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Guest Post: The Straw That Potentially Breaks The Camels Back

Tyler Durden's picture




 

Submitted by Lance Roberts of StreetTalk Advisors

The Straw That Potentially Breaks The Camels Back

oil-price-gasoline-022212Back in December I penned an article about the potential for gasoline prices to rise quickly to catch up with surging oil prices.  We said then "If we look at just the nominal price data going back to 1990 we can see that there is indeed a very high correlation between oil prices and gasoline prices.   While divergences from each other do occur on occassion those divergences tend not to last for very long with gasoline usually correcting towards the price of oil."   That is precisely what has happened since the near $3 per gallon of gasoline this summer, which was an effective $60 billion tax break for consumers during the much anticipated retail shopping season, to near $3.50 a gallon today.  That 16% rise in gasoline has now effectively wiped out the entire payroll tax cut being extended into 2012.

There has been a lot of media commentary as of late about the recovery in the economy.  The dangerous assumption being made here is that the recent upticks in the economic data have come primarily at the expense of inventory restocking and end of year buying of capital goods by businesses to lock in tax credits.  Extrapolating those bounces in the data well into the future can prove to be disappointing.  Yet this is exactly what the the President's current budget, which has been presented to Congress, has done.  That budget plans for 3% or stronger economic growth over the next 6 years.  This is a pretty lofty goal which considering last years growth was a paltry 1.7%.  However, in order to acheive a 3% plus growth rate the consumer is going to have to should 2.1% of that load through consumption. 

pce-foodandgas-wages-022212As we showed in our recent report on consumer spending and credit increases "...[The] recent increases in consumer debt are disturbing.  The rise in NOT about increasing consumption by buying more 'stuff' it is about just about being able to purchase the same amount of 'stuff' to maintain the current standard of living."  The rise in consumer credit is a function of the increases in the cost of food and energy on the consumer.  While the core consumer price index (ex food and energy) is tame at just over 2% the real impact to the American consumer is a combination of weakening incomes and rising food and energy costs as a percent of those incomes.  The chart shows the recent declines in wages and salaries versus the steady uptrend in food and energy costs as a percentage of wages and salaries.  The problem is the math - declining incomes + rising costs - lack of credit = weaker consumption and slower economic growth.

oil-price-contracts-022212There have been quite a few theories as of late about rising oil prices whether it is a potential war with Iran or seasonal demand.  While part of the issue is the supply and demand equation - that does not account for the recent price surge.  As the world central banks have turned on the liquidity pumps to support the Eurozone and the U.S. economy; the most logical place for that excess liquidty to go is into highly liquid, highly leveraged, commodity contracts.  The rising number, the second highest peak on record, of oil contracts outstanding continues to push prices higher.  In turn those higher prices draw more speculation into the market - so forth and so on.  That is - until it pops. 

This is good if you are investing in oil and gas related stocks - it is bad everywhere else.  As oil prices rise so do the input costs to businesses.  Those costs have to be passed onto the consumer.  Currently, the consumer can do little to offset those increases other than by decreasing consumption.  The decrease in consumption leads to lower profits for businesses who in turn become defensive.  Since businesses have already cut permanent labor to the bone - the impact to profitability will be immediate.  The longer that oil prices remain elevated while incomes decline the more likely it is that the economy, which is already extraordinarily weak, will slow more than expected.

With Europe slipping into a deeper recession, which in turn will effect domestic corporate profitability, combined with rising input costs it is only a function of time until something has to give.  While the world, and the markets, are currently focused on the daily soap opera of "As The Greeks Turn" it cold be something as innocuous as food and energy prices that becomes the final straw for this camel.

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Thu, 02/23/2012 - 01:22 | 2187930 CrockettAlmanac.com
CrockettAlmanac.com's picture

I'd walk a mile for a Camel. Cheaper than driving.

Thu, 02/23/2012 - 01:43 | 2187963 iDealMeat
iDealMeat's picture

If I were BP, I'd drill the Gulf dry, refine it in TX, fill my tankers with gas, and ride the current back to the E.U..

 

oh..  wait..   industry is already doing that??  ok, then.. never mind..

 

back to sleep sheep.  Feed buckets will be filled back up at midnight..

Thu, 02/23/2012 - 02:00 | 2187986 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

My father rode a camel; I drive a car; my son flies a jet airplane; his son will ride a camel.

-Middle Eastern Proverb

Thu, 02/23/2012 - 02:31 | 2188018 12ToothAssassin
12ToothAssassin's picture

Someone show me where I can get $3.50 gas PLEASE!

 

Its $4.28 at the cheap stations here.

Thu, 02/23/2012 - 02:42 | 2188034 HungrySeagull
HungrySeagull's picture

Aint happening son.

Get ready for 5 and 6 dollar gas and higher.

Get work close to home, as in within walking distance. Drive when you must.

Spend when you must. Not want.

Thu, 02/23/2012 - 05:08 | 2188289 economics1996
economics1996's picture

Israel wants to make sure Obummer does not get re-elected.

Thu, 02/23/2012 - 04:56 | 2188251 ChrisFromMorningside
ChrisFromMorningside's picture

$5.89 at some Central Florida stations. $5+ in some desert communities in Southern California. $4.20+ throughout most of Los Angeles.

Thu, 02/23/2012 - 06:07 | 2188418 Snidley Whipsnae
Snidley Whipsnae's picture

12ToothAssassin... From Gas Buddy here are the 5 states with highest average prices for gas...least expensive first...link here... http://gasbuddy.com/GB_Price_List.aspx

Note the most expensive city is Santa Barbara, Ca, with avg gas $4.227...

I don't know how often the Gas Buddy site is updated.

Oregon 3.802   Connecticut 3.890   New York 3.899   Alaska 3.952   California 4.169   Hawaii 4.203

 

Thu, 02/23/2012 - 07:27 | 2188467 StormShadow
StormShadow's picture

Atlanta $3.58

Thu, 02/23/2012 - 08:09 | 2188499 battle axe
battle axe's picture

NJ is always the cheapest, because that is were the refineries are....

Thu, 02/23/2012 - 08:43 | 2188531 CPL
CPL's picture

You mean were as in past tense.  NJ refineries have been offline for "repairs" for a month.  Around 90% of the US refinery capacity is offline for "repairs".  With none of it coming back online.

 

http://www.csdecisions.com/2012/01/31/gasoline-prices-surge-as-n-j-refin...

 

It's effecting diesel production as well.  One of the reasons the Tar Sand oil mines and the Shale oil mines have been stopping production 3 days out of 7.

 

The main reason is there is simply nothing to refine available. 

 

#PeakSweetLightCrudeBitchez!! 

#PeakDieselAdditiveComponents!!!

 

5.01 canadian per gallon, which is around par for USD carry trade. right now in town.  If it makes you feel any better most of the refineries are offline in Canada as well for indefinate "repairs".  The UK only has two refineries operating.

 

 

Thu, 02/23/2012 - 10:59 | 2188868 IrritableBowels
IrritableBowels's picture

Why the seemingly coordinated effort in slowing refining?

Thu, 02/23/2012 - 12:38 | 2189357 azusgm
azusgm's picture

Heard that it is change-over time to the summer blend.

Thu, 02/23/2012 - 13:37 | 2189589 CPL
CPL's picture

Because the refineries can't process the heavy oil into anything useful. Heavy crude is fairly dirty.  There just isn't an industrial process yet to make the Oil into anything useful, can't even be used for heating oil until it's refined.  Don't get me wrong, it'll burn, but if you put it in a furnace you'll have to replace the furance every season

 

It's Peak sweet light crude.

 

So, yes by all means, scoffing at Peak Oil is appropriate, ignoring all the low hanging fruit called sweet light crude.  Forget about.  It runs jets, tanks, planes, trains, power plants...everything.

Thu, 02/23/2012 - 13:16 | 2189525 roadhazard
roadhazard's picture

"nothing to refine" = bullshit, son.

Thu, 02/23/2012 - 13:37 | 2189600 CPL
CPL's picture

There isn't, until there is an industrially engineered process to refine heavy oil, the plants are idling doing nothing.

 

So understand this, you will pay ANYTHING for sweet light crude, because humans haven't got their shit together yet to process the heavy oil in any meaningful quanity.  Watch the pecking order this summer, you'll be very surprised that you aren't on the guest list with the rest of us for gas allowances.

 

Just thought I would give you a heads up.  Come July, unless you own a printing press, you won't be driving.  Either through shortages because military is first priority, then infrastructure, then the rest of us.

Thu, 02/23/2012 - 09:46 | 2188610 Shizzmoney
Shizzmoney's picture

It's $3.60 here in MA; that is helped by the fact that we have a pretty extensive public transit system....but that's going up to as MBTA fares will be increased by 25-43% by July.

In a sense, I'm rooting for oil to go up to $5.  Shit, make it $6.  Fuck it, we need the pain, the American people need to wake up.....and I need to find me all of the anti-OWS/anti-Ron Paul people at my job who refused to listen to the warning signs of hyperinflation.

It's gonna be lulzy when people wake up in the morning to find gas at the pump worth more than an Big Mac Combo.

Thu, 02/23/2012 - 01:45 | 2187967 non_anon
non_anon's picture

smoke a Camel with an open gas can full of gas in a closed space

edit: near empty can of gas for more fumes and less cost

Thu, 02/23/2012 - 04:28 | 2188203 respect the cock
respect the cock's picture

I am officially in the market for a TDI.  Going to trade in my 4runner before it's too late.  

Fuck this bullshit! 

Thu, 02/23/2012 - 08:44 | 2188532 CPL
CPL's picture

waaat!!

 

You can just put all that biodiesel that has been promised to replace oil....lol!!!

Thu, 02/23/2012 - 09:52 | 2188622 catacl1sm
catacl1sm's picture

Get an 06 or earlier. The newer 'Clean' diesels won't handle high blends of biodiesel.

Thu, 02/23/2012 - 08:08 | 2188498 battle axe
battle axe's picture

And just wait until Iran War starts. Good Times at the pump...

Thu, 02/23/2012 - 08:46 | 2188533 CPL
CPL's picture

You mean the start of WW3.

Thu, 02/23/2012 - 09:54 | 2188631 battle axe
battle axe's picture

Yup, everyone jump in the pool...

Thu, 02/23/2012 - 01:25 | 2187934 devo
devo's picture

Great article. Nothing revolutionary, but spot on.

Thu, 02/23/2012 - 02:37 | 2188026 LowProfile
LowProfile's picture

It's easy here to get wrapped up in nth degree hypothecation of 3rd order derivatives, abrogation of contract law, high frequency theiving, etc. and miss the simple point that:

They printed too much goddamn money, and now gasoline is too fuckin' expensive.

Thu, 02/23/2012 - 08:21 | 2188511 engineertheeconomy
engineertheeconomy's picture

they promised to be good and stop printing themselves free money. right. THAT'S gonna happen. Gas will be $20/gal in no time

Thu, 02/23/2012 - 01:27 | 2187938 AllThatGlitters
AllThatGlitters's picture

Heh.

Of course it is the money pump driving oil prices. 

Gold sees it, look at how it is still surgin:  http://www.pmbull.com/gold-price

The upcoming war with Iran / Syria (WWIII) is an added kicker for oil prices, which are now at a level that will virtually guarantee a collapse in the economy and equity prices, along with a currency collapse.  

What will come of it all?  That is the only speculation I'm interested in at this point.

 

Thu, 02/23/2012 - 01:39 | 2187951 devo
devo's picture

What will come of it all?

Good question.

Answer: A massive crash and reboot with the least redistribution of wealth possible. i.e. they won't let average Americans holding gold (or other assets) win. Possible civil/class war from this.

Thu, 02/23/2012 - 02:39 | 2188027 LowProfile
LowProfile's picture

...Possible?

Thu, 02/23/2012 - 05:35 | 2188392 respect the cock
respect the cock's picture

Ridiculous...in my line of work...more chaos=more work...as long as home value assessments keep holding up...not likely!

Let's levitate some home values! 

Thu, 02/23/2012 - 08:29 | 2188514 engineertheeconomy
engineertheeconomy's picture

home values depend on good jobs. jobs depend on bank loans and GAS.

so much for home values

Thu, 02/23/2012 - 09:52 | 2188623 snowball777
snowball777's picture

but, if you don't have a job to drive to, and live in your 4-runner (bwahahaaa), the sky is the limit!

 

 

Thu, 02/23/2012 - 08:47 | 2188536 CPL
CPL's picture

You read the news lately?

 

Thu, 02/23/2012 - 09:00 | 2188556 Conchy Joe
Conchy Joe's picture

A great man once told me "there is profit in chaos" and there always is.

Whether or not you can profit depends on how quick you are and sometimes how low you are willing to go,,,,

 

Thu, 02/23/2012 - 04:36 | 2188206 Non Passaran
Non Passaran's picture

Yeah right, WW 3...
Anyone who believes in it must be spending like a mofo and not "saving" money (for what?).

Thu, 02/23/2012 - 08:54 | 2188542 CPL
CPL's picture

Iran is the last oil patch not occupied by the US.  India, Russia and China need that Oil, but not with US strings attached.

 

What do you think is going to happen?  Other large sovereign nations with troops that out number the entire population of England are going to just roll over?  Since there isn't enough oil to have a traditional ground battle, this time the cheapest way to do what needs to be done are with nuclear missles.  They are already in the silos and gased up. 

No training and hussling up an army.  Fire and forget.  If you think that the those running the show give a fiddlers fuck about you or I if we are caught in the cross fire on this nonsense.  You are completely deluded, you are meat, meat for the grinder.  A name to go on a wall and be forgotten with us all.

"on a long enough timeline the survival rate for everyone drops to zero."  <upper right hand corner>

Thu, 02/23/2012 - 11:06 | 2188904 VisualCSharp
VisualCSharp's picture

Riiiiight, let's irradiate the very oil fields we want to take over.

That makes so much sense.

Thu, 02/23/2012 - 01:36 | 2187948 CrashisOptimistic
CrashisOptimistic's picture

Well, the guy has a few interesting things to say, right or wrong.

That 16% rise in gasoline has now effectively wiped out the entire payroll tax cut being extended into 2012."

So what?  This happened in 2011, too.  Big oil spike, smashed first half GDP, destruction of oil demand, price fall and resultant GDP stimulus.  Not rocket science.  

But you notice that sequence, likely repeating, has nothing particularly to do with trading?  Refineries buy oil from the source (or a tanker) and have zero obligation to look at NYMEX prices during the negotiation.  The only market he cares about is what other refineries are offering.

"There have been quite a few theories as of late about rising oil prices whether it is a potential war with Iran or seasonal demand."

Seasonal demand?  A warm winter?  Expired unemployment that becomes disability benefits and moves in with parents so that only one household trip to the grocery store is req'd rather than 3.  That REDUCES oil demand.  Less driving.

Not a bad write up, and it's entirely understandable that someone whose livelihood is tied up in trading thinks trading defines the world, but for oil, that just doesn't stand up to recognition of 26 million new cars each year driving in China and the fact the Iranian oil minister today said he's outputing 2.X million bpd, which is his normal amount.  The sanctions did nothing because when there is nowhere else to get oil, you get it where you can.  

It won't be long before those sanctions get profoundly leaky as the embargo countries notice that the country next door is paying 0.9 Brent for a barrel from Iran and they are paying full Brent price or whatever the going rate is from Nigeria -- which is a lot more than 0.9 Brent.

 


Thu, 02/23/2012 - 02:35 | 2188022 Manthong
Manthong's picture

Well, look at the bright side..

At least we don't have to worry about spilling any Canadian pipeline oil and polluting Nebraska.

 

Thu, 02/23/2012 - 06:35 | 2188437 Snidley Whipsnae
Snidley Whipsnae's picture

CO... Think about the concept of 'oil embargo' in the context of oil tankers registered in many countries filling up in Iran and then putting to sea... Many oil tankers per day enter/exit the Persian Gulf.

Those tankers destinations that are exiting the Persian Gulf can be any port in the world with oil storage facilities.

Tankers can off load at a 'neutral' port and that same oil can then be loaded into another tanker headed for a port in France, Germany, or any other 'embargoed' port. Or, the Iranian oil may be refined and then reloaded into another tanker headed for who knows where.

The idea that some Iranian oil will not reach 'embargoed' European countries is silly... as is the concept that all Iranian oil is going to be tracked to it's final destination.

This little tit for tat game between Iran and the countries that have 'embargoed' Iranian oil is another Punch and Judy show for the pols in Iran and those that place embargoes on Iran. More pols drumming up popular support and reinforcing nationalism.

A shooting war and closure of the Straits of Hormuz is the real sword of Damocles. If central banks are striving for inflation that should do the trick.

 

 

 

Thu, 02/23/2012 - 09:04 | 2188559 gookempucky
gookempucky's picture

Tankers can off load at a 'neutral' port and that same oil can then be loaded into another tanker headed for a port in France, Germany, or any other 'embargoed' port. Or, the Iranian oil may be refined and then reloaded into another tanker headed for who knows where.

Gave U a greener...Nice point wiplash- but offloading tanker to tanker wont happen--the cargoe will be re- brokered out of port with the same tanker holding the product--destination from public eye is unknown but it is known within the register. 

Thu, 02/23/2012 - 13:19 | 2189543 roadhazard
roadhazard's picture

"...payroll tax cut wiped out".

It happens every time the Gov. throws the People a bone. Straight to Big Oil.

Thu, 02/23/2012 - 01:40 | 2187956 devo
devo's picture

The payroll tax cut was probably wiped out by the average American's first two months of groceries. So, this gasoline situation is just further damage. The cheap credit/ZIRP driven corporate profits are next to fall, which is why we're seeing corporate tax reform action...

It's not rocket science. It just takes time to develop. House of cards, folks...

Thu, 02/23/2012 - 01:47 | 2187971 spekulatn
spekulatn's picture

The spoken cliche fits, me thinks.

 

The math doesn't lie.

 

House of cards indeed, devo.

Thu, 02/23/2012 - 09:55 | 2188633 snowball777
snowball777's picture

The dirty secret of capitalism is that corporations like the increased productivity / lowered labor costs of layoffs, but it's a cheap high.

Ask Mittens.

Thu, 02/23/2012 - 01:41 | 2187961 Dingleberry
Dingleberry's picture

Ben's money printing is why oil is rising. Along with the interminable "Iranian crisis". 4 buck gas = re-recession.

Thu, 02/23/2012 - 01:44 | 2187966 devo
devo's picture

Not sure the US ever came out of recession...

 

Thu, 02/23/2012 - 12:44 | 2189380 Chumly
Chumly's picture

Future historical accounts will probably confirm your doubts.  We are living the BIG WHITE LIE - the consumate shell game of numbers (BLS stats, true GDP, etc) will be the sum of our discontent.

Thu, 02/23/2012 - 09:56 | 2188636 snowball777
snowball777's picture

Your local evil speculators will try to leave a nice tip.

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