Forecasting The Current Recession

We all know that the current economic conditions are unlike anything we have ever seen before. This was a large reason why it took the folks responsible for identifying recessions so long to make the official announcement. It is very interesting to hear their reasoning behind the delay, and even to understand how these things are tracked to begin with. James Picerno from The Capital Spectator interviewed one of the officials that helps make these determinations which helps shed some light on the topic. You can read more about it in his blog post below.

Forecasting cyclical turning points in the economy (and inflation) is job one at the Economic Cycle Research Institute (ECRI), a New York consultancy. In fact, it seems to do so rather well, or at least it has in the past. Notably, ECRI has earned some well-deserved praise in recent years for correctly predicting the 2001 recession.

But the current downturn has been a little trickier. True, ECRI was warning of trouble in late-2007. Even so, the firm held out hope that a recession might be sidestepped. As discussed in a November 2007 report, ECRI explained that "the leading indexes are not yet in a recessionary configuration, thus a recession can still be avoided." Alas, it was not to be. With the clarity of hindsight, we know that the recession began in December 2007, as per NBER's official (albeit 12-month lagged) dating of the downturn's start.

To be fair, ECRI was advising that a downturn was possible well ahead of December 2007. Today, the firm counsels that the recession is well entrenched and that economic contraction looks set to roll on. "The bad news is that the recession is going to continue for the next couple of quarters, and we know that objectively from the leading indexes," says Lakshman Achuthan, managing director of ECRI and co-author of Beating the Business Cycle: How to Predict and Profit from Turning Points in the Economy.

In an interview earlier today with The Capital Spectator, Lakshman talked of recessions, how we got into this mess and the outlook for, one day, better times. If you have a taste for the ugly details of the business cycle, read on…

Lakshman, ECRI did a nice job of predicting the 2001 recession. Were you ahead of the curve this time?

No, we were much more coincident, for a whole host of reasons. We said a recession was unavoidable in early March 2008. The reason we held out some hope that the recession could be forestalled was because of a weird confluence of events going on at the end of 2007 and early 2008 with respect to inventories—manufacturing stuff in the U.S. economy.

Typically recessions are kick started in many examples by a big inventory overhang that, all of a sudden, in sort of a Wile E. Coyote moment, give way and the floor falls out from under manufacturers. They realize that they have way too much inventory and they stop [producing]. That's how a lot of recessions tend to start.

But not this time.

No, it didn't happen that way. There was very little inventory and so we didn't have that kind of downturn in the economy. That gave policymakers the briefest window of opportunity to maybe push [the recession] off. But they weren't that worried and thought they had things pretty much under control. And we had growth abroad that was still drawing on U.S. manufacturers and so there was a widely held belief that we didn't have to worry about [recession] and that we were managing the home price decline and the emerging credit crunch quite well.

The economic cycle has in fact been some sending false signals, or certainly misleading signals in recent years, or so it seems. Inflation, for example, was running hot in the first half of 2008. But by the end of the year, deflation seemed to be the big threat.

Yes, it's been very schizophrenic. For example, the assumption in many models was that home prices couldn't go down; now the assumption is that they can't go up. All along the way there were plenty of prognosticators saying extreme things. Today there are some expecting a depression while others are expecting things to rebound in the second half of this year.

Looking back, you can see how this recession was set up. Certainly oil was part of the reason. We started to have oil spikes in 2005, and every year since then, through early 2008, we had oil spikes. Every time you had an oil price spike, someone warned of recession. When you had the housing market downturn begin in 2005, and you combine that with an oil spike, a lot of people saw recession.

But those were false signals, at least for a few years after 2005.

Right, and instead what we saw was that the economy accelerated to a four-year high with the growth rate in 2007. That's kind of an inconvenient fact. We actually grew faster than Europe in 2007. This wreaked havoc with all kinds of assumptions that decision makers had taken. In fact, the acceleration in 2007 may have lit the match for a lot of this credit stuff.

How so?

Because decision makers in the fixed-income markets and other markets were looking for a recession in 2007, but it never happened. You had the expectation on Wall Street, at Merrill Lynch and Goldman Sachs, for instance, of a 75-to-100 basis point rate cut by the Fed. And then one day in early June those two houses, which have a lot of followers, abruptly turned on a dime and said they didn't think there would be any rate cuts in 2007. What this did was immediately wreak havoc with all of the models pricing subprime credit groups, where the assumption was that rates would go down and so those instruments would maintain their credit ratings. The minute you took out the rate cuts, the guise fell away and everyone started running away from subprime debt very quickly. And that continues today.

So you had a housing price downturn that began in 2006 and then morphed into a credit crunch in 2007. These are massive things that take time to resolve. But they don't in and of themselves mean that you must have a recession. Our indicators were saying, yeah, things were bad, but it wasn't a guaranteed recession.

When did things take a turn for the worse in terms of triggering a real economic contraction?

We started to get a real recession risk in the second half of 2007. Our weekly leading index peaked in June 2007, about six months before the recession actually began in December 2007. In fact, by December 2007, our weekly leading index had plunged to its worst reading since the 2001 recession. However, because of these inventory issues I mentioned [there was an expectation that] maybe we would be able to buy a little bit of breathing room. That didn't happen. You saw the recession begin at the end of 2007. All the dead bodies started showing up in 2008 as the recession turbocharged the housing downturn and credit crisis.

What's the outlook now?

The outlook remains recession. Retail sales, the Fed Beige Books, industrial production, jobs growth—these are all coincident indicators and they confirm that we're in the most severe recession in the post-World War II era. This was forecast by our weekly leading indicators. Our leading index had earlier fallen to a 60-year low. So it's not a surprise that the coincident indicators are now weak.

What has changed in very recent weeks is that the leading indicators have begun to stabilize. I'm not suggesting that there's an imminent recovery ahead, but it is notable that we've gone from minus 30% growth rates to minus 25%, minus 28% or so. I suspect this is largely related to hope. We have a new year. We also have a new administration and some new stewards of the economy. There's talk of a new stimulus plan. The leading index may be showing there's some pause to this sharp decline. However, an objective reading of the index doesn't yet show a sustained recovery. That would require a very persistent and pronounced rise in the leading index for us to make that kind of forecast. What we know objectively is that the first two quarters of 2009 are going to be recession quarters.

The longest previous recessions were 16 months each, in the early 1970s and early 1980s.

If we date the current recession's start to December 2007, that suggests that we'll soon match the previous recessions' 16-month time frames. Does that mean we'll be getting close to the end of the current downturn later this year?

Saying at this point that the recession will end in the second half is really a coin toss—no one really knows. We don't know because the leading indicators haven't turned up yet. The bad news is that the recession is going to continue for the next couple of quarters, and we know that objectively from the leading indexes. The good news is that the leading indexes can't see that far. A lot of it is going to depend on, for example, the stimulus debate. If the stimulus is three times the proposed size and it happens quickly, then that's one extreme and so there's probably a chance of some kind of bump in the second half of 2009. On the other hand, if the stimulus is delayed, or adjusted down, maybe there's less chance.

Keep in mind that the recessions of the early 1970s and early 1980s were also international recessions. The number of countries in recession around the world today is the broadest we've seen since World War II. It's broader now than it was in the 1970s and 1980s in terms of the diffusion and pervasiveness of the recessions globally. That informs our view of what may happen in the U.S. There's a linkage: The broader the recession, very often the longer it is.

This post can also be viewed on capitalspectator.com.

Looking Ahead To The Bubble Of Tomorrow

As we deal with the consequences of the current asset bubbles popping around us, it is hard to give any thought to future bubbles. However, considering all the recent moves that the government has made, we really do need to pay attention to what their ramifications will be. The things that the government has done are unprecedented, and we should expect the next round of bubbles to be the same. James Picerno from The Capital Spectator talks more in depth about this in his blog post below.

Governments are now working overtime in dispensing monetary and fiscal medicines intended to renew, restore and revive battered economies. In time the aid will quicken the economic heartbeat, although exactly when and to what degree is unknown. The patient has for years gorged on any number of goodies, ranging from the sweet treats of leverage and the candied delights of easy money to roller-coaster thrills of irrational investing.

The party, of course, is over, and the cleanup may go on for some time—probably longer than we expect. In a somewhat haphazard and increasingly desperate effort to ease the current and future pain, governments are dishing out unprecedented rounds of stimulus pills. For obvious reasons, everyone's watching each new step in what promises to be a long run of conventional and unconventional programs intent on propping up economies from east to west, north and south and everywhere in between.

But while the lion's share of attention is on the medicines, what might follow once the patient is no longer in imminent danger of cardiac arrest? In a speculative exercise of considering the possibilities, we offer the following thoughts for the post-crisis world order, which one day will arrive, amazing as it seems at the moment.

* Inflation
Yes, inflation. Strange as it sounds to talk about inflation at a time when deflation seems to be stalking the U.S. economy, it's never too early to think about the natural state of economic affairs. One day (don't ask us when), all this stimulus and its baggage will be yours. Pulling back on the sea of money washing ashore will eventually require the mother of all mopping-up campaigns. Assuming, of course, the Fed and central banks around the world have the stomach for the task.

Make no mistake: pulling back will be tough, very tough. Imagine the scenario a year from now. Let's make a big assumption and say that the economy's showing signs of life and GDP manages to post a modest 1% rise in Q4 2009, with more of the same expected for 2010. Higher interest rates would certainly be warranted, relative to the near-zero levels of the moment. Perhaps much higher rates will be required. But will Bernanke and the boys be willing and able?

The political pressure to keep the stimulus going will probably be immense. Meanwhile, warnings of higher inflation at some point are likely to fall on deaf ears for an extended period. Higher inflation, after all, is just what the Fed wanted by lowering rates so low and so arguments for containing the revival in prices will initially dismissed.

Yes, the inflation beast will work his way back into the director's chair. He always does, and he has a thousand tricks up his sleeve. His task will be all the easier if the deflation mindset takes root, which looks increasingly possible.

Nonetheless, some corners of finance are worried about the longer-term risks. That includes the dollar sellers and the gold buyers. Yes, deflation is a risk, but in the long run history tells us that inflation always comes out on top eventually.

What's more, a sudden change in the weather is hardly beyond the pale. Recall that inflation worries were all the rage earlier this year. Yet that fear quickly gave way to deflation. Expecting smooth and gradual changes on the pricing front may be asking for too much in the 21st century.

* Oil
Just as inflation worries have been banished in recent months, so too are the headline-grabbing predictions of $200 oil. These days, that's a forecast with one too many zeroes.

But let's be clear: the recession-inducing fears that are pushing oil lower these days will eventually abate. That doesn't mean oil will suddenly resume its skyward run at the first sign of economic stability. But marginal growth in oil demand isn't dead; it's merely hibernating.

China, India, and, yes, the United States will one day be in need of more oil. Yes, green technology will slow future demand for fossil fuels. But unless you're expecting miracles, the world economy will almost certainly be consuming more oil in 3 to 5 years compared with today. The crowd, however, will be focused on demand trends over the next year or two and thereby conclude that high oil prices are forever gone. Oil companies will be pressured into agreeing, resulting in a sharp decline in searching for and developing new oil fields. Those are the seeds that will push prices higher once more, perhaps to new all-time heights, although probably not for several years.

* The Bubble of 2013?
No one knows where all the stimulus will wind up, but there are pretty good odds (and a fair amount of historical precedent) suggesting that exuberance will eventually reanimate itself with all its immoderate excess intact. Some say that Treasuries are now a bubble waiting to burst, courtesy of interest rates that can only go higher from here. Perhaps, although it's a safe bet that one day, perhaps sooner than we expect, bubble sightings will return.

Bubbles, writes John Kemp of Reuters, are no accident. "It is the direct consequence of the Fed's asymmetric response to shifts in asset prices." Much will depend on whether the reflation policy is, at the appropriate time, wound up and put in the closet. In theory, it's a no-brainer. In practice, there are complications.

Finally, we bring all this up mainly as a reminder that it's always difficult to maintain strategic perspective. Two years ago, when all the major asset classes were rising, few could imagine the current pain of the moment. Similarly, looking at where we're headed several years from now looks about as relevant as studying the moons of Saturn. But the future keeps coming, even if we're not looking. It's tempting to make all our investment decisions based on what happened yesterday, but we're all probably better off keeping our strategic-investing focus on what's likely to unfold several years from now. No easy task, to be sure. Par for the course if you're intent on winning the investment game.

This post can also be viewed on capitalspectator.com.

Consumer Prices Show Record Fall: Fight Against Deflation Heats Up

Consumer prices are continuing to fall, even setting new records. This is of course heating up discussion about deflation, which is a horror no one wishes to see. Bernanke and the Fed are going to do everything they can to prevent deflation from coming, but with this crazy economy who knows if they will have the wherewithal to do so. James Picerno from The Capital Spectator dives deeper into the issue in his blog post below.

For the second month running, consumer prices fell. And by more than a little, invoking the specter of deflation once again.

CPI slumped by a hefty 1.7% in November on a seasonally adjusted basis, the government reports today. That follows October's 1.0% fall. More dramatically, last month's tumble is the deepest monthly decline in CPI since the Labor Department began keeping records on this series in 1947. Meanwhile, MarketWatch.com reports that the 1.9% non-seasonally adjusted fall in CPI is the steepest monthly rate since January 1932—the height of the Great Depression.

Meanwhile, core CPI (which strips out food and energy) is unchanged, following a slight decline in October. As this is the Fed's preferred measure of inflation, even a central banker can't deny that inflationary pressures have evaporated, at least for the time being.

Looking at the more familiar year-over-year calculation of headline CPI, consumer inflation is still positive, running at 1.0% for the 12 months through November. Even so, that's down sharply from October's annual rate of 3.7%. At this rate, CPI will soon be falling on an annual basis too.

As striking as the news is, a decline of some magnitude in CPI was expected, partly based on the earlier report of the ongoing decline in producers prices. Nonetheless, the sight of broad price indices sinking month after month in both the consumer and wholesale markets raises the question of whether this is merely a temporary state or something with more endurance?

We've been writing about rising deflation risk for some months now, and it's clear that the beast is here. It's still unclear how long it lasts, and so for the moment one can be optimistic that an unhealthy downward spiral in prices isn't fate.

Keep in mind that the massive monetary stimulus engineered by the Fed has only partly filtered into the economy. Monetary policy has a fair amount of lag time, perhaps a year or more. With each passing month, the aggressive liquidity injections will work deeper into the consumer and business sectors. Few expect a sudden rebound in spending and lending, but at this point simply keeping prices steady would be no small accomplishment.

Another reason to think that prices may soon stabilize comes from the fact that heavy drops in energy prices are currently leading CPI's descent. The energy component of consumer price inflation has lost ground for four months straight, with November's whopping 17% fall the biggest so far. But energy prices can't keep falling off a cliff month after month. Yes, the world economy is headed for tough times, which is paring demand for oil, gasoline and other fuels. But the lion's share of the price cutting relative to the highs of last summer is behind us.

There may yet be more declines in energy coming. In fact, we expect as much. But the magnitude of future declines, if any, will almost surely be smaller. Nor is it unreasonable to expect that energy prices generally will soon tread water, albeit at substantially lower levels compared with recent history.

As for the other components of CPI, well, that's another story. The transportation slice of consumer prices retreated by nearly 10% last month—the fourth month in a row of red ink. Housing prices are weakened last month, although just barely. But not every is posting price discounts. Prices for food, apparel, education/communication and medical care all managed to rise last month. Deflation hasn't yet infected everything, and therein lies more reason for hope.

Still, no one will wonder why Fed funds futures are pricing in a 50-basis-point cut at the Fed's FOMC meeting later today. If accurate, that would bring the target Fed funds down to 0.5%. As extraordinary as a 0.5% will be in historical terms, at this point it's something of a formality to reflect reality since the effective Fed funds (which is based on actual banking activity) is already at a scant 0.14%.

In sum, the war to head off inflation is in full swing. The Fed can't afford to fail in this battle. Allowing deflation to build a head of steam at this point is tantamount to economic suicide. It must be stopped, even at the risk of letting inflation out of the bag down the road. Controlling inflation, after all, is well understood, even if the political will isn't always there. Fighting deflation, by contrast, is far tougher and so preemptive medicine is preferred.

The challenge before us is defeating deflation with unconventional monetary policies, supported by aggressive fiscal stimulus. Since there's not a lot of precedent for the former, one might reason that the fiscal side of the ledger will have to do the heavy lifting, which necessarily depends on the political process. 'Nuff said.

Yet the task is not insurmountable. Indeed, monetary and fiscal policies will be that much more effective if consumer prices merely stabilize in the coming months, or at least stop dropping so rapidly. But that, as they say, is a big "if." Stay tuned.

The full post can also be viewed on capitalspectator.com.

Could Gas Prices Be Heading Below A Dollar?

It was only a few months ago when Americans were swearing off SUVs and the press was clamoring about how the world was going to have to get used to sky high oil prices, because this time they were hear to stay. How things can change in such a short period of time. No that gas prices have dropped below $2 dollars a gallon Americans are dusting off their SUVs and the talk is now about how oil is going to fall further. Tim Iacono from The Mess That Greenspan Made talks about one report that suggusts gas prices might even fall below $1 in his blog post below. Now wouldn't that be something?

The pendulum has swung quite far for gasoline prices - so far, that this popular sign for $4.00+ a gallon gas is equally applicable to current prices that, in some parts of the country, appear to be headed toward $1.00 a gallon.

Seeing the leading number "1" at gas stations in recent weeks (yes, even out here in California) has been strange enough and has led to a noticeable increase in the number of Hummers out on the road.

But, some are now predicting a more unusual leading number - zero.

Gasoline below one dollar a gallon?

According to this report in the LA Times, it could be here before you know it.

Pump prices headed toward five-year lows nationally and in California, the Energy Department said Monday. And despite a bump in crude prices, some analysts say the slide might not end until oil hits $25 a barrel and gasoline drops to $1 a gallon or below.
...
"The world has changed. I don't see any reason why $1 gasoline isn't possible, and $25-a-barrel oil is not out of the question," said Phil Flynn, vice president and senior market analyst for the Alaron Trading Corp. in Chicago. "I don't think the downside is over. There is a lot of surplus oil out there."

But Fadel Gheit, senior energy analyst for Oppenheimer and Co., is one of the analysts saying that oil won't stay down, even if the historic price drop isn't quite over yet.

"Some of the same clowns who were predicting $200-a-barrel oil a few months ago are in the crowd predicting $25 a barrel. But just as we believed that oil above $100 was not sustainable by market fundamentals, oil below $30 isn't sustainable either," Gheit said.

I wonder if Phil Flynn realizes that Fadel Gheit may have just called him a "clown".

The national average retail price is about $1.70 a gallon at the moment, about 10 cents higher in California. Maybe I ought to dust off that SUV Fill Up Index that was last updated when gasoline was $4.50 a gallon last summer.

This article has been reposted from The Mess That Greenspan Made. The full post can also be viewed on The Mess That Greenspan Made.

The Oil Bubble Has Burst—What Now?

I think it is safe to say that the oil bubble has gone the way of the housing bubble, exploding with a loud pop. The price of oil this morning has fallen below $42, and some analysts see it falling as low as $25 next year. That is a far cry from the high price we saw not too long ago of $147. During the oil boom, everyone was focused on doing what they could to conserve oil, and alternative energy investments were the rage. Oil companies were vilified and at the same time oil workers and oil dependant economies were rolling in cash. We have seen oil booms and busts before, but we kept hearing arguments that this boom was different: This one would never end because there just wasn’t enough supply. In the long run we will surely succumb to supply issues, but for now the world is flush with oil and the boom is over. What does this mean, though?

What this likely means is that Americans will once again return to their old ways. That means that instead of fighting over hybrid cars, people will once again buy SUVs. Instead of doing what we can to conserve energy, we will revert to our wasteful ways. As for the government, there was a lot of talk about new alternative energy projects, and how we wanted to eliminate our dependence on foreign oil. However, with oil prices in check you can bet that the government is going to be much more concerned with the financial crisis on hand rather than starting alternative energy projects that won’t offer returns for several years.

The reason why we continue to see these oil booms and busts is because each time they come around we fail to adequately prepare. During the boom we talk about all the wonderful things we are going to do to prevent this from happening again, but then once the boom ends we fail to start or finish the projects that will actually solve the problem. Obama seems intent to follow through on the alternative energy plans he so heavily promoted during his campaign, but I have a feeling that his priorities once he takes office will reflect other, more immediate needs.

That means that this won’t be the last oil boom and bust cycle, and one thing is certain: The next time around is going to be even worse than this one. Each time we fail to solve the problem, the cycle becomes more painful. In the meantime investors might want to think twice before investing in those alternative energy projects and companies that they are hoping Obama will give a boost to. Real estate investors might also want to rethink investing in oil dependant economies. As existing contracts run out, and oil companies cut back on new projects, these economies are going to feel the pinch. Many of these areas look great on paper, because they seemingly have avoided the real estate bubble, but now that the oil bubble has popped, so too will these local real estate markets.

Prices Are On Their Way Down--That’s Good News, Right?

Considering all the bad news in the headlines now, the fact that prices are falling is probably making most people ecstatic. The biggest excitement of course is likely surrounding gas prices, which fell nearly 25 percent last month, according to a Bureau of Labor Statistics (BLS) press release. And while prices of goods other than food and energy actually rose 0.4 percent last month, according to the same report, as the cheaper commodity prices come into play for manufacturers, we are surely going to see these prices fall soon enough. Since Americans, along with the rest of the world, are in penny-pinching mode right now, these new lower prices are a godsend. This good news, though, could quickly turn bad if it gets too out of control.

Of course we like to see prices fall; that means we can now buy more stuff than we could before, and for the most part falling prices are a good thing, especially when they had been inflated so much in recent years. What we have to watch out for is deflation. Deflation can be a horrible thing, and even though you might think it is good, it most certainly is not. Deflation leads to lower company profits, layoffs, business closures, falling wages, loan defaults (deflation increases the real interest rate on loans) and so on. People lose the incentive to spend, and borrowing becomes nearly extinct as borrowers don’t want to borrow and banks don’t want to lend. Deflation can even be the catalyst that pushes a country into a depression, and we know we don’t want to go there again.

Deflation is an extremely scary thing to think about in reality, and the only scarier thing to think about is the fact that we might not be able to prevent it from happening. Typically, preventing deflation has been as easy as lowering interest rates and adding to the monetary supply. Interest rates are already at 1.0 percent, meaning there really isn’t much more room to maneuver. Japan had to deal with their own bout of deflation during their so-called lost decade, and they weren’t able to dig out of it even with interest rates at 0 percent. Sure, there are a few other things that the government can pull out of its sleeve, but again, there is no guarantee that anything is going to work this time around.

If the government is able to help us prevent deflation, it is also possible that they could end up creating another boom and bust cycle. The following is an excerpt from an opinion piece by Gerald P. Driscoll, the former vice president of the Federal Reserve Bank of Dallas, published in the Wall Street Journal:

“The economy now confronts deflationary forces. If past is prologue the Fed will concentrate on those deflationary forces for too long and rekindle an asset boom of some kind. The fiscal "stimulus" being contemplated by Congress could be another economic accelerant. If both the fiscal and money stimulus efforts kick in just as market forces also kick in, we're likely to see another unsustainable boom that will be followed by a bust.”

Either way it seems that we are likely headed for an undesirable outcome. This reminds me of the game Operation I used to play when I was a kid. The smallest mistake in any direction is going to cause all heck to break loose. I don’t know about you, but I sure hope Obama and his new staff have amazingly steady hands.

Falling Gas Prices Aren’t Making Everyone Happy

Most of the country is ecstatic that gas prices are falling. Just the other day I was able to fill up my car for less than $50--I know I certainly was ecstatic. But while most of the country is happy to see gas prices fall, there are certain pockets that are going to suffer for it. Texas is the energy capital of the country, and when gas prices are up, cities such as Houston and Fort Worth boom. This was certainly the case of late. These energy hubs continued to boom despite the rest of the country suffering from the credit crisis; it seemed as if they were immune. But now that gas prices are falling, these places are starting to feel the pinch--and it is likely to get worse.

Unemployment is rising in these areas as energy companies start to cut back. Projects that made since when oil was at $140 a barrel just don’t look as good now that it is less than $70 per barrel. It isn’t just unemployment either; many residents in these areas lease their land out to energy companies and depend on these payments to support their lifestyles. You can bet that as these energy companies continue to cut back, businesses in the area--along with the local real estate markets--will suffer. While many of these places avoided the big run-ups in housing prices that were so prevalent throughout the rest of the country during the housing boom, the real estate prices here never really experienced the falls, either. I would suspect that they will begin to fall a bit now, although not nearly as heavily as in most other places in the country.

As jobs dry up and the real estate and business markets contract, investors need to be extra careful when dealing in these areas. The numbers may look attractive right now thanks to low unemployment, low vacancy and real estate prices that have stayed study despite the economic turmoil, investors need to look beyond past performance and into the future. Now that Obama is president-elect, things could get even worse for some of these energy hubs. He wants to make a huge push for alternative energy, which could very well push the price of oil down even further. While some of these places are focused entirely on oil and gas, others are diversified into alternative energy, which would obviously be a preferable place to invest at this point. If you want to invest in these areas, look hard at diversification. Are there many jobs outside the oil industry? If the area is completely dependent on oil and gas, I would suggest you move on (think Fort McMurray in Alberta, Canada).

Paris Hilton For President: Energy Policy For People (magazine)

Paris Hilton has recently released a video rebuttal to a rather ill-advised John McCain ad which compares Barack Obama with “celebrities” such as Hilton and Britney Spears, suggesting a lack of substance despite their charisma. The original ad seems desperate and is as insulting to the viewer as it is to those mentioned. Meanwhile, Paris’ ad is actually witty, albeit a touch misinformed about energy policy.

Who would have thought that perennial tabloid darling Paris Hilton could actually deliver a speech more effectively and with greater poise than our president of eight years? It seemed, in fact, that her relevance was beginning to fade until the McCain ad was released. While I doubt that Ms. Hilton will win a single state in November, this may have the unfortunate side-effect of reinvigorating the public’s fascination with her. Thanks, John; I guess we’ll always have Paris. Still, we could do worse than President Hilton: I dare say that she would have looked as convincing as Bush did arriving in a flight suit on the USS Lincoln to announce “Mission Totally Accomplished! Luvz it!” She might even be able to pronounce Sarkozy properly.

But my praise of Ms. Hilton stops there. In the video, she suggests combining the two energy policies of McCain and Obama to help solve the energy crisis. Her suggestion is to allow offshore drilling to tap those rich deposits for cheap, easy fuel as we work on alternatives. Appropriately enough, the last time I used the words “rich,” “cheap” and “easy” in the same sentence, it was to describe Paris Hilton, but unfortunately her plan is as superficial as her cult, and it is flawed for the same reason that McCain’s “solution” is flawed.

Offshore drilling would be a placebo for the problem at best, as the restricted areas would provide only a drop in the proverbial barrel of our oil consumption. Furthermore, it will take several years to construct derricks and refine the crude, providing no immediate relief and precious little when the wells truly begin to produce. All of this assumes that the oil would be sold exclusively to Americans, and we should know by now that this is not a given.

The Paris for President campaign is off to a rocky, though amusing start. I’m afraid she won’t have time to really establish a solid platform by November. That said, I think her decision to start this late in the campaign is a refreshing one. This overextended campaign season has been costly and grueling for everyone involved, and though I can’t get behind Hilton on her energy policy, her frank approach is a balm in this hostile election year. She even may have a running mate selected before the Republicans or the Democrats. She mentions Rihanna, but a ‘Hilton Clinton’ ticket has such assonant appeal, and it’s better to be called assonant than asinine, which is how I would describe the campaigns of other nominees at this point.

Luvz it, indeed.

A Look Back At America’s Energy Policy Blunders

I was reading the New York Times and came across an interesting article that talked about America’s energy policy, and particularly the political happenings that led us into the energy problems we are now faced with. I found it fascinating to look at the various opportunities we had over the years to address this problem, and that we opted to do nothing about it. So I thought I’d share some of the key points of this article with you.

“Ever since the oil shortages of the 1970s, one report after another has cautioned against America’s oil addiction.”

“Nearly 70 percent of the 21 million barrels of oil the United States consumes every day goes for transportation, with the bulk of that burned by individual drivers, according to the National Commission on Energy Policy, a bipartisan research group that advises Congress.”

“’Much of what we’re seeing today could have been prevented or ameliorated had we chosen to act differently,’ says Pete V. Domenici, the ranking Republican member of the Senate Energy and Natural Resources Committee and a 36-year veteran of the Senate. ‘It was a bipartisan failure to act.’”

“Home to only 4 percent of the world’s population, the nation slurps up about a quarter of the planet’s oil — and Americans’ daily use is nearly twice the combined consumption of the Chinese and Indians, according to an annual energy survey published by BP, the British oil giant.”

“According to energy policy experts, it was in the late 1980s and early 1990s — during the administrations of President George H. W. Bush and Bill Clinton — that things began to go wrong. Before that point, the country reaped the benefits of the first fuel-economy standards, passed in 1975, known as corporate average fuel economy, or CAFE. Between 1974 and 1989, the efficiency of a typical car sold in the United States almost doubled, to 27.5 miles per gallon from 13.8.”

“…oil consumption in 1990 totaled 16.9 million barrels per day, basically on a par with the 17 million barrels per day consumed in 1980, even as the economy grew substantially.”

“In 1990, Richard H. Bryan, a Nevada Democrat, teamed up in the Senate with Slade Gorton, Republican of Washington, and proposed lifting fuel standards again over the next decade, with a goal of 40 m.p.g. for cars. Amid furious opposition from Detroit, liberal Democrats from automaking states, like Carl Levin of Michigan, joined conservative Republicans like Jesse Helms of North Carolina, who died on Friday, to block new CAFE standards.”

“’But had we passed that bill, we’d be using three million barrels less oil a day now,’ Dan Becker then a lobbyist for the Sierra Club said.

“Consumers overseas might not like higher taxes on gasoline, but they’ve adapted, says Jeroen van der Veer, chief executive of Royal Dutch Shell, the European energy giant. In Mr. van der Veer’s native Holland, for example, gasoline sells for more than $10 a gallon, with $5.57 of that going to taxes. Even in Britain, which has substantial North Sea production, gasoline sells for $8.71 a gallon.” Several measures to raise gas tax were shot down during both the Bush and Clinton administrations.

“In 1990, three months before the effort to raise fuel-efficiency standards failed on Capitol Hill, President Bush issued an executive order making large swaths of the continental shelf off-limits to new exploration. That policy remains in effect today.”

“As Paul Bledsoe, strategy director of the National Commission on Energy Policy, recalls it, ‘The 1990s were something of a lost decade for American fuel efficiency.’ With oil prices low, consumers began snapping up pickup trucks and sport utility vehicles, which were governed by less stringent fuel economy standards, thanks to a loophole in the original 1975 law. These carried higher sticker prices and profit margins, and both Detroit and foreign automakers were happy to oblige.”

“In 2007, with oil at $82 and gas nearing $3, Congress finally approved the first big increase in fuel-efficiency standards in 32 years, requiring the fleet average to reach 35 m.p.g. by 2020. That will save one million barrels a day by 2020…”

“Since the 1980s, fuel efficiency has flatlined at 24 m.p.g., while vehicle weight has jumped more than 25 percent and horsepower has nearly doubled. In Europe, on the other hand, fuel efficiency currently stands at 44 m.p.g. and is slated to hit 48 m.p.g. by 2012.”

“Congress, meanwhile, in its bid to explain the run-up in fuel prices, is examining the role of speculation and the increased flow of investor money into commodities.”

I found it very interesting that in the '90s there was legislation proposed that would take fuel efficiency standards to 40 m.p.g. Now today we are hoping to increase fuel efficiency to 35 m.p.g. by 2020. The old saying that hindsight is 20/20 could certainly be applied in this situation, but as the author points out in the article, we all knew that oil was in limited supply. Basic economics tells you that when something is in limited supply, then as demand increases, prices are going to go higher. American auto makers saw an opportunity to make a quick buck off big gas guzzling cars and consumers ate them up.

At the end of the day, it is hard to blame the auto makers because they just produced what consumers wanted. They are businesses, after all, so we can’t expect them to do anything other than what is best for their business. On the other hand, as a nation we rely on our government officials to spot these types of glaring problems and take the necessary steps to prevent them from happening. In my mind the politicians are the main culprits, with ignorant consumers coming in a close second. We can drill in the Alaskan National Wildlife Refuge and we can drill in the Gulf of Mexico, but in the end it will have little effect. High gas prices are here to stay and I’m a firm believer in raising gas taxes. In order for us as consumers to make the necessary lifestyle adjustments, we need stern guidance away from gas. In case you are wondering how high gas prices might go, just take a look at the $8.71 a gallon being paid in Britain. It is not out of the question here by any means.

The Day The Music’s Engine Died: Gas Prices Ground Indie Artists

Disclaimer: This blog post contain explicit lyrics and should not be viewed by children.

Another heaven-ordained American right is under attack by rising fuel prices: the right to inflict your music upon others.

Long known for their frugality in touring, indie bands are finding that they can’t even break even when playing in remote locations thanks to the rising price of fuel. As quoted in an AP article on MSNBC, 23 year-old indie minstrel Steven Garcia had this to say about budgeting for his now-canceled tour:

“Once I ran the numbers it was a ‘There’s no (expletive) way’ kind of moment.”

Indeed, such an articulate sentiment will strike a chord with any driver these days. It’s surprising that we haven’t seen more artists tackling this issue in their music. Allow me to seed a few songs:

Punk	Gangster Rap	R & B
Sixty bucks to fill my tank? This must be some kind of prank F*** you Exxon, F*** you Shell! You oily pigs can go to hell!	My baby mama toll me she need money fo’ gas. Now da b**** is Super-Leaded ‘cause I popped a cap in her a**. So I’m doin’ hard time, but you all is da chumps; Droppin’ soap is still better than getting’ r**ed at the pump.	Oh baby, baby, you know you’re my world; it’s true. I’d drive three-quarter miles just to be there next to you. Call me, baby girl, and you know that I’ll come You’re my baby (You’re priceless) You’re my Super-Premium.

With CD sales already on the decrescendo, it has been suggested that artists would have to adapt and drum up most of their money through concerts and merchandise, as Prince did when he gave away copies of his latest CD in the U.K. to advertise for his concert. Under these circumstances, however, it’s questionable if young bands can avoid losing money, let alone make it. The East Coast has a greater density of towns which affords artists there a slight advantage over West Coast and Midwestern bands, who have a lot of awe-inspiring, wide-open spaces to suck their wallets dry between cities.

I have a possible solution: In the past, I’ve recommended teepees to solve the housing crisis. In a similar vein, I say we resurrect another bit of Americana to keep American rock and/or roll alive—the wagon train.

If these musical pioneers are willing to cram seven people into a single van and hit the highway to hell with half a ton of equipment designed to be as noisy as possible, then they can probably manage in a covered wagon. This “bandwagon,” if you will, might allow musicians to save money, to grow rugged and to connect with American history. As an added bonus, it’s eco-friendly...like when Sheryl Crow toured using only bio-fuel, except without the smug self-righteousness.

It seems, though, that some artists will still be getting around the old-fashioned way (as opposed to the old-old-fashioned way). Ann Yu, singer of indie band LoveLikeFire, has this to say in the AP article:

“What else can you do? It’s just the battle scars of trying to get your music out there. And for every band that doesn’t or can’t do it, there are other ones that can and will.”

Ms. Yu is probably right. The road to fame has always been arduous, and high gas prices are just one more stumbling block, and probably less damaging than band politics, drug addiction and the stress of divvying up groupies after the show. More than ever, artists must have serious dedication and financial savvy (or a trust fund) to make the cut. Which is to say, whatever their "sound" may be, they all sound more and more like one thing: investors.

Oil Crisis Worse Than The Housing Crisis?

The housing crisis in the U.S. is bad, but is the oil crisis even worse? I read an interesting article that takes the stance that the oil crisis is in fact a bigger problem than the housing crisis, and I wanted to share a few of the points that the author, Jeremy Siegel, Ph.D., made.

The first point that Siegel made was that the U.S. is a net importer of oil--in fact, the largest importer of oil in the world. Each day the U.S. imports around 12 million barrels of oil at a cost of around $1.5 billion. That adds up to $570 billion a year in foreign oil imports, and makes up a large chunk of our trade deficit.

The housing crisis has surely hurt the U.S. economy and has resulted in the reduction of construction spending and the loss of many construction jobs. At the end of 2005 the U.S. was spending around $600 billion a year on residential construction, according to Siegel, and that number has now dropped to approximately $400 billion. So that, of course, is a net reduction to the economy of $200 billion, a sizable amount by any calculation. Now let’s take a peek at the impact of oil.

In 2005 oil was going for around $50 a barrel, so at 12 million barrels a day that would mean the U.S. was importing around $600 million in oil each day, or $219 billion each year. If you compare those to the numbers we looked at earlier, at today’s oil price of $130 a barrel, you see that the difference is $351 billion a year. Simply put, the oil crisis has had a greater impact on the economy’s bottom line. [Siegel makes his comparison based on 2007 oil prices, but since we were comparing housing prices from 2005 I thought a 2005 oil comparison would be better. Therefore these numbers are my own and not Siegel’s.]

The next point that Siegel makes is that the oil crisis is much worse than the housing crisis because the housing crisis was caused by a slowdown in demand, whereas the oil crisis was largely the result of supply issues. This means that resources that were slated for housing, such as labor or materials, can now be used in other sectors of the economy. “In contrast, rising oil prices are an outright cost that does not release other resources into the economy,” Siegel said.

Siegel goes on to explain that there are some adjustments which need to be factored into the estimates, such as the fact that consumption of oil tends to decrease as prices rise, but I’ll let you read the full article to hear about all of those.

Siegel ends his article with a statement of hope: “The rise in oil prices has shocked Americans into realizing that fossil fuels are not unlimited. In the long run I am optimistic that conservation and alternative fuels will significantly blunt the impact of rising oil prices and not constrain economic growth. But getting to that long run will require painful adjustments in the short run and, to that end, higher energy prices may be a blessing in disguise.”

Homemade Ethanol: The Future Or Waste Of Money?

Efuel Corporation could not have picked a better time to unveil their state-of-the art home ethanol distillery. Despite its $10,000 ask price, the EFuel100 MicroFueler is a remarkable product that might provide Americans with a glimmer of hope. The device can produce up to 35 gallons of ethanol from a combination of sugar, yeast and water that can be pumped directly into your vehicle.

The process is as easy as “third grade science,” according to CEO and founder Tom Quinn. The feedstock, which consists of sugar and yeast, is loaded into the machine, which then mixes it with water and uses a membrane system to turn the ingredients into ethanol in about a week. The device uses a standard household 110 to 220 volt AC power supply and consumes about 150 watts.

But is the EFuel100 practical? It takes 14 pounds of feedstock to produce a gallon of ethanol. If you were to use EFuel’s Carbon Credit Coupon Program, you could buy discounted EFuel certified sugar feedback for 15 to 30 cents per pound which would cost $2.10 to $4.20 per gallon by my calculation, not including electricity costs.

Most cars are capable of running on ethanol as long as they are equipped with a converter kit. This isn’t necessary for some of the new flex cars, but traditional cars will likely need to have the converter kit installed, which costs around $700.

There is also a $1,000 federal tax credit available, which will help offset some of the initial $10,000 investment. While I think it is more economical than a $100,000 Tesla electric roadster, most people are still probably better off with a good hybrid.

While promising as an alternative fuel source, there are several issues with the Efuel100. Food and electricity prices have been skyrocketing right along with oil, so the cost of fuel for the Efuel100 keeps going up. It may not scale since it requires loads of sugar to operate, and most people don’t have room in their homes for hundreds of pounds of sugar. Worst of all, a study by Stanford University professor Mark Jacobson found ethanol is no better for air quality because it releases formaldehyde and acetaldehyde into the atmosphere, which can be harmful to humans. Then of course there is the initial $10,000 investment. Because the savings on over gas is pretty minimal it would take a long time for someone to recoup that initial investment.

Despite the drawbacks, I like the idea of fighting the profiteering oil companies by creating my own fuel. If you have an extra $10,000 lying around, and loads of extra storage space, why not be an early adopter and help fuel demand for alternative fuel sources? If this product does well, it will lead to companies creating even better fuel devices, which in the end should help everyone.

This was a guest post by Charles Sipe. If you want to read more from him visit his blog.

Is The American Dream Out Of Reach?

So American Airlines has started charging $15 for checked luggage. Wednesday, it was the lead story on the “Nightly News.” Thursday, an ABC headline read, “Checked Bag Fees: Money for Nothing.”

What’s the big story? Is it the same as taxes, where once they start charging, there’s no turning back? Or is it just that sensational statements draw readers?

Who knows, but frankly, I’m getting a little tired of the media bashing the airline industry. If it’s not incessant coverage about scheduling delays or lost luggage, it’s about security. Today it’s about charging for luggage. As I write this, the price of oil is topping $130 a barrel and is projected to exceed $200 by the end of the summer. That’s the story, and it’s way bigger than the airline industry trying to stay afloat--or should that be aloft?--by adding $15 to the price of a flight. But I think it goes beyond that.

I think people love to complain and the media gets paid by giving people what they want to hear.

Does this sound familiar? For the last 20 years, most people have agreed that airline food sucked. They’d say things like, “all three of the coach entrée choices were inedible.” Then, all of a sudden, the elimination of free food service is seen as huge disappointment. “Oh no, I won’t be getting ‘Something Over Rice’ on my two-hour flight home?”

It’s similar to people in Seattle, where I live, who, when we finally get a sunny, 80-degree day after nine months of rain, whine, “ Put on the air-conditioner, it’s too hot.” But I think it goes beyond the weather weenie mentality.

Here’s my theory about why the $15 per bag issue is so hot: The story is not about the cost of flying going up, it’s about the reality that the average Joe is getting squeezed out of the American dream. Ever since the inception of commercial airlines, flying has been a hallmark of living large. Images of pretty flight attendants, macho pilots and wealthy travelers became icons of the glamorous American lifestyle that created the “jet-setter” as an American model. Today, the air travel experience has lost its sizzle. You go through security, do what you’re told, wait for a couple of hours to board, stay seated with the buckle fastened, don’t use the toilet facilities in the front of the plane--for security reasons--and de-board without a welcome.

The whole flying experience today is threatening the average American’s chance to feel like a jet-setter, and they don’t like it. Except for when you were boarding and had to shuffle your way through the first class gauntlet, flying always allowed Americans to feel like someone special. Today, the flying experience is more like taking a bus. Airlines have always charged us for the mysticism of flying. Americans just miss the allusion in the old slogan, “It’s The Ooooonly way to fly.” Today it’s more like, “Pay up, sit down, and get out--it’s the only way to fly.”

Then again, you can always drive.

This was a guest post by James Krieger. If you want to read more from James check out his blog www.nicaraguarealestateinvestment.org.

Gas Prices Causing 23 Percent Of Americans To Change Memorial Day Plans

23 percent of Americans cut back, or abandoned altogether, their weekend travel plans because of gas prices, a survey by consulting firm Deloitte & Touche found, according to Bloomberg. High gas prices coupled with worries about the economy will likely have a big impact on this year’s travel season and beyond. Investors should consider the implications of such changes.

People are always going to need vacations and time off, so one way or another they are going to get it. The question is, where are they going to go? Obviously with gas prices so high traveling long distances, either by car or plane, becomes more expensive. Thus we can conclude that people are going to be taking their vacations closer to home than they normally would. Instead of driving 400 miles to a lake resort in a neighboring state, maybe families will settle for the one 50 miles away, whether or not it is as nice. Resorts, camp grounds and other recreational and vacation-type places close to urban centers will in all likelihood see increased business. These naturally will become the places people from the city turn to instead of further out locations. Owners of vacation and recreational properties that are far out but get most of their business from in-city travelers could be in for some rough times.

While the above scenarios focus mainly on weekend-type vacation, there will also be impact on international travel. Vacationing in Europe was already becoming prohibitively expensive thanks to the falling dollar, but now with airlines raising ticket prices to cover the cost of fuel, the dream of a European vacation is now out of reach for most people. Instead of traveling to Europe those vacationers looking for a more exotic local might turn to Mexico or a Central American country. The flights to Mexico and Central America are still affordable, and the cost of goods and services in Latin America are cheap.

High gas prices are changing more than just the thickness of our wallets, they are changing our lifestyles. It used to be that gas was an afterthought; now it is on the forefront of everyone’s mind. Instead of the big SUV, more people are opting for the fuel efficient sedan; instead of buying a home in a far out suburb, people are opting for the close in condo or smaller home; instead of traveling long distances for our vacations, we are now staying closer to home. High gas prices are changing the way we live, and since they are unlikely to go away any time soon investors should take note of these trends and act accordingly.

ANWAR Alaska: Is Drilling For Oil In This Wildlife Refuge The Answer?

For those who are not aware, the Arctic National Wildlife Refuge (ANWAR) in Alaska is said to hold the largest undiscovered oil reserve in North America, and maybe even the world. We have known about the oil in ANWAR for a long time, but thanks to campaigning from environmentalists, the land has been untouched. It is estimated that the potential for recoverable oil in ANWAR would range in the multiple billions of barrels, along with trillions of cubic feet of natural gas, according to Forbes.

The political battle over oil in ANWAR has been fought for many years, but the closest to drilling we have gotten was back in 1995 when only a President Clinton veto stopped a bill from Congress that would have opened up ANWAR. Now a couple of senators from Alaska, Lisa Murkowski and Ted Stevens, are trying to resurrect the idea of drilling for oil in ANWAR. So, should we open up ANWAR Alaska for oil drilling?

This debate is tough for me. I certainly understand the economics of the matter and how beneficial this development could be for the U.S. economy. Not only would we be able to save billions of dollars off oil imports, but we would also see increased tax revenue and thousands of new jobs. Overall, it is without question that developing ANWAR would be great for the economy. At the same time, though, I can’t help but think of the environment.

Supporters of development in ANWAR claim that wildlife and oil development can coexist in harmony, and with the advances in technology, the chances of any mishaps are minimal. Yet when I watch videos like the one below I can’t help but have doubts:

If we could truly have both--development without interference to wildlife--I would be on board without hesitation, but I’m just not sure we are there yet, hence the internal debate I still have. The other thing to keep in mind is that it would likely be 15 years or so before any oil from ANWAR would hit the market. What if we were able to find a good alternative to oil within the next 15 years? The flip side of that argument, of course, is what if we don’t? If we think we are in dire straits now, just wait 15 years and see how bad things look if we don’t find some more oil soon. Just look back at the last time the ANWAR development bill was shot down, in 1995. Had that bill been passed we would soon be seeing the fruits of ANWAR’s black treasure; instead we are still in the same place we were back then development-wise, only with $130 per barrel oil instead of $16.86 per barrel oil, as it was back in 1995, according to the OPEC website.

I’m still undecided on the issue, and I guess to come to a conclusion, I will need to get more facts on the subject. If anyone has additional thoughts or information on the topic, I would love your input.

Should We Sue OPEC Over Oil Prices?

I never before thought to ask the question, but apparently it is possible for us to sue OPEC over the current state of oil prices. In fact, the House just passed a bill today that would allow Justice Department to sue OPEC members for limiting oil supplies and working to set crude prices, according to Reuters. Of course, the White House has all but guaranteed a veto of this bill, so whether or not it actually comes to pass is another story, but it is an interesting thought to ponder.

First off, I’m not sure just how successful this measure would be anyway. Even if we could legally sue these countries, according to our laws at least, what would make them actually honor these claims? I have a feeling that international courts might not feel so bad for the poor U.S. considering we still enjoy some of the lowest oil costs in the world. Just go to Europe or New Zealand and tell them your sob story about $4 a gallon gas, most likely they are going to laugh you out of the room and tell you they could only dream of gas being that cheap. If the international community were able to also take part in the suit, that might make things a little more amenable, but in reality how fair would that be?

These OPEC countries are simply trying to maximize revenues on their limited natural resource, what is so wrong with that? Countries in the Middle East, for example, have little driving their economies other than oil, so what happens to these countries when their oil supply is gone? Should the U.S., or any country for that matter, be able to tell another country that they want and need what they have, but wait a sec, you are only allowed to charge me X, and if you try to charge any more than that or withhold supplies, I’m going to sue you? Something just doesn’t sound right in that scenario. Sure, the main argument is that these countries are working together to fix prices, but then again, where does the U.S. get the majority of its oil? The answer is from non-OPEC countries, with Canada leading the way.

Is there some level of price fixing going on? Probably, but in reality, can we blame them for it? I don’t think so; they are doing what’s best for their economies and their countries. If they continue to raise prices, our defense has to be to stop buying from them. That is the only way we can and should be able to affect pricing. It is our own fault we have become so reliant on oil to fuel our country and economy, and now that these countries want to get paid, it is not our place, nor our right, to tell them otherwise. The oil belongs to them, not to us; they should be able to do with it what they will.

Senate Puts President Bush In His Place But Was It Warranted?

Over President Bush’s pleas to the contrary, the Senate almost unanimously (97 to 1) approved a measure that will halt the further purchase of strategic oil reserves. Since it was passed by such a large majority, the measure cannot be vetoed by the President, so it looks as if President Bush has lost this battle for good. "Why on earth should we be putting oil underground at a time of record high prices?" Sen. Byron Dorgan (D-N.D.), the measure's chief sponsor, argued in a LA Times article. Democrats have been calling for this action for quite some time, but more recently Republicans have taken their side on the argument as well. Considering how much oil has been going up, though, this hoarding of oil might prove to be one of President Bush’s best investment decisions yet.

Under President Bush’s guidance the government has been adding about 70,000 barrels of oil a day, in comparison to the approximately 21 million barrels of oil the U.S. consumes each day, according to the LA Times. Since the amount being hoarded is minimal compared to total usage, the impact of suspending further stockpiling won’t be that great, but some economists figure it could save consumers as much as 3 to 5 cents per gallon on gas, according to the LA Times.

It is not hard to see that the motivations of many of these politicians is to get re-elected, but Bush doesn’t have that problem, so logic would say his only incentive is to do what is best for the country going forward. The main reason he gives for the stockpiling is energy security, which certainly has validity, yet I think it is proving to be an even better investment.

Here are some numbers to consider: Our national oil stockpile sits at approximately 702.7 million barrels, with an average price paid of $28.42 a barrel, according to the U.S. Department of Energy website. Since oil is more than $125 a barrel, that means that thanks to the policies upheld and pushed by Bush, we have created almost $68 billion of “oil equity,” so to speak. Considering many of the other dumb decisions Bush has made over the years, this might actually be one of his better ones, so let’s cut him a little slack. If the U.S. were now to release oil reserves to ease oil prices until we hit the stockpile point we would have been at had we listened to the previous Democratic oil outcries, we would be able to reduce gas prices by much more than the 3 to 5 cents we may see because of the current measure just passed by the Senate. So maybe there really is some method to Bush’s madness.

The Detroit Auto Industry Might Be In For Yet Another Hit

At this point probably everyone is aware that Detroit’s auto industry has been struggling, and as the auto industry goes, so goes Detroit’s economy. During the past few years, consumers have left the American car manufacturers for their smaller and more fuel efficient foreign counterparts. Recently the American car manufacturers have begun to embrace the consumer’s desire for fuel efficiency, but they are still behind the competition, and now it appears that the entire auto industry might be in for a new shock.

As the price of oil continues to skyrocket, many consumers aren’t satisfied, or will eventually become unsatisfied, with the current level of fuel efficiency and are simply deciding to pass on the new car altogether in favor of public transportation. Many people have already been priced out of buying a new car with the added cost of fuel, but if $200 oil becomes a reality, as Goldman predicts, then you can bet the number of people being forced to public transportation will increase. This obviously is bad news for the Detroit auto industry.

I would love to see more people take public transportation. It is much more environmentally friendly and cost effective, yet there is a major problem: Many major cities in the U.S. have poor public transportation systems, and at their current levels, they are just not realistic for many professionals. I would love to take public transportation into work each day, but if I took the bus to work, it would take me about an hour and 15 minutes instead of the 10 to 15 minutes it takes me now. When you factor in the trip there and back I would have lost 2 hours of my day--not something that I’m willing to give up. It seems rather silly to me that a 7-mile journey would require three bus transfers and take more than an hour. Because of these many inefficiencies, and the increasing demand for public transportation, I see some changes in the future--and, of course, an investment opportunity.

First off, as more patrons are forced to public transportation, you can be sure that the government will be hearing their outcries about the inefficiency. As a result, I foresee an increase in public transportation investments, and possibly even upgrades. I love the light rail system they have going in Portland, and although I probably shouldn’t even mention the word "monorail" in Seattle (we’ve had quite the costly experience in the past with this one), I’m starting to think it’s not such a bad idea--assuming we actually do it right this time.

Lastly, I see access to public transportation becoming an important part of a person’s home buying decision. As you can probably tell, when I chose my home I wanted something close to work so I didn’t have to commute far, but I didn’t take into account whether it would work for public transportation. Those properties that are close to main transit centers which allow homeowners to easily go wherever they need to go might see an increase in demand. If I was planning to use public transportation from the start I certainly would have factored it into my housing decision. So while the Detroit auto industry may be in for another hit, public transportation companies and properties that are public transportation friendly should do well.