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Ways of the World

Carol Stone, business economist & active Episcopalian, brings you "Ways of the World". Exploring business & consumers & stewardship, we'll discuss everyday issues: kids & finances, gas prices, & some larger issues: what if foreigners start dumping our debt? And so on. We can provide answers & seek out sources for others. We'll talk about current events & perhaps get different perspectives from what the media says. Write to Carol. Let her know what's important to you:

Saturday, April 26, 2008

A Fervent Rogation Commemoration

Monday, Tuesday and Wednesday this coming week – April 28, 29 and 30 – are "Rogation Days", a time every year just before Ascension Day when the Church asks God's blessing on the planting of the crops and the production of other goods and services. Ways of the World always commemorates this occasion, but this year, with high food prices as well as high energy prices, the increasing use of food crops for fuel and the present pervasive financial strains, we feel the need for these petitions all the more.

For Agriculture*
Almighty God, we thank you for making the earth fruitful, so that it might produce what is needed for life: Bless those who work in the fields; give us seasonable weather; and grant that we may all share the fruits of the earth, rejoicing in your goodness; through Jesus Christ our Lord. Amen.

For Towns and Rural Areas*
Lord Christ, when you came among us, you proclaimed the kingdom of God in villages, towns, and lonely places: Grant that your presence and power may be known throughout this land. Have mercy upon all of us who live and work in rural areas; and grant that all the people of our nation may give thanks to you for food and drink and all other bodily necessities of life, respect those who labor to produce them, and honor the land and the water from which these good things come. All this we ask in your holy Name. Amen.

For Workers**
O God, Father of us all, we pray for all who toil in mill, mine and oil field; for all by whose labor we are clothed and fed; for those who build and adorn our houses; for those who trade in shop or market; for those who go down to the sea in ships and do business in great waters and faraway ports; and for those who manage risky investments and other financial services. May our service and our merchandise be holy unto the Lord. May we do justly and love mercy and walk humbly with you, for your Name's sake. Amen.

*From the Book of Common Prayer, "Prayers and Thanksgivings" beginning on page 810.

**Adapted and modified from Prayers for All Occasions, a Forward Movement Publication, 1964, page 52.

Tuesday, April 22, 2008

Special Note: Last weekend, we attended the annual conference of The Episcopal Network for Stewardship -- TENS. The meeting was at Grace and Holy Trinity Cathedral in Kansas City and saw upwards of 150 stewardship officers, volunteers and clergy from all around the country, and even Canada and Australia. We had a fine time, and we will tell you about it, especially a new program in the Episcopal Church called "Living Wi$ely", which excites us a great deal. As we explain below, though, the price of gasoline took our attention in the succeeding days, so we tell you about that first. More to come!

Gasoline Prices -- Yikes!

Sigh. We were going to write you a nice Earth Day commentary today. But then we bought gas during the weekend and paid 30 cents more a gallon – nearly 10% more – than we had paid only two weeks ago. So we thought maybe we should talk about that instead.

In our last commentary on April 1, we expressed concern about rising energy prices and how our spending for energy is eating into our incomes. The information we used then covered February, a month when petroleum prices were actually down, albeit briefly. Our estimations, using US Commerce Department data, showed people's energy expenses absorbing about 13.8% of our take-home pay. But at that time, gasoline averaged "only" $3.03 a gallon. Now, in yesterday's AAA survey, the national average is $3.503. That's enough to push the energy burden on income to at least 15-1/2%, sapping billions of dollars from consumers' discretionary purchasing power.

Price Gouging Not in Evidence
How did this happen? Are the oil companies ripping us off – again? Well, no. What we find is that beyond movements in the world price of a barrel of oil, there is little evidence that gasoline consumers are being gouged.

At the wholesale level, refining margins have decreased. That is, the value of the products produced at oil refineries has gone up less than the cost of the crude oil that goes into them. Last week, ended April 18, this amount, the so-called "crack spread", was $13.96 for a barrel of Texas oil. A year ago, it was $20.40. Over the last four weeks, the crack spread has accounted for 11.6% of the value of the gasoline and heating oil produced in the refineries. This is down from a five-year average of 15.2% and about 17.5% during the late 1990s, when oil was still "cheap". So refiners are not adding to our woes.

Nor, apparently, are our local gas stations. We looked at the difference between retail gasoline prices and the wholesale "spot" prices. In the late 1990s, this spread was about 60 cents a gallon. Over the last four weeks, it was 68 cents, and in the last week alone (ended April 14), it was only 57 cents. So our stations are not taking a bigger piece of the pie, and on a percentage basis, it's considerably smaller. In fact, during the last year, the retailers' spread over cost has represented 24% of the retail price, but historically, just over than half of that price we pay was added by the stations themselves.

World Oil Demand Up, But Not in US
So to find the source of our current problems, we need to go to the underlying oil market itself. Here on Earth Day, we can talk for two reasons about conserving use: the environment and the cost. And we can also tell you that conservation is happening. According to some proprietary data from Energy Intelligence, a private consulting firm, oil demand in the US was the lowest in March in five years. It hasn't come down a lot, 600,000 barrels per day, from the March peak of 21 million in 2005, but it certainly is not rising. [Oil usage varies with seasons, so we look at the same month each year to make our comparisons.] Demand in Europe has also eased, to 15.5 million barrels/day this March from a peak of 16.3 million in 2006. As you've perhaps heard, it's China and India where the gains are. Their consumption isn't yet nearly as large as in the US, but they are growing: China is up to 7.9 million barrels daily from 6.7 million in 2005 and India 3.1 million from 2.6 million in 2005. Total world usage over that whole period is up to 86.9 million barrels a day in March 2008 from 85.7 million in March 2005.

The price pressures come because the total supply can't keep up. March production of petroleum and its products ran at 85.5 million barrels, less than the needs of 86.9 million. But this shortfall of 1.4 million is actually an improvement. The prior three years saw an average of about 4 million; this amount of demand was thus supplied by reductions in world inventories. This is an important point. It took a while for the higher prices to have an impact, but they are bringing out more supply. It now pays to go after the harder-to-reach oil deposits, and part of the recent supply increase is the opening of a new North Sea field. And despite the insistence by OPEC that they are not raising their production target, they are raising their production. Their output in March was reportedly 36.7 million barrels/day, compared with about 34 million in the prior three Marches.

Weak Dollar Does Hurt, Though
These fundamental supply and demand factors interact to increase prices. The price of oil in US dollars has also increased because of the weakness of the dollar in foreign exchange markets. Note, though, that the fall in the dollar does not cover the entire oil price change. The price of oil expressed in euros, for instance, has also gone up. Since March 2006, it has risen about 30%. The exchange rate of the euro has risen by about 30%, so that almost equal parts of the higher dollar price of oil come from the low dollar and tight oil market fundamentals.

Green Is "In": Happy Earth Day!
In Sunday's New York Times, Jad Mouawad, the Times' main energy reporter, bemoans the high cost of oil. "What shall we do?" he seems to complain in his "Week in Review" feature, "The Big Thirst". This situation indeed does not have an easy solution. His article discusses only one aspect, however, adding to supply by finding new sources of oil. As he says, that certainly takes a long time. We are encouraged, though, by numerous efforts to rein in consumption in this country, spurred by a combination of government support and private sector marketing. Have you shopped for light bulbs recently? It's harder to find incandescent ones now, as CFL bulbs begin to dominate. Green buildings and hybrid cars are becoming more prolific. Some car companies are even starting to market hybrids in China. These technological changes will only be accelerated by the high oil prices. The next few months won't be much fun for consumers, but as we've argued before here, "good old American ingenuity" will eventually go a long way toward alleviating high energy costs – and helping the environment in the bargain. Maybe it isn't such a bad Earth Day after all.
* * * * *
For some DIY information on saving energy, see the Hodgepodge entry for April 23. Debbie directs you to the US Department of Energy's webpage for a whole catalog of tips. Go to to get connected. We even heard Bill O'Reilly on FoxNews give advice tonight about driving less!

Tuesday, April 01, 2008

Is the Worst Over?

The stock market has started the second quarter of 2008 with a rousing gain: as of 2:00PM, almost 300 points on the Dow, an increase of 2.5% for the day, and it closed up 391 points or 3.2%. It's still off about 4.5% so far in 2008, but this familiar measure of 30 companies is up marginally from this time a year ago, a remarkable stability if the economy is in recession. Broader stock price gauges are down several percentage points from year-earlier levels, but they are showing milder declines than during previous contractions in the economy. You perhaps get the feeling, as I do, when the market swings up and down from day to day that investors aren't sure which way things are going.

So far, measures of economic activity have behaved in a similar fashion. Today, for example, the Institute of Supply Management, an industrial trade association, reports that its index of manufacturing activity hovered just below 50% in March for a third straight month, indicating that while the sector is experiencing retrenchment, it is quite modest. Broader evidence will come Friday, when the Labor Department publishes economy-wide job and unemployment data for March.

The Federal Reserve Staves Off Panic
Part of the stock market's relatively even-handed performance is surely related to the recent decisive actions by the Federal Reserve. With the significant degree of debt in the economy, confidence is all-important. Within a few days near mid-March, Bear Stearns, a large, 85-year-old investment bank, lost the confidence of its day-to-day lenders. We often think that long-term investing is the riskiest, but in extreme situations, funders may worry that they might not get repaid even tomorrow, so overnight financing becomes next to impossible. Such a situation loomed on March 13 and 14. ["Beware the Ides of March." Haven't I heard that somewhere before?] On the morning of March 14 and again on Sunday, March 16, the Fed announced a special lending facility for Bear and the extension of its regular discount window operations to the entire network of so-called "primary dealers".

As we mentioned last time, only commercial banks have had access to the full range of Federal Reserve support activities. A select group of investment banks also participate in the Fed's "open market operations", which are the main tool for adding or draining monetary reserves. Those dealers, just 20 in all, that are chosen to conduct these monetary policy transactions are high quality institutions that must maintain specific minimum capital levels; they are obligated to trade Treasury and other securities even under adverse market conditions and they must make extensive daily and weekly reports on their financial condition and market positions to the Federal Reserve. Thus, it would have been a tremendous shock at the very core of the US financial system if a "primary dealer" were to fail.

The Fed's also brokered the sale of Bear Stearns to JP Morgan Chase; this quick commitment to ensure the continuity of business by arranging a sale of the firm surely helped to maintain the viability of US markets in general. Just as surely as time goes on, questions will be raised about whether the Fed's actions were completely legal and appropriate, but in the moment a panic was averted.

Going forward, it seems to us that financial failure is probably less a concern for the economy in general. Among its actions, the Fed cut its key short-term interest rate again, now to 2.25%. Other interest rates have eased for many borrowers. Mortgage rates, for instance, have dipped back below 6%. And rates on most corporate bonds and short-term obligations have also declined.

But Consumers' Incomes Are Squeezed
At the same time, we do have a worry about the broader economy – and it's about us. We watch with increasing nervousness as gasoline prices continue increasing. And we know we're paying more for milk and other basic food items. The Commerce Department has published data through February on consumers' wage-and-salary income and their spending on some of these necessities, so we can see how much of our income they are taking. In the graph, you can see that energy has risen to absorb more than 13% of "take-home pay" (an after-tax measure we calculated from the Commerce Department array of information), the most in 20 years, and food-at-home has started to rise again after a lengthy decline. "Financial obligations" are a Federal Reserve series encompassing mortgage payments, rents, property taxes and insurance and they too, as we might imagine, have been taking more and more of our incomes. A more thorough exploration of these consumer finance issues will surely occupy us again. But as outlays for food and energy approach 30% of our paychecks and housing expenses account for another 42%, that leaves the smallest portion of income available for discretionary spending since these data were first compiled in 1980. So some risks to the economy might be subsiding, but we're clearly not out of the woods. And all the precautionary ideas we've expressed here about seeing to your own financial health can't be repeated too often.

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