Wednesday, March 31, 2010

Drill, baby, drill....

I won't get into the politics of the off-shore drilling but I do question the way this story will be presented to the American public as a way to lower costs.

Let's clear up a couple of misconceptions. Oil is over $80 again not because of increased demand or limited supply but rather investor demand. Oil is plentiful and the refineries are voluntarily running way below capacity in an effort to support a higher oil price. This ultimately works its way to you and I in the form of $3/gallon gas. Consider the following excerpts...

“People are using oil as a store of value rather than as a commodity,” Beutel said. “It’s the investors who are buying.”

There’s no shortage of oil inventories, which are above their five-year average and have been rising steadily in the past three months. Gasoline stocks are also well above their five-year average for this time of year.

But that hasn’t helped at the pump.

Beutel estimates that, after oil prices crashed last year, American consumers saved some $117 billion at the pump compared to what they spent in 2008. But with prices rising again, American drivers paid $20.2 billion more to fill up in the January and February than they did in the in the first two months of 2009. At that rate, consumers will take a $100 billion hit in 2010 just from higher gas prices."

On a somewhat related topic have you seen the trailer for "Gasland"?





The key clip comes in somewhere around the 0:50 into the video when the homeowner sets his water on FIRE! This has some relevance for our neighbors to the south that are considering Hydrofracking for natural gas in the NYC watershed. Exploding water faucets in NYC might make hurt the manhattan real estate market just a bit :)

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I've mentioned it many times before, but the state pension gaps really deserve more attention than they are receiving today. At last night's community school budget meeting people seemed to be obsessed with sports budgets which are a tiny fraction of the overall budget. However our school's contribution to pension and healthcare premiums -- which are skyrocketing -- received very little public commentary.

Consider this piece from the NY Times on the state fiscal issues...

"California, New York and other states are showing many of the same signs of debt overload that recently took Greece to the brink — budgets that will not balance, accounting that masks debt, the use of derivatives to plug holes, and armies of retired public workers who are counting on benefits that are proving harder and harder to pay.

Pensions are debts, too, after all, paid over time just like bonds. But states do not disclose how much they owe retirees when they disclose their bonded debt, and state officials steadfastly oppose valuing their pensions at market rates.

Joshua Rauh, an economist at Northwestern University, and Robert Novy-Marx of the University of Chicago, recently recalculated the value of the 50 states’ pension obligations the way the bond markets value debt. They put the number at $5.17 trillion.

After the $1.94 trillion set aside in state pension funds was subtracted, there was a gap of $3.23 trillion — more than three times the amount the states owe their bondholders.

“When you see that, you recognize that states are in trouble even more than we recognize,” Mr. Rauh said."

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Cheers!

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