do the same. I think Raleys is charging $1.79 per lb the last time I went in there. The only hold out has been Winco, but they're employee owned, so they do things for the customers that most grocers won't (stay open 24 hours a day, refuse to pay credit card fees, let you bag your own groceries, etc.) Given that chicken is probably the cheapest source of meat for the poor, this form of inflation affects the neediest the most. My guess is that Costco will hold steady on the $1.50 price point for the hot dog and drink, but will default on the all-beef dog and go to a less appetizing pork, chicken, & beef heart dog instead. If they do take a step down in quality, my brother and I have agreed that the dilution is a form of a price increase, so you should be aware of all the rules if you want to join. I like mine with extra onions, but fortunately the condiments are free.

  4. Huh. That is a really interesting. I think most rational people agree that product dilution is a form of inflation.