Piqued by Oil

The price of petroleum's slacking

With all of that pumping and fracking

Maintaining supply

At a level so high,

While demand, at the same time, is lacking. 

One would think, from the low price of crude,
That the future has been misconstrued,
But there's finite supply
In the ground, which is why
When it's emptied, it can't be renewed.

The price of oil continues to fall as, in the face of weak demand, producers from the Arabian peninsula to the tar sands of North Dakota keep pumping it out.   Like the protagonists in the famous Prisoners' Dilemma, exploration & production companies know that they would collectively benefit by slowing the pace of production, but individually they are motivated to cover as much of their costs as possible. 

In the short run, this development benefits consumers around the world, especially where the cost of driving is a major factor. At the same time, the oil exploration & production companies and their lenders are reeling from prices far below those they assumed when budgeting for the costs of extraction. 

In such times it is helpful to take the long view, which is that we are headed toward an eventual fall from the "net energy cliff," in the words of oil analyst Chris Nelder. This is the point at which it takes so much energy to extract the petroleum that it's no longer worth it. Notwithstanding today's bargain prices, that point may be closer than you think. 

Season of Easin'

S&P GSCI GLOBAL COMMODITY INDEX 
VS. U.S. 5-YEAR INFLATION EXPECTATION

The Fed has a great flexibility
To promote economic stability;
They may finish QE
If it's growth they foresee,
Or extend if they sense more fragility.

In the weakening outlook of Spring,
It appears to QE they must cling,
While back in the Winter,
We thought they'd begin ter
Discreetly unwind the whole thing.

Down on the Farm

Said a weathered old farmer named Weiss
At his acres of oats, wheat and rice:
"There's nothing I grow,
As far as I know,
That is subject to free-market price."

$2.50 Gasoline?

An economist, questioned on her view
Of the tools in the President's purview
To cheapen our gas,
Responded: "Alas,
Cheaper gas isn't what would best serve you."

"If to prices in Europe we liken it,
We should surely impose a tax hike in it,
For unless it is dear,
We're too cavalier
For pooling or busing or bikin' it."

"The high price of gasoline" has loomed as a political theme this year, as sharply rising fuel prices have coincided with the US Presidential primaries. And yet, most economists agree that the problem with American gasoline prices is that they are too low, and encourage an excessive level of consumption. Noted behavioral economist Richard Thaler, in a New York Times op-ed piece entitled "Why Gas Prices Are Out of Any President’s Control," argues for higher gasoline taxes and points out that Greg Mankiw, advisor to Mitt Romney (and former advisor to George W. Bush), is among the prominent advocates of this policy. A gradual hike in gas taxes would give drivers the right incentives and help to reduce the federal budget deficit. However, in a political season in which one Presidential candidate - with a straight face - claims that his policies could bring about $2.50-a-gallon gas, no other candidate, whether incumbent or challenger, can safely endorse a sensible gasoline tax policy.

A Crude Iranian Conflict

If an outbreak of Persian hostility
Brings petroleum price volatility,
The economy's cooling
From trouble in fueling
The engine of upward mobility.

Tensions with Iran over its nuclear program have introduced a new round of uncertainty into global strategic affairs, but one thing is definite: if Iranian supply is taken off the market, rising oil prices would impinge on almost every aspect of the US economy. Higher gasoline prices would cause consumers to cut back on discretionary spending, as most have a limited ability to cut back on driving. Manufacturers would be hurt both from higher delivery costs as well as higher prices for plastics and other petroleum-based materials. Even many service industries maintain fleets of vehicles and would feel the effects of a Persian Gulf conflict. The one bright spot at this point is that the prospect of $4.50 gasoline, as in 2008, appears as yet remote.

Pungent Predicament

The high price of onions in Mumbai
Means for many, they're harder to come by,
So the Bombayite lunch
Loses some of its punch,
Unless they can really find some buy.

With millions of poor farmers and even more millions of poor consumers, India tries to strike a balance between supporting farm prices and moderating food prices.  Now however, Bloomberg Business Week and others report that the cost of farm production is going up by 20% due to fuel and fertilizer price hikes.  This means that the government will have to re-calibrate the minimum guaranteed price of crops that farmers receive, as well as the subsidies that are extended to such staples as grains and oils.  In a pinch, however, things may have to get blander at the dinner table.

Unrefined Reversal

On the global commodity bourses,
Crude oil is subject to forces
Like the gasoline price,
Which, when high, may suffice
That the market puts carts before horses.  

A sudden, 8.6% plunge in the price of crude oil to $99.80 a barrel yesterday originated with a surprising source: the high price of US gasoline.  Fears of an imminent "double dip" into recession have been fed by gas prices approaching $4/gallon.  Oil, which - though the main ingredient in gasoline - is sensitive to economic cycles, was evidently poised for a break to the downside.  All that was needed was a surprisingly bearish announcement, and the market got two: European Central Bank President Jean-Claude Trichet implied no imminent hike in euro interest rates, which strengthened the dollar; and new jobless claims were higher than expected, which weakened the US growth outlook.

Hot Metal

With the copper price four-fold inflated,
Commodity analysts debated
Whether Chinese demand,
From the stockpile on hand,
Really could or just couldn't be sated.  

Copper prices, which have quadrupled after a two-year rally, are now drawing some skepticism.  Although Chinese industrial demand has driven the rally, recent signs indicate that a slight revaluation is in order. According to the Wall Street Journal, evidence has surfaced that up to a million tons of copper may be sitting in bonded warehouses around the country, implying a weaker consumption than was heretofore assumed. Copper bulls counter that these stockpiles could be consumed in less than one month; such is the voracious appetite of Chinese industry.

Corny, But True

The proportion the price of grain takes
Of the pay that a poor nation makes
Is more, as a rule,
For a serving of gruel
Than a similar serving of flakes.

Everyone's talking about the rising price of food, but only in poorer nations has it led to political upheaval. One reason is that, not only does food make up a greater percentage of the household expenses of lower-income nations, but by economizing with foods made from scratch they are more exposed to commodity price fluctuations. As Cornell University professor Per Pinstrup Andersen explains on the public radio Marketplace program: "[With Corn Flakes] you're paying a little for corn and the rest for the person who makes the cereal, packages the cereal, sells the cereal, and prints that fancy rooster on the box. That corn tortilla, well, that just requires corn."

So, while the flakes may be overpriced, the tortilla is more affected by overpriced corn.

Fed-Fueled Feeding Frenzy?

The Federal Reserve was attacked
By many who cited the fact
Of unrest overseas
Since they started to ease,
A tack which the right never backed.  

"Food inflation is quite a misstatement,"
Said the Fed, "Of what lowering the rate meant;
For oil and wheat
Beat a hasty retreat
On the days when we signaled abatement."  

The Federal Reserve's "QE2" program of stimulating the markets through purchases of Treasury bonds has coincided with price increases of 30-50% for metals, fuels and food since last August. Hawkish commentators such as Larry Kudlow and right-wing bloviators such as Rush Limbaugh have seized on this fact to claim that the Fed's easing caused commodity inflation. The argument is that it created excess capital flows that bid up the prices of assets around the world. The criticism took on apocalyptic overtones when food protests erupted in Arabic countries and led to political upheaval.

In response, two reasearchers from the San Francisco Fed have published a rather polite study, which concludes that they "cannot provide evidence" that QE2 caused food inflation. The reason is that, on the days when new asset purchases were announced, commodity markets tended to retreat; the market therefore thought of QE2 as bearish for commodities. Left unanswered, however, is the question of whether excess capital did in fact cause more buying of commodities and the overall bullish trend.

The San Francisco Fed's omission does of course leave the field wide open for blogging poets to address this crucial question, which we will bravely attempt.

That Empty Feeling

A fellow was fit to be tied:
"How the food makers subtly misguide!
While the price has held steady
Per box of spaghetti,
There's not as much noodle inside."  

This week, Limericks Économiques looks at food inflation.  You've probably noticed that those grocery items that have not gotten pricier have gotten smaller. This phenomenon was documented behind the paywall of the New York Times by Stephanie Clifford and Catherine Rampell. They quote one mother of nine who, only after the pasta dinner came up a bit short, noticed that the boxes that once contained 16 ounces now only held 13.25.  In this way,  food processors hope to mitigate the perception of the unavoidable passing of higher costs along to the consumer.

Stop Blowing Bubbles

Thomas Hoenig, the hawkish Fed governor,
Says: "The Dollar has way too much dove in 'er;
With a null target rate,
I doubt we'll deflate,
But inflation is bound to be stubborner."  

Retiring Kansas City Federal Reserve Bank President Thomas Hoenig summed up his argument for tighter money in a speech at the London School of Economics yesterday.  In what may be his valedictory address, Hoenig stressed the urgent need for a transition from short-term liquidity crisis management to longer-term inflation-fighting.  As he pointed out, the Fed's overly accomodative policy in 2003 set the stage for the asset bubble that crashed five years later.  Hoenig also added his voice to those blaming "QE2" for the recent round of commodity inflation, though without really making the case for it.

Anyone But China

The fervently flung accusation
That commodities' rampant inflation
Is the fault of Bernank's
May be gentler on Yanks
Than a less US-based explanation.    

Federal Reserve Chairman Ben S. Bernanke appeared before a Senate committee yesterday, once again facing questions on the Fed's role in rising prices for food and fuel.  Since these commodities comprise a global market in which prices are set by international supply and demand, one may wonder whether the blame directed at quantitative easing willfully ignores the  the "£800 million panda in the room."  Most knowledgeable observers agree that Chinese demand is a more important driver of commodity prices than US money supply.

Crude Commodities

When politics don't go as planned,
Commodities get out of hand,
As markets pay heed
To the fear and the greed,
Instead of supply and demand.    

The gyrations in the price of oil that have accompanied the uprising in Libya - a country with only 2% of global oil reserves - once again highlight the fact that markets are often more focused on the fear of adverse consequences (and the greed for what scarcity could do to prices) than actual changes in supply.

Fed Foments Revolution?

Said conspiracy theorists: "Debatably,  
That the cost of food acted inflatably  
Brought Egyptians to crisis,  
But started when prices  
Were eased by the Fed quantitatively."    


The Wall Street Journal's Real Time Economics reports on a speech yesterday by Fed Chairman Ben Bernanke, in which he said that it's unfair to blame global food inflation (and by extension, political unrest) on US monetary policy.  Recent spikes in the prices of such commodities as wheat, soy and sugar are due to supply constraints such as bad weather, and increased demand from increasingly prosperous emerging markets, says Bernanke.

Food Fight

When bread was too pricey to eat,
Egyptians rebelled in the street;
Now others may hoard,
As they cannot afford
The true cost of the high price of wheat.    

The Wall Street Journal's Heard on the Street column, citing the 13% rise in the cost of wheat since December, notes the role that the rising cost of staple foods has played in unrest in Cairo, Tunis and elsewhere. The natural impulse of governments to increase supply by hoarding may ironically drive the price higher, since such actions remove some of the marginal supply from the world market.