Carpe Diem

Are Oil and Gas Prices at Record Levels? Yes & No

The Washington Post ran an article on Wednesday titled “Oil at Record Price? That Depends“:

Cambridge Energy Research Associates says the record is $99.04 a barrel, a level it said was reached in inflation-adjusted terms in April 1980.

The International Energy Agency agrees that April 1980 was the peak month, but it said that the price would translate to $101.70 a barrel today.

The Energy Information Administration says that the previous inflation-adjusted record, $93.48 a barrel, was set in January 1981.

That would make the price reached yesterday (Tuesday, Nov. 6), $96.70 a barrel on the New York Mercantile Exchange after a $2.72 increase, a new record closing price.

MP: One issue that adds to the confusion about record-high oil and gas prices is that we have daily price information for oil and gas, but we only have price index data with a lag, and that price index data is required to adjust for inflation. For example, we won’t have October CPI data until November 15, so we can’t even accurately compute real oil and gas prices in October until late next week.

Another issue is whether or not gasoline prices (which consumers care more about than oil prices) are at record-high levels, especially since oil prices have been rising more than retail gasoline prices (see bottom chart above). Notice the breakdown of the historically close link between oil prices and gas prices in the last few months. Since late August, oil prices have increased by about 40% and gas prices by only 15%.

Using monthly gasoline price data from the Energy Information Administration back to 1976, and CPI data through September (and estimates for October and November), the top chart above shows monthly inflation-adjusted gas prices (in November 2007 dollars) from January 1976 to November 2007.

Bottom Line: The record for inflation-adjusted retail gasoline prices was set in March of 1981, when prices peaked at $3.35 per gallon. With current gas prices averaging $3.013 per gallon as of November 5 according to the EIA, we’re still 11% below the record price for gas.

Carpe Diem

Experimental Economics: M-F Stereotypes Are True

Greg Mankiw has a link to this interesting article “An Economist Goes to a Bar“:

The article discusses how two economists and two psychologists conducted a two-year speed-dating experiment at a bar near the campus of Columbia University, and they found these results:

1. Men put significantly more weight on their assessment of a partner’s beauty, when choosing, than women did.

2. Women got more dates when they won high marks for looks.

3. Intelligence ratings were more than twice as important in predicting women’s choices as men’s.

4. Men avoided women whom they perceived to be smarter than themselves. The same held true for measures of career ambition—a woman could be ambitious, just not more ambitious than the man considering her for a date.

5. When women were the ones choosing, the more intelligence and ambition the men had, the better.

Conclusion: Male-female stereotypes appear to be true.

a) Males are a gender of fragile egos in search of a pretty face and are threatened by brains or success that exceeds their own.

b) Women, on the other hand, care more about how men think and perform, and they don’t mind being outdone on those scores.

Carpe Diem

Look Out Starbucks:McDonald’s Coffee, Sales Rock

Nov. 8 (Bloomberg)McDonald’s Corp., the world’s largest restaurant company, said October sales rose 6.9%, beating analysts’ estimates on sales of cinnamon rolls and coffee in the U.S. and chicken snack wraps in Europe.

Sales in U.S. restaurants open at least 13 months advanced 5.4%, while Europe’s comparable sales increased 6.4%, the Oak Brook, Illinois-based company said today in a statement. The median estimate for global sales growth among four analysts surveyed by Bloomberg was 5.2%.

Carpe Diem

Capital vs. Talent:Capital Is Plentiful, Talent Scarce

I came across an interesting 2005 New Yorker article titled “Net Worth,” here are some excerpts:

In the traditional struggle between capital and labor, more often than not capital has won, because the real source of value for most companies has historically been the hard assets that they owned and controlled. Toyota owes its success to its machines, assembly lines, and system of production. For Wal-Mart, it’s primarily store location, technological efficiency, and product selection. For Coca-Cola, it’s carbonated beverages and exceptional distribution. Workers for these companies are, for the most part, interchangeable, so their bargaining power is limited.

But in a host of industries—most notably in what we now call the knowledge economy—the arrangement is different. In Hollywood, in Silicon Valley, on Wall Street, and in professional sports, hard assets matter far less than people. The employees—the so-called knowledge workers—make the difference between success and failure.

Capital is plentiful; it is skilled people who are scarce. The salient struggle is no longer capital versus labor but, capital versus talent. The upshot is that in many knowledge businesses the employees often do better than the shareholders.

Talented workers were always in demand, but only recently did they recognize how much they could get for their services. Things may be getting harder for traditional labor—real wages for most workers actually fell last year (2004)—but they’re getting better for the talent.

Bottom Line: The “capital vs. talent” argument could actually help explain: a) rising CEO pay, b) rising income inequality, and c) the decline of manufacturing wages and the power of unions, etc.

Carpe Diem

With Derivatives At An All-Time High, US Economy Can Handle $100 Oil, Falling $ and Subprime Crisis?

I blogged before about why “The Energy Efficient Economy Can Handle $100 Oil,” and Greg Mankiw linked to that CD post on his blog asking “Where have all the oil shocks gone?” As Mankiw summarized, “The economy is far more energy-efficient today than it was in the past, in part because economic activity is based more on services and less on manufacturing. As a result, energy prices matter less today.”

Another reason that the U.S. economy today can handle record oil prices, a falling dollar, and increasing credit risks, without going into recession? Price, currency, and credit risks have been hedged effectively using derivative contracts (futures, options, swaps, etc.), insulating the U.S. economy more than ever before from oil shocks, currency risk and the subprime mortgage crisis.

As the top chart above shows, the volume of futures contracts at the Chicago Mercantile Exchange is at an all-time historical high, and have increased by a factor of 6X between 2000 (231 million contracts) and 2006 (1.403 billion).

Likewise, the value of derivative contracts (according to the OCC) held by U.S. commercial banks in 2007 ($152 trillion) is almost 11X 2007 U.S. GDP ($14T), compared to a ratio of 2:1 in 1994 (see bottom chart above) for Derivative Contracts:GDP.

Bottom Line: With derivative trading at an all-time historical high, which allows for low-cost effective hedging of price risk, currency risk, interest rate risk and credit risk, the U.S. economy of 2007 has been able to easily accommodate oil shocks, a falling dollar, and the subprime mortgage crisis, without the risk of recession.

Carpe Diem

U.S. Productivity Growth Is The Highest in 4 Years, Real Compensation Up by 2.7%

According to the BLS’s report today, productivity in the nonfarm business sector grew by 4.9% in the third quarter, the largest gain in four years – since the third quarter of 2003. The 4.9% productivity growth was well above Wall Street’s expectation of 3.4% growth, was also more than twice the average productivity growth over the last 25 years of 2.07% (see chart above, click to enlarge).

The BLS also reported that real compensation, adjusted for inflation, rose 2.7% in the third quarter, well above the average of 2.08% over the last ten years.

Carpe Diem

Why Subprime Mortgage Crisis Won’t Cause A Recession: The U.S. Economy Survived S&L Crisis

Remember the Savings and Loan crisis of the 1980s? Does it offer any lessons about how the U.S. economy and financial system will absorb the current “subprime mortgage crisis” (a phrase so common and popular now that you’ll find 349,000 Google hits).

The top chart above shows the annual number of bank failures in the U.S. from 1979 to 2007, using data from the FDIC. Between 1982 and 1993, 1456 banks (mostly S&Ls) in the U.S. failed, and at the peak of the banking crisis in the late 1980s about 200 banks were closed in each year from 1987 to 1989 (see bottom chart above). That’s almost one bank failure on each business day of the year, for three years in a row!

One lesson we can learn is that even at the peak of the “S&L crisis,” the overall economy performed well, with pretty impressive real GDP growth at above-average rates (3.4%, 4.1% and 3.5% from 1987-1989), and most importantly, the economy did not go into a recession even at the peak of the most serious banking crisis since the Great Depression!

In some ways, today’s economy is in much better shape than the U.S. economy of the 1980s, e.g. unemployment rates today (4.6% average over the last two years) are much lower than the 1980s (7.3% average).

Consider also that not a single U.S. bank failed in 2005 or 2006 (see chart above), and only 3 banks have failed in 2007, which a very impressive record of only 1 bank failure per year on average over the last 3 years. I am pretty sure that there has never been any two-year period in U.S. history without a single bank failure in the U.S., and no three-year period in U.S. history with only 3 bank failures. The U.S. banking system has never been as strong and as stable as it is today.

Bottom Line: If the economy of the 1980s could withstand a banking crisis as serious as the S&L crisis (with almost 1500 bank failures) without going into a recession, a much stronger and more resilient 2007-2008 U.S. economy and banking system will not go into a recession because of the current “subprime mortgage crisis.”