Wednesday, April 23, 2008
$4 Gasoline? Have You Looked At Food Prices Lately?
I get asked a lot about when gasoline will hit $4 a gallon. My current response is Memorial Day. For $5 gasoline, go to Los Angeles or San Francisco, and wait a few days. One of the biggest factors contributing to this cost of gasoline is that a barrel of oil costs $120 at the moment. You could hear this any night on the news. The news doesn't tell you that the "crack spread" (the process for breaking crude oil to various distilate parts including gasoline is called catalytic cracking and is done at high heat with catalysts. By shifting things around, heating oil is produced for the winter heating season) is slim to negative and that refiners are shutting down for maintenance at the moment. This does not make the evening news unless you live in a refinery town in West Texas or Western Wyoming, and then you really should be in the same town as the refinery. Or, you read the financial press where this is exciting stuff (yawn).
What does get the blood pumping is the heart thumping discussions as to the Congressional mandate to convert ethanol to gasoline. You see, Congress, in its infinite wisdom (they thought they were the Great State of Maryland, my traditional repository of infinite wisdom) decided that to ensure energy independence, that we should subsidize a quarter of the American corn crop and have it converted to ethanol and then have that added to gasoline to make even more gasoline. It's all a process thing.
And then the farmers love you too. No one thought of what would happen when you took a quarter of the corn supply off the market. I mean, corn is used as cattle feed. It's used as all kinds of animal feed. And here's the real shocker, the real mystery that no one thought of, real people eat corn as food too. Duh. Farmers rushed to plant corn, and cut back on planting other crops. Duh. Wheat went up in price. One of my favorites, rough rice has sky rocketed in price. I leave it to your imagination as to what rough rice is, but, that third World Country California has seen rice rationed at Sam's Club and Costco. In several emerging market countries, rice has been priced out of the markets and is no longer available, and I am being serious.
As countries such as China and India develop and industrialize, copper and steel prices have risen to record levels. We are experiencing a massive shift of human beings from poverty levels to a new middle class. Tata Motors of India is building a new $2500 car or the masses of China and India. These two countries actually subsidize the price of gasoline in their country, as well as copper and steel. The demand for commodities will continue to rise as more and more people move to cities and become part of the industrialized work force.
Food is becoming more and more expensive and we burn more and more of it for fuel, consuming more fuel to make less fuel from it. The counter argument claims it isn't so when we take the spent food that was converted to ethanol and use it for foodstock for livestock. It hasn't happened as a practical application yet, but this solution seems stupid to me. There are cheaper, more efficient sources of energy, and more common sense ways of using them, such as solar energy, wind energy, and even nuclear energy.
The other issue rarely discussed is the dollar itself. A few years ago, say before the Iraq War, the exchange rate was about $0.80 = 1 euro. Then, we had the first Republican President in the history of the country to fight a war and not raise taxes to pay for the war. The last American President that did this was Lyndon B. Johnson who made his famous guns and butter decision which was to invest in the country and the Viet Nam War. No new taxes. That produced the runaway inflation of the 70's. I have lived through this before. It is ugly; inflation taxes everyone, regardless. History repeats itself. Today, $1.60 = 1 euro. Since oil is priced in dollars, a lot of the change in price is because of the drop in value in the dollar. Ask any American who has recently traveled to Europe what the prices in London or Paris were like. My brother-in-law is going to Italy next month for three weeks. I had him move his money into a portfolio of euros last year so he had the euros for his trip. He also bought some Traveler's Cheques denominated in euros. It won't stay this way forever. One day, someone will short the pound, and it will be time to buy the dollar. I doubt that George W Bush will be in the White House....not that I have an opinion, naturally. Any questions?