Inflation

[TV and credit cards]

Or US producers willing to fill that gap.

The US producers are producing more than ever, well over 10 Mbbl/d. Most of it is from fracked shale wells, the boogeyman of the squady left.
View attachment 38907

Some five years ago, "Wall St experts" were squeaking about how anything over $50 a barrel and US producers would swoop in. Now all I'm hearing is investors want US oil producers to "maintain capital discipline".

And they did swoop in. US increased oil production quite a bit since 5 years ago, only broken by the 2020 COVID collapse in demand.
But that also means that the most profitable plays are already producing and marginal cost for every additional bbl/d of production gets more and more expensive.
Add to that an administration that is not exactly friendly to oil and gas industries, and esp. fracking without which we could not be producing even half of the oil and gas we are producing. Note that it was Biden's former boss who, for purely political reasons, cancelled Dakota Access Pipeline permit after 95% of the pipeline had been completed already. What will Biden do when the next pipeline for fracked oil or gas is needed? He already killed Keystone XL, so we know he is not too pipeline friendly.

I've got another term for "maintaining capital discipline".

Believe it or not, oil companies are businesses, not charities. They are seeking profit in an uncertain political landscape. Biden is under a lot of pressure from his left flank to be even less friendly to oil and gas companies. Some on his left are demanding he kill DAPL even though it has successfully transported half a million bbl/d of light sweet crude for five years.
Nevertheless, fossil fuel companies greatly expanded US oil and gas production over the last 10-15 years thanks to the shale revolution/fracking. But that also means that the most easily accessible plays are already tapped in order to get to quite impressive ~12 Mbbl/d. Increasing it from that level is not easy, or cheap.

My emphasis.
Swoop? You call this swooping? They swooped 2013-2020 when the price was bouncing around $50 a barrel. They've come back in something far short of swooping since 2020 while the price doubled.
I'll stand on the original articles I posted regarding investors pressing for less investment and more return. So the investors make hay and the rest of the country suffers for it, especially those who can least afford it. What is happening in the oil markets today is the poster child for why our capitalism run amok system does not work.

 

[Swammerdami]

Stagflation is the worst of both worlds, and I certainly do not envy Jarome Powell and the Fed right now. They need to calibrate interest rate increase carefully lest they trigger a recession.
. . .
We certainly had a huge increase in M1 supply between April and May 2020 according to this chart. M2 increased less extremely, but it still increased quite a bit.

Yes, as I've said often the FRB is trying to steer between Scylla and Charybdis and will probably fail.

But as for your graphs, did you notice that the Y-axis has $19 Trillion where Zero should be, so a 5% increase looks like a 2000% increase? I clicked somewhere hoping to make the graph more useful and was invited to Start a Free Trial instead.

For graphs of economic data I don't think you can do better than fred.stlouisfed.org. That particular graph just compares inflation rate with Baa bond yields but you can click 'Edit Graph' and, with practice, construct a wide variety of useful graphs. Remember to click 'Share Links' before linking to your custom graph here.

 

[Jimmy Higgins]

(OPEC doesn't give a damn anymore)

Is it that they are not giving a damn anymore or that they cannot easily increase supply in the short run?

Saudi Arabia can likely drown us all in oil and quickly. But the leadership has other goals in there.

Any projects have a lead time from commencement to start of production. And many projects were cancelled/delayed in 2020.
Add to that that as time goes on it will be more difficult to extract oil from the ground. Saudi Arabia in particular is relying on fields like Ghawar that have been producing for more than 70 years for most of its production.
It's not as easy as turning a spigot to produce more oil.

Is Derec defending OPEC? I must have bumped my head last night. I'm not reading things right.

 

[Jimmy Higgins]

The economy lost trillions.

That does not make your statement 'The US Government didn't pump much money into the economy...' true. It printed 80% of dollars the US ever had over 22 months.

I'm afraid I will have to agree with Messrs. Derec and Metaphor here. Giving people extra dollars to spend while the pandemic gave them fewer goods to buy obviously tended to increase prices.

How? What is the economic model for that? I'd like equations. The US economy lost 20+ million jobs in an unprecedented short period of time. The US economy dropped over 30%!

In the 4th qtr of 2019, the US GDP was $21.7 trillion (adj annual rate). 2nd qtr of 2020, the US GDP was $19.5 trillion. It was a rate drop that was unprecedented as well. Assuming the US economy only gained $0.2 trillion per qtr in lieu of the pandemic, that would mean that in 2020, the US economy lost over $5 trillion. So unless the stimulus was notably greater than economic loss, inflation is caused by the stimulus.

This was exacerbated by the fact that stimulus checks reduced some people's incentive to work, further lowering the supply of goods and services.

The stimulus checks did no such thing. It is possible that the unemployment bonus did, however, receiving a check of a few grand every 6 months isn't enough to consider not working. Also, the fact that the US economy added a record 6.4 million jobs in 2021 takes away this myth that people didn't want to work.

This is not to say that the stimulus checks were the major reason for inflation, nor that they were necessarily ill-advised. The nation was faced with a severe crisis and excessive partisanship limited the options. It is unfortunate that one political party prefers electoral success over the welfare of the nation and therefore roots for an opposition President to fail.

If the inflation of 2021 subsides by 2023 it should have limited long-term impact. Unfortunately, chain reactions may give momentum to inflation. Raising interest rates will risk a fall in asset valuations, a credit crisis, and recession. I do not think there is any obviously correct policy path forward, especially given the fact of political gridlock.

Interest rates were the driving cause of the 2008 recession. And Trump's influence on the Fed in his Presidency led to continued artifically lower interest rates. Higher interest rates aren't a bad thing.

Localized inflation was caused by supply issues, then shipping clogs, then more generalized due to shipping being expensive because oil supply is a little short because the global industry has a 1920's mindset. This has all be caused by a interconnected global economy running at a particular level that was greatly disturbed by the pandemic. The outcome is unique because the cause was unique.

 

[Swammerdami]

I'm afraid I will have to agree with Messrs. Derec and Metaphor here. Giving people extra dollars to spend while the pandemic gave them fewer goods to buy obviously tended to increase prices.

How? What is the economic model for that? I'd like equations. The US economy lost 20+ million jobs in an unprecedented short period of time. The US economy dropped over 30%!

In the 4th qtr of 2019, the US GDP was $21.7 trillion (adj annual rate). 2nd qtr of 2020, the US GDP was $19.5 trillion. It was a rate drop that was unprecedented as well. Assuming the US economy only gained $0.2 trillion per qtr in lieu of the pandemic, that would mean that in 2020, the US economy lost over $5 trillion. So unless the stimulus was notably greater than economic loss, inflation is caused by the stimulus.

(I assume you meant ". . . inflation is NOT caused by the stimulus.")
But how do you figure you can replace lost production with stimulus checks? That's like saying you can save someone suffering from malnutrition with injections of sugar (or heroin — pick your metaphor!).

The purpose of stimulus is to stimulate DEMAND. But the pandemic slowdown was more driven by a shortfall in SUPPLY, rather than demand.

Anyway, I did write "This is not to say that the stimulus checks were the major reason for inflation, nor that they were necessarily ill-advised. "

This has all be caused by a interconnected global economy running at a particular level that was greatly disturbed by the pandemic. The outcome is unique because the cause was unique.

Yes, I've complained about the problem of Hyper-efficiency. Some modern efficiencies (like "just-in-time scheduling") can back-fire, and expose fragility. The 2008 crisis was provoked by the hyper-efficiency of slicing and dicing mortgage packages, and selling derivatives on derivatives. Recently I linked to an interesting article blaming hyper-efficiency (though it didn't use that term) for a recent rise in world hunger despite record levels of agriculture.

 

[Jimmy Higgins]

I'm afraid I will have to agree with Messrs. Derec and Metaphor here. Giving people extra dollars to spend while the pandemic gave them fewer goods to buy obviously tended to increase prices.

How? What is the economic model for that? I'd like equations. The US economy lost 20+ million jobs in an unprecedented short period of time. The US economy dropped over 30%!

In the 4th qtr of 2019, the US GDP was $21.7 trillion (adj annual rate). 2nd qtr of 2020, the US GDP was $19.5 trillion. It was a rate drop that was unprecedented as well. Assuming the US economy only gained $0.2 trillion per qtr in lieu of the pandemic, that would mean that in 2020, the US economy lost over $5 trillion. So unless the stimulus was notably greater than economic loss, inflation is caused by the stimulus.

(I assume you meant ". . . inflation is NOT caused by the stimulus.")
But how do you figure you can replace lost production with stimulus checks? That's like saying you can save someone suffering from malnutrition with injections of sugar (or heroin — pick your metaphor!).

No, it isn't like saying that at all. Stimulus checks amounted to small amounts of money. Nothing compared to unemployment assistance. There was a loss in GDP of $5 trillion, the stimulus checks didn't come close to over-riding that.

The purpose of stimulus is to stimulate DEMAND. But the pandemic slowdown was more driven by a shortfall in SUPPLY, rather than demand.

Pandemic slowdown was a sudden drop in demand, not supply. Hospitality services vanished because there was no longer demand due to the soft shutdown.

Anyway, I did wrote "This is not to say that the stimulus checks were the major reason for inflation, nor that they were necessarily ill-advised. "

This has all be caused by a interconnected global economy running at a particular level that was greatly disturbed by the pandemic. The outcome is unique because the cause was unique.

Yes, I've complained about the problem of Hyper-efficiency. Some modern efficiencies (like "just-in-time scheduling") can back-fire, and expose fragility. The 2008 crisis was provoked by the hyper-efficiency of slicing and dicing mortgage packages, and selling derivatives on derivatives. Recently I linked to an interesting article blaming hyper-efficiency (though it didn't use that term) for a recent rise in world hunger despite record levels of agriculture.

The slicing and dicing however, was enabled by the substantial inflation of the US Housing market, which was caused by the low interest rates and the Fed's short-sightedness on the impact of the housing inflation, as that was the main driving force of the US economy during the W years. Without it, there would have been a much slower economy.

 

[ZiprHead]

You forgot to include oil company price gouging.

What "gouging"? All prices are a function of supply and demand. And oil companies have hardly a high net profit margin to begin with.

Oil producers control the supply part of the equation and are deliberately not increasing that supply keeping prices artificially high.

2 wild charts show how Big Oil profits are skyrocketing as prices at the pump rise

Oil companies are raking in the largest quarterly profits in a decade, raising concerns that the sector is using high gas prices to gouge customers.

www.businessinsider.com

Several of the world's largest oil companies reported first-quarter earnings in recent weeks, giving investors new detail as to how sky-high gas prices are bolstering firms' bottom lines. Performance, in a word, was stellar. ExxonMobil reported a net profit of $5.5 billion, more than doubling its earnings from the year-ago period. Shell notched its strongest quarterly profit ever, and Chevron posted its best earnings quarter in nearly a decade.

A new analysis from the Center for American Progress examined five major oil companies — Shell, ExxonMobil, BP, Chevron, and ConocoPhillips — as gas prices soar.

The authors of the Center for American Progress post wrote that, in the first quarter of 2022, these companies "brought in more than 300 percent more in profits than in the first quarter of 2021. That is a total of more than $35 billion in profits in just three months."

"In fact, these five companies' first-quarter profits alone are equivalent to almost 28 percent of what Americans spent to fill up their gas tanks in the same time period," the authors added.

The windfalls mark a seismic shift from how oil companies were performing at the start of the pandemic. The first wave of lockdowns saw demand for energy crater. Crude oil prices even turned negative in the spring of 2020 as companies rushed to get unwanted oil off their hands.

The US is now experiencing what happens when the market swings in the opposite direction, and companies with pricing power are making a killing.

Oil companies are also spending huge amounts of money on stock buy backs.

Big Oil on course for near-record $38bn in share buybacks

Western energy majors are on course to buy back shares at near-record levels this year as soaring oil and gas prices enable them to deliver bumper profits and boost returns for investors.

The seven supermajors — including BP, Shell, ExxonMobil and Chevron — are poised to return $38bn to shareholders through buyback programmes this year, according to data from Bernstein Research. Investment bank RBC Capital Markets put the total figure higher, at $41bn.

That would be almost double the $21bn in buybacks completed in 2014 — when oil last traded above $100 a barrel — and the biggest total since 2008. The plans underscored the strength of companies that are reaping the rewards of a resurgence in energy demand as pandemic lockdown restrictions are rolled back.

Gas prices are at record levels and oil is trading at a seven-year high of more than $90 a barrel, resulting in big profits for the supermajor group rounded out by TotalEnergies, Eni and Equinor.

 

[Swammerdami]

Pandemic slowdown was a sudden drop in demand, not supply. Hospitality services vanished because there was no longer demand due to the soft shutdown.

Many people would have been happy to go to resorts, restaurants, or on cruises if they could. But the SUPPLY of unrestricted hospitality had fallen due to distancing rules and lockdowns.

This is not just a matter of semantics. Giving people enough money to visit Disneyland will not increase visits to Disneyland if Disneyland is shut down.

 

[bilby]

If there are jobs you can’t fill, you are not offering high enough wages.

Or there is too much incentive not to work.

It’s basic supply and demand.

It is. And US paid people an extra (i.e. in addition to regular unemployment) $15/h full time not to work. Of course people were not eager to work retail or food service jobs given such a sweet deal.

$15 is a fucking pittance. Nobody should be paid so little.

That you think not working is such a ‘sweet deal’ tells me only that you haven’t been unemployed for any length of time.

I have, and I can assure you that nobody is doing it for the oh-so-lucrative free cash.

 

[Jason Harvestdancer]

As the song says ... you ain't seen nothin' yet.

I don't blame the supply chain, and all the money pumped into the economy isn't the government stepping back and letting the market do it's magic.

This is the end result of a process that began long ago but has recently taken off like a rocket. It is creating a negative feedback loop as well, wherein higher prices lead to more higher prices. It will take a few years to stabilize from what we have now, assuming nothing else bad happens in the mean time. That is a very big assumption given our current "leadership".

We're in for quite a ride folks. It's going to get very bumpy.

Another indicator of how bad things are getting, we are indeed experiencing shortages. Expect that to get worse as well.

 

[Swammerdami]

We're in for quite a ride folks. It's going to get very bumpy.

From the famous lines from famous movies Desk. (If you're as easily infatuated as I, I suggest you fast-forward to the 1:36 mark and watch a young actress, fresh from performing in a Pabst beer commercial, in a bit part. Did she ever make it big in Hollywood?)

 

[Derec]

Swoop? You call this swooping? They swooped 2013-2020 when the price was bouncing around $50 a barrel. They've come back in something far short of swooping since 2020 while the price doubled.

Yes, I do call it swooping. And more. Production was doubled, thanks to shale/fracking, and maintained for years. The slump in 2020 was because of the unprecedented demand falloff, but it has since recovered to ~11-12 Mbbl/d, number one in the World.

I'll stand on the original articles I posted regarding investors pressing for less investment and more return. So the investors make hay and the rest of the country suffers for it, especially those who can least afford it.

That is nonsensical. US is producing about as much as it can based on our reserves. We are certainly producing far more relative to our reserves than say KSA. Anything more and you draw down your reserves more quickly, risking a faster decline of production faster.
Also, oil production is only one part of the equation. You have transportation (Obama and Biden showed themselves hostile to pipelines, as did MI Gov Whitmer) and refining as well. And our refining is pretty much at capacity. It is difficult to build new refineries because of regulation and NIMBYism, and impossible to do so quickly.
No new refineries likely ever built again in the U.S., Chevron CEO warns

What is happening in the oil markets today is the poster child for why our capitalism run amok system does not work.

US is producing >10 Mbbl/d based on proven reserves of ~50 Gbbl.
Socialist Venezuela manages less than 1 Mbbl/d on proven reserves of ~300 Gbbl.
I'll take the capitalist system.

By the way, even your own charts show US producing oil at a very high level. There was a drop in 2020, due to low demand, but production recovered quickly. What do you expect? US to produce 15 Mbbl/d? More?

 

[Derec]

Yes, as I've said often the FRB is trying to steer between Scylla and Charybdis and will probably fail.

Yeah, those are treacherous waters to navigate.
The 75 basis points increase of interest rates is probably too much.
I interpret the modest gains stock market had today not as an endorsement of the Fed move by the investors, but rather as investors seeking to buy at a discount after the substantial drop on Monday.

But as for your graphs, did you notice that the Y-axis has $19 Trillion where Zero should be, so a 5% increase looks like a 2000% increase? I clicked somewhere hoping to make the graph more useful and was invited to Start a Free Trial instead.

I did notice. Having non-zero x-axes is sadly very common. That isolates the graph itself, allowing greater resolution and avoids wasting space (which is why they do it), but it exaggerates any movements. It is especially egregious when you have stock prices and it may have dropped from $51 to $49 or something but on the graph it looks like it lost all its value and its time for execs to be on a ledge somewhere.

For graphs of economic data I don't think you can do better than fred.stlouisfed.org.

Noted.

 

[Derec]

Saudi Arabia can likely drown us all in oil and quickly. But the leadership has other goals in there.

No, they can't. I doubt they have any meaningful short-term spare capacity (they probably could manage 500 kbbl/d, or something modest like that), much less "drowning us in oil" kind of spare capacity (which I interpret as raising production by at least 4-5Mbbl/d).
Saudis mostly rely on very old fields for most of their production. Ghawar is still responsible for ~1/3 of their total production and it has been online since the 50s.

Is Derec defending OPEC? I must have bumped my head last night. I'm not reading things right.

I am defending geological realities.

 

[Swammerdami]

But as for your graphs, did you notice that the Y-axis has $19 Trillion where Zero should be, so a 5% increase looks like a 2000% increase? I clicked somewhere hoping to make the graph more useful and was invited to Start a Free Trial instead.

I did notice. Having non-zero x-axes is sadly very common. That isolates the graph itself, allowing greater resolution and avoids wasting space (which is why they do it), but it exaggerates any movements. It is especially egregious when you have stock prices and it may have dropped from $51 to $49 or something but on the graph it looks like it lost all its value and its time for execs to be on a ledge somewhere.

Even worse are Finance.Yahoo's graphs. They often have a NEGATIVE y-axis value where zero should be! The values BELOW zero are shaded red or green. (They need the negative ordinates when the stock was once low-priced, to give them room for their volume indicators. Look up GameStop (GME) and select '5Y' time-scale to see what I mean. It looks like GME is only double its price of two years ago.)

A decade(?) ago Google had an absolutely splendid stock-price grapher, allowing multiple stocks on the same graph, just a click away from anyone who could spell, say 'MSFT Quote.' If I looked at stocks regularly I'd have been happy to pay for the facility. But the facility suddenly disappeared without the slightest whimper of explanation.

 

[ZiprHead]

What do you expect? US to produce 15 Mbbl/d? More?

Why not?

 

[TV and credit cards]

Swoop? You call this swooping? They swooped 2013-2020 when the price was bouncing around $50 a barrel. They've come back in something far short of swooping since 2020 while the price doubled.

Yes, I do call it swooping. And more. Production was doubled, thanks to shale/fracking, and maintained for years. The slump in 2020 was because of the unprecedented demand falloff, but it has since recovered to ~11-12 Mbbl/d, number one in the World.

I'll stand on the original articles I posted regarding investors pressing for less investment and more return. So the investors make hay and the rest of the country suffers for it, especially those who can least afford it.

That is nonsensical. US is producing about as much as it can based on our reserves. We are certainly producing far more relative to our reserves than say KSA. Anything more and you draw down your reserves more quickly, risking a faster decline of production faster.
Also, oil production is only one part of the equation. You have transportation (Obama and Biden showed themselves hostile to pipelines, as did MI Gov Whitmer) and refining as well. And our refining is pretty much at capacity. It is difficult to build new refineries because of regulation and NIMBYism, and impossible to do so quickly.
No new refineries likely ever built again in the U.S., Chevron CEO warns

What is happening in the oil markets today is the poster child for why our capitalism run amok system does not work.

US is producing >10 Mbbl/d based on proven reserves of ~50 Gbbl.
Socialist Venezuela manages less than 1 Mbbl/d on proven reserves of ~300 Gbbl.
I'll take the capitalist system.

By the way, even your own charts show US producing oil at a very high level. There was a drop in 2020, due to low demand, but production recovered quickly. What do you expect? US to produce 15 Mbbl/d? More?

I expect them not to pull capacity off line and not return it when needed. The US is off about 1M barrels a day from 2020 peak. Fully a third of this was due to damage at a PA plant that will not be brought back on line.
So they did not forsee a need to bring more capacity on line in 2021? Or they thought they'd drag their feet and enjoy the spread for awhile? Or any time there is significant damage to a refinery, they're just going to walk away from it?

And considering your article, what is stopping them from continuing this trend? A finger-wagging president?
What is going to happen is they are going to ensure that as demand drops, supply will remain tight so they can ride this horse until it drops.

Yeah, no one is making hay here:

 

[Derec]

I expect them not to pull capacity off line and not return it when needed.

That's not how it works. Capacity is not something static. Existing wells peak and start declining and have to be replaced by new wells. The record 2020 capacity cannot be brought back. At best, new equivalent capacity can be brought in, but nobody is going to increase production to levels where marginal revenue exceeds marginal costs.
And I have already mentioned long term considerations - the faster you drink your milkshake, the sooner it is gone. It is not wrong for oil companies to take into account longer term sustainability of these plays.

The US is off about 1M barrels a day from 2020 peak. Fully a third of this was due to damage at a PA plant that will not be brought back on line.

You mean the oil refinery? That's another thing. No matter how much oil you produce, it will not be turned into gasoline and diesel without adequate refining capacity.

So they did not forsee a need to bring more capacity on line in 2021? Or they thought they'd drag their feet and enjoy the spread for awhile? Or any time there is significant damage to a refinery, they're just going to walk away from it?

It has been almost impossible to build new refineries in the US for decades due to regulation.

And considering your article, what is stopping them from continuing this trend? A finger-wagging president?

I do not think finger-wagging will accomplish much. Neither will "windfall taxes" or price controls.
Biden could invoke defense production act or at least loosen regulations in order to expand refinery capacity but that would firstly take a while and secondly would go over like a lead-balloon with his oil and gas hating base.

What is going to happen is they are going to ensure that as demand drops, supply will remain tight so they can ride this horse until it drops.

I don't think so. Price equilibrates based on supply and demand. If oil companies could demand any price they want like you seem to think they can, why were prices much lower before?

Yeah, no one is making hay here:

What do you propose as a solution?

 

[Derec]

Why not?

Marginal cost of such a production expansion, even if it could be feasibly done, would be very high. If marginal costs are higher than marginal revenue, you lose money. Why should companies do that?
Besides, that would not solve the refining bottleneck. It would not increase gasoline supply, but it would reduce our oil imports. But as I said, it would not be practical.

 

[Derec]

How? What is the economic model for that? I'd like equations.

Not sure what equation you expect here. It's about the principle - more money chasing fewer goods and services means increased inflation.

The US economy lost 20+ million jobs in an unprecedented short period of time. The US economy dropped over 30%!

The economy reopened relatively soon after the initial shock. But the money being pumped into the economy persisted for a long time afterwards. Last stimulus payments were authorized in March 2021, a year after the pandemic started and more than half a year since the economy pretty much reopened. The extended unemployment benefits were likewise not stopped until March 2021, long after they should have been ended. And the pause on student loan repayments and interest accrual is still ongoing.

The stimulus checks did no such thing. It is possible that the unemployment bonus did, however, receiving a check of a few grand every 6 months isn't enough to consider not working.

It is true that the direct stimulus payments had a relatively small effect by itself, but it is about the cumulative effect of all these programs, from stimulus to extended unemployment, rental assistance, expanded child tax credits, and student loan pause. Together all these programs had a massive effect and they were kept on long after the economy reopened in the 3rd quarter of 2020.

Interest rates were the driving cause of the 2008 recession. And Trump's influence on the Fed in his Presidency led to continued artifically lower interest rates. Higher interest rates aren't a bad thing.

First of all, the Fed is not taking direction from the executive branch.
Second, where do you get the idea that low interest rates were the "driving cause" of the 2008 recession?

Localized inflation was caused by supply issues, then shipping clogs, then more generalized due to shipping being expensive because oil supply is a little short because the global industry has a 1920's mindset. This has all be caused by a interconnected global economy running at a particular level that was greatly disturbed by the pandemic. The outcome is unique because the cause was unique.

You had all these things on the supply side. But you also had huge amounts of money being pumped into the economy by the pandemic policies that were kept on way too long. It's a combined effect. It's not either or.