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Guest Post: Energy Higher, Earnings Lower

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Until oil no longer matters, our real earnings and our economy remain hostages to the cost of oil.

 

As we all know, what matters isn't our nominal earnings, it's what our earnings can buy that counts. If it takes an hour of labor to buy four gallons of gasoline, it doesn't really matter if we're paid $1.60 an hour and gasoline costs 40 cents a gallon or we're paid $16 an hour and gasoline costs $4 per gallon. Ditto $16,000 an hour and $4,000 per gallon.
 
What matters is if our hourly wage once bought eight gallons of gasoline and now it buys only four gallons. This is called purchasing power, and rather naturally the Status Quo has worked mightily to cloak the reality that our purchasing power of the bottom 95% of wage earners has been declining for decades. More recently, 2011, real median household income was 8.1 percent lower than in 2007.
 
So even as nominal earnings rise, earnings lose purchasing power.
 
These charts, courtesy of our Chartist Friend from Pittsburgh, depict the dynamic of energy costs, loss of purchasing power and earnings. The first chart plots hourly earnings and energy costs.
 
Note that hourly earnings rose smartly in the 1960s era of cheap oil, and suddenly plummeted to a lower plateau after the 1973 oil shock. The next jump in oil (the Iranian revolution) sent earnings to a new low. Recall that each leap in energy costs pushed the U.S. into a deep recession (1973-74 and 1981-82).
 
As oil costs declined over the next two decades (the exception being the first Iraq War, which triggered the 1991 recession and spiked purchasing-power earnings lower), real earnings rose.
The Internet boom and oil dropping to $15/barrel caused real earnings to spike in 1999. The bubble burst in 2000, causing a mild recession. Earnings subsequently spiked again during the housing/credit bubble, and then plummeted when oil rose to $140/barrel in 2008.
 
Predictably, that rise in energy costs triggered a deep recession made even more severe by the bursting of the housing bubble. The sharp decline in oil to $35/barrel caused real earnings to spike once again, and then decline sharply as oil returned to the $100/barrel level.
 
Adjusted for energy CPI (consumer price index), real earnings are back to the recessionary lows of the early 1980s. How much new debt can households leverage when their real earnings are declining?
 
The next chart shows earnings and the entire consumer price index (CPI) that includes all components, not just energy. Once again we see a decline in the era of stagflation, high CPI and the general adjustment of the U.S. economy to global competition and diminishing returns.
 
 
Purchasing-power earnings bottomed in the early 1990s and then rose smartly as inflation declined and the computer/Internet revolution increased productivity (with a boost from rampant financialization).
 
Interestingly, the credit/housing bubble did not raise real earnings in the 2002-2007 period. What did boost real earnings was a big drop in oil and official inflation and trillions of dollars in "free money" stimulus that essentially doubled the Federal debt in a few years.
 
Massive injections of borrowed money and the deflation caused by the bursting credit bubble (deleveraging) bumped real earnings higher after 2008, but the cost of energy, medical care, college tuition etc. has continued ever-higher, pushing real earnings lower since the spike of 2010. Recall that the Census Bureau calculated real earnings fell by over 8% from 2007 to 2011.
 
Despite the improvement from 1994, real wages are around the levels reached in 1969, 43 years ago, and 1980, 32 years ago.
 
Next up, a chart of the price of gasoline.
 
 
This suggests the price of gasoline is in a secular uptrend, and the recent stabilization in price may give way to higher highs. Since very few of us have natural-gas powered vehicles, any further increase in the price of oil/gasoline will push real earnings lower. If history is any guide, any price increase will also push the U.S. into another "official" recession.
 
Until oil no longer matters, our real earnings and our economy remain hostages to the cost of oil.
 

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Wed, 10/10/2012 - 12:11 | 2875113 DUNTHAT
DUNTHAT's picture

Major actors at capacity/turnaround points.

Oil going up.....

 

https://docs.google.com/open?id=0B16Nxp5pgJBzUTE4MmtzYWg1bHc

Wed, 10/10/2012 - 12:44 | 2875221 Richard Chesler
Richard Chesler's picture

Who needs oil when you have an Obamaphone and ability to layaway?

 

Walmart U.S. is preparing for a strong holiday season, ordering twice as many Apple Inc (AAPL.O) iPads and other tablet computers as last year, said Duncan MacNaughton, the chief merchandising and marketing officer at Walmart U.S.

The company has seen roughly $400 million in layaway orders already, after starting the process in mid-September, a month earlier than it did when it brought the service back in 2011. With layaway, shoppers buying certain items can put them on hold and pay for them over time.

http://www.reuters.com/article/2012/10/10/us-walmart-investors-idUSBRE8990ZR20121010

 

 

Wed, 10/10/2012 - 13:28 | 2875410 Da55id
Da55id's picture

My Chevy Volt goes up to 90 miles per day (2 charges @240v). No gas needed unless I want to use it. I estimate I will not need additional gas until July 2013. $2.70 gets me 90 miles. Just saying that there are options.

Wed, 10/10/2012 - 13:39 | 2875459 FeralSerf
FeralSerf's picture

How much gas tax do you pay?  You are aware that roads are expensive to build and maintain and have been supported by the gas tax, aren't you?  Or are you one of the free riders like so many in our society today, (a rhetorical question, since the taxpayer also subsidized your purchase of that fraudulent POS)?

Wed, 10/10/2012 - 15:38 | 2875882 Da55id
Da55id's picture

hmmm - I pay about 1/2 my income in taxes (county, state, fed, sales, use, property et al). If you have used Amazon to make retail purchases, have you also scrupulously paid use tax in lieu of sales tax? Perhaps your state does not have a use tax? If it does, perhaps the concern about gas tax is unjustly selective?

Wed, 10/10/2012 - 19:12 | 2876420 3rdgrader
3rdgrader's picture

Buy one of those free energy perpetual spinning machines. Bernanke will you have printed you into a black hole by the time you figure out where you went wrong on your math

Wed, 10/10/2012 - 12:11 | 2875114 singsing
singsing's picture

Worth repeating:

I used to worry about oil depletion but I just don"t have the energy anymore.

Wed, 10/10/2012 - 12:18 | 2875136 cocoablini
cocoablini's picture

Deflation in labor costs definitely- as opposed.to price inflation in goods and commodities. Thats the only deflation that makes Ben Bernanke have orgasms.

Wed, 10/10/2012 - 12:48 | 2875251 Winston Churchill
Winston Churchill's picture

Used to be indecisive,now I'm not so sure.

Wed, 10/10/2012 - 12:16 | 2875129 Wakanda
Wakanda's picture

Another article by CHS that even I can understand.

Thanks Charles!

Wed, 10/10/2012 - 12:19 | 2875140 malikai
malikai's picture

I give CHS shit from time to time when I disagree with his points.

But there's much more credit to give the man for his understanding of the issues at hand and his excellent ability to communicate it effectively.

Wed, 10/10/2012 - 12:50 | 2875256 DeadFred
DeadFred's picture

Yet he understates the potential boost to the economy when a million gas stations have to replace their signs to add another digit as gas moves from $9 to $10. Pretty much as good as busting a bunch of windows or even a minor war with Alpha Centari

Wed, 10/10/2012 - 13:05 | 2875316 malikai
malikai's picture

But the guy on TV says that is transient. So everything is alright.

Wed, 10/10/2012 - 12:27 | 2875179 Shameful
Shameful's picture

So gas is in a secular uptrend but Mr. Smith is a dollar bull.  He points out the costs of things is higher and moving up but we are in deflation while the Fed expands the money supply.  Am I the only one that gets feelings of schizophrenia from Mr. Smith day to day?

Wed, 10/10/2012 - 12:43 | 2875226 Dr. Engali
Dr. Engali's picture

I get that sense from him all the time. One article will be logical like this , then he will follow it up with a nonsensical contradictory article. He's all over the map.

Wed, 10/10/2012 - 12:57 | 2875272 SemperFord
SemperFord's picture

Like Tyler Durden or "Jack"

Wed, 10/10/2012 - 13:18 | 2875377 Dr. Engali
Dr. Engali's picture

You are aware that there's more than one Tyler Durden right?

Wed, 10/10/2012 - 13:12 | 2875357 DaveyJones
DaveyJones's picture

and like a map, more flat than global                                                                                                                                                                                                       

                                                                                                                                             

Wed, 10/10/2012 - 12:28 | 2875183 azzhatter
azzhatter's picture

the number of jobs I see posted for $10-12.00 per hour is amazing. Maybe 3 of those jobs will keep you in some kind of cotton but $10 per hour just ain't gonna cut it

Wed, 10/10/2012 - 13:48 | 2875504 Offthebeach
Offthebeach's picture

True.
Just enough for gas( money to oil companies, ADM and corn farm whores, a taste to Freebies, local, state, feds ), food to work to buy food. Cheap, bad food. Zip benefit. Rent a room/basement/gaeage, POS car with a mandatory insurance to Warren Buffet( GEIGO) or a retired state legislator.

Better deal is psych disability. Section 8 apt, cable, utilities, obamaphone, $1,000/ mo, plus the free squirrel cage pills to cash at the bar for another g. 2 grand a month, sleep late, full medical and dental, no lifting. Just. Be. Depressed.

Wed, 10/10/2012 - 12:29 | 2875189 Hayabusa
Hayabusa's picture

The article is simple, direct and of course true.  For those of you who think our warmongering in the middle east is to spread democracy, think again... it's all about the oil/energy/resources.

 

 

Wed, 10/10/2012 - 13:12 | 2875354 LawsofPhysics
LawsofPhysics's picture

"it's all about the control of oil/energy/resources."  -fixed.

Wed, 10/10/2012 - 13:18 | 2875378 DaveyJones
DaveyJones's picture

the first physical thing we did was secure the physical oil resources, the first political thing we did was try to get the new "democratic" assembly to resurrect foreign ownership of the fields. They weren't that stupid. Turns out we were  

Wed, 10/10/2012 - 12:38 | 2875214 fuu
fuu's picture

How come all the little ups and downs don't have tiny letters next to them? Looks random.

Wed, 10/10/2012 - 12:38 | 2875215 q99x2
q99x2's picture

Sounds reasonable.

Wed, 10/10/2012 - 13:11 | 2875349 LawsofPhysics
LawsofPhysics's picture

File this report under "Duh!"

Wed, 10/10/2012 - 13:34 | 2875405 FeralSerf
FeralSerf's picture

CHS left out the effect of the increase in efficiency of internal combustion engines for the last 50 years.  It has doubled in most cases, which should, if the motorist drives an equal number of miles, reduce his fuel expenses, both in ounces of gold and hours worked.  Dollars are not a useful measure, since their value is anything but constant.

My new 1965, 40 horsepower VW bug that weighed 1,600 lbs. got 30 mpg on a good day.  The 1964, 325 horsepower, 3,300 lbs Pontiac GTO, the VW replaced got about 12 mpg.  (I couldn't afford the fuel, insurance or speeding tickets.)  My 2010, 300 horsepower BMW that weighs over 4,000 lbs also gets 30 mpg (at a speed greater than the VW would even max out at).

If a 1,600 lb, 40 HP car were produced today, it should be able to get over 60 mpg using Prius type technology, double the number of miles per gallon.  If its owner drives the same number of miles and pays twice as many hours worked per gallon, his cost would be the same in miles per hours worked as it was 50 years ago.

Wed, 10/10/2012 - 14:23 | 2875646 Metalredneck
Metalredneck's picture

40hp would barely power most fat-asses' Hoverounds, or Rascals.  My 40year old motorcycle is 55hp, and I like it.  50mpg, as well.

 

I estimate the average Muhrkan SUV/pickup/WalMart-mobile may get 18mpg, mean average.  Just because we know how to make fuel economy doesn't mean people will buy it.

Thu, 10/11/2012 - 13:30 | 2878024 FeralSerf
FeralSerf's picture

If gas gets expensive enough, people will buy fuel economy (again).   Given the choice between walking and taking public transport or driving a Prius or its ilk because they don't otherwise have enough money to get to WalMart, they'll be down at the car lot bidding up those econoboxes again and signing for another 8 years of payments.

If gas stays cheap, and $4 is still cheap, they'll keep driving their big gas hogs.

Wed, 10/10/2012 - 19:16 | 2876429 3rdgrader
3rdgrader's picture

Bernanke Endgame: Let the kill off begin, the  slaves are beginning to catch on, next thing you know they will demand food and water...

Wed, 10/10/2012 - 22:35 | 2876828 malek
malek's picture

 What matters is if our hourly wage once bought eight gallons of gasoline and now it buys only four gallons.

If that change happened over 10 years as the chart seems to imply, everyone could have have bought a car with double the fuel efficiency in that time frame.

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