Iran and its allies are slitting the throat of US reliance on Mideast oil; here’s a path for individual and US energy independence

 

 - by New Deal democrat

This week, like last week, starts out with a few days of no meaningful economic data. But there is still much to talk about. So let me spend a little time talking about the disastrous Iran war and the tiny silver lining of energy independence which is likely (after much pain) to finally result.

First of all, it appears that Iran is benefitting from Chinese tech and Russian targeting. Apparently another US military base in the Mideast, this time in Jordan, has been seriously damaged, including destruction of some fighter jets (none of which the current Administration wants to tell the American people about.

Just as importantly, the other side has learned some lessons from Ukraine’s use of drones and ballistic missiles to identify chokepoints and inflict maximum economic damage. In particular, within the past week Iran’s Houthi allies have obtained another choke point at the southern end of the Red Sea, and - aided by pinpoint targeting - have put Saudi Arabia’s east/west pipeline designed to circumvent the Strait of Hormuz out of commission. The Saudis have indicated it will be back up and running in a few weeks, but of course I hear that Iran has more missiles as well. Anyway, as a result, Gulf Oil has all but been shut off:

This is reminiscent, by the way, of the Ottomans’ strategy of “slitting the throat” of Constantinople by cutting off the ability to ship through the Bosporus. Hence, the title of this piece.

Meanwhile the US strategic oil reserve is at its lowest level since 1982:

Oil prices are back over $100/barrel and are close to their Iran war high:

And retail gas prices are back over $4/gallon. While diesel prices, which affect all the trucks which bring consumers all their goods, hit an all time high of $6/gallon last week:

While I don’t pretend to have a crystal ball about what might happen in future months, the current US Administration is going to remain in power, and just as incompetent, for the next two years as it has been for nearly the last two.

Fortunately, there are a number of things that homeowners in particular can do to all but eliminate their gas and oil consumption, and large efficiency gains have been made in almost all of them. So here are some options:

1. Install rooftop solar:

While this doesn’t work everywhere, and some HOA’s have rules limiting its use (which should be overruled legislatively), modern solar panels are much more efficient and much less expensive than those of even 10 years ago. An average rooftop installation can cost between $20,000-$30,000, but has a lifespan of up to 25 years, and savings pays back its installation costs within about 10 years. In the meantime, use of rooftop solar all but eliminates electricity bills, which average only $10-$30/month.

2. Consider small windmills as a supplement:

There’s a reason windmills haven’t been installed as much as solar. While installation costs can also run into the $1,000’s and even be over $10,000, the electricity generated is typically much less than solar sytems, and is more intermittent. Also they need to be installed high enough above the ground or rooftop to take advantage of the wind. But for areas that typically see wind speeds over 5mph, they can be a useful supplement. And they aren’t huge: the typical wingspan is on the order of 5-6 feet.

3. Install a modern heat pump. The knock on heat pumps used to be that they did not work in cold conditions lower than about 35°F, making them a poor alternative in areas with cold winters. But modern heat pumps are much more efficient, capable of pulling heat out of outdoor air as cold as 5°F, and in some cases even lower. Further, most can be installed without ripping out existing HVAC ductwork and make use of some existing HVAC hardware. Obviously installation costs vary greatly, but the average is about $10,000. The time it takes for the system to pay back installation costs also varies, but is typically on the order of 5 to 10 years. Again, the system can easily last 15 to 25 years, so it is still a net positive.

4. Consider an PHEV if not an EV. Plug-in hybrids have several advantages. They are full-fledged EV’s for typical daily in-town driving, and hybrids for longer trips. Further, they can fully charge overnight on a regular 120 volt line, so there is no need to expensive installation of higher voltage lines. And most hotels now have charging stations in their parking lots, obviating any problem with recharging on long trips.

One thing to keep in mind is that auto dealers are not idiots and are aware of this as well. Thus the price for used EVs and PHEVs were bid up at the Mannheim Auto Auction earlier this year, and can be expected to rise again:

 (h/t Wolf Street)

All of the above ideas come with substantial costs, although in the long term they are net positives. And if there is ever an outright shortage of gas or oil, as there was several times in the 1970s, the homeowner or driver who has converted to alternate systems won’t particularly care.

Finally, there are several things to consider pushing any subsequent Democratic Administration in 2029  (should we be so lucky) to undertake.

1. Mandate that vehicle fleets be fully hybrid or electric in 2 years, and PHEV or EV in 4 years. This is similar to the mileage targets that were set for motor vehicles beginning in the 1970s after the first oil shocks. Congress by law established minimum requirements, which were technologically achievable, and then let the automakers set their own courses to achieve them. The point of any new Congressional target should be to all but eliminate reliance on gas as a fuel for vehicles.

2. Treat the interstate transmission of electricity the same as interstate transmission of gas. When an energy company wants to run a new interstate line, States in the right of way do not have veto power. One federal approval is enough. By contrast, transmission from, say, the sunny Southwest or the windy High Plains or mountain States to population centers several States away requires approval from each State along the path - which is almost impossible to obtain, and has derailed many plans for much more energy efficient sources of electricity. 

Both of the above enactments should have sunset dates of January 20, 2033, both to encourage quick construction and to present any subsequent GOP Administration from either derailing the plans or corruptly rejiggering them. 

Unfortunately, for the next 2+ years, we are on our own; but as I have described above, there are actions that individuals can take. And as I’ve read somewhere, when panic is appropriate, the first person to panic has the most advantage.

Weekly Indicators for September 7 - 11 at Seeking Alpha

 

 - by New Deal democrat

My “Weekly Indicators” post is up at Seeking Alpha.

The story of this past week is the same story of the several preceding weeks; namely, increased interest rates across the board, driven by all of the inflationary “policies” of the current Administration, most especially its increasingly disastrous war, are turning more of the financial indicators negative.

Against this we continue to see AI data center construction-driven gains in several short leading indicators and in particular consumer spending.

As usual, clicking over and reading should bring you up to the virtual moment as to the state of the economy, and reward me a little bit for organizing the information for you.

August core inflation benign, but energy related prices make all the difference for headline

 

 - by New Deal democrat

After benign June and July consumer inflation due mainly to the temporary decline in energy prices, August inflation returned to its recent trend. On a monthly basis prices (blue) rose 0.4%, although on a YoY% basis, August equaled July’s 3.4%. But perhaps more importantly, core CPI excluding food and energy (red) rose 0.3%, and made a new post-pandemic YoY% low of 2.4%. Excluding shelter (gold), CPI rose 0.3%, but worryingly increased 3.6% YoY:

While I’ll go into more detail below, the good news on “core” inflation was mainly about a number of recent “problem children,” like transportation services and medical care, being somnolent, more than anything else. 

 But let’s start with shelter, which is 1/3rd of the entire index. It continued its deceleration, up 0.3% for the month, but up “only” 3.0% YoY (blue).  Of it’s two components, Owner’s equivalent rent rose 0.2% monthly and 3.1% YoY, tying its post-pandemic low, while actual rent of primary residence also rose 0.2% in August but was only up 2.7% YoY, the second lowest YoY advance since the pandemic:

As I indicated above, with the exception of a few salient smaller purchases like coffee, or dental care, almost no sector of purchases exceeded 4% YoY. One portion of the former problem child of transportation services, to wit motor vehicles repairs and maintenance, did continue to rise, up 1.1% in August and up 5.2% YoY; but motor vehicle insurance has also become well-behaved. So I won’t bother with graphs.

Another former problem child, motor vehicles, remained sleepy. New vehicles (red) rose 0.3% for the month, but were only higher 0.6% YoY, while used vehicles (gold) rose 0.4% for the month, but were lower in price YoY by -2.3%. The average for all motor vehicles (blue) was higher 0.3% monthly, and *down* -0.5% YoY:

But if shelter was only slightly elevated, vehicles actually experienced deflation, and the rest of core categories were generally well-behaved, that was absolutely not the case for energy or energy services. 

In the broad category of energy, prices in August rose 2.1%, and 16.3% YoY. Gas and oil rose 4.2% for the month, and were up 28.0% YoY:

Meanwhile, the AI data center related categories of electricity and utility services showed an actual decline of -0.4% monthly, but remained up 4.0% YoY%: 

Additionally, computer software and accessories rose 3.8% (!) for the month and are up 8.4% YoY:

Before I conclude, let’s update real nonsupervisory hourly wages (orange), which declined -0.1%  for the month and remain down less than -0.1% YoY; and real aggregate nonsupervisory payrolls (red), which rose 0.1% for the month and are up 1.0% YoY, although both remain about -0.5% and -0.1% below their February and January peaks respectively:

Recall that real aggregate nonsupervisory wages are an excellent short leading indicators for recession. The current situation is almost sui generis. On the one hand, it is very rare for this metric to stay below peak for more than half a year without a recession occurring shortly thereafter. On the other hand, a good coincident marker for the onset of recession is when they turn negative YoY, and in that regard they actually improved this month:

On final very big caveat. This data does not include the big increase in the price of gas and oil we have seen in the last few weeks. With the situation in the Strait of Hormuz becoming chronic, and the strategic oil reserve close to empty for all practical purposes, this statistic could well be underwater by the end of this year.

The same suboptimal stagnant existing homes market continued in August

 

 - by New Deal democrat

For the last three years, the market for existing homes has been rangebound. While there may be some slightly upward pressure on prices, with the background financial fundamentals the same, the existing home market has reached a suboptimal equilibrium, with something like a -500,000 decline in housing inventory available compared with ten years ago; and rangebound sales as well.

That continued to be the case in August. Existing home sales declined a seasonally adjusted -2.0% monthly to 3.98 million annualized. Which continues to be well within its range of between 3.85 - 4.30 annualized for the past three+ years:

Historically prices follow sales, and so with rangebound sales, prices on a YoY basis have been relatively calm as well. These are not seasonally adjusted, so we look at them YoY. And since February of last year, there has been no YoY comparison higher than 3.0%. in August the YoY comparison was +1.9%:

This year the most lagging metric, inventory, has also fallen in line. In August, the YoY% change in existing home inventories was -0.6%. By contrast, as recently as last December it was up 7.9% YoY, and in March was up 4.5% YoY:

For the last two months, I have introduced my look at the existing home sales report as follows: “The housing market has reached a new, suboptimal equilibrium in sales, construction, prices, and inventory. Until some new positive or negative shock occurs (like a surprise new Fed hiking regimen), expect little change in this important leading sector of the economy, which is needless to say neutral for forecasting purposes.” That suboptimal static equilibrium continued again in August.

Continued very low jobless claims, and a note about vulnerability to a stock market shock

 

 - by New Deal democrat

With other news (finally!) out today, let’s take at least a brief look at jobless claims.

Initial claims declined -1,000 to 206,000, while the four week moving average declined -1,500 to 205,000. With the typical one week delay, continuing claims declined -1,000 as well to 1.774 million. These all continue to be extremely low numbers, close to the low end of the entire 60 year series:

I’ll dispense with the graph this week, but the more important YoY% changes are pretty dramatic, as they are in comparison to a Labor Day spike last year. Initial claims were down -21.5%, the four week moving average down -15,9%, and continuing claims down -7.9%.

Jobless claims, along with stock prices, compose my “quick and dirty” forecasting tool. With stock prices still up over 15% YoY, they continue to suggest a solid expansion over the next few months (oil price shock permitting). [Note: There is an issue with FRED updates today. If and when the information is posted there, I will update here]

Aside from the fallout from the Iran war, the one big thing that concerns me is just how much of consumer spending - which, again, is about 70% of the economy - has been dependent on the wealth effect from stock market gains this year. To the best of my knowledge, this is the first time since the Roaring ‘20’s of 100 years ago that so much spending has been downstream of the stock market. While I am absolutely *not* forecasting any sort of similar crash, the fact is that this dependency creates a very real possibility of a stock market downturn feeding on itself via the effect it would have on consumer spending. 

Updating the potential for an Iran war oil shock

 

 - by New Deal democrat

When the Iran war started this past March, I wrote about the potential for an oil shock and a resulting recession. While it briefly looked like that could happen, Wall Street’s rose colored glasses approach to oil futures together with the gradual draining of the strategic oil reserve prevented that from happening. With renewed attacks on shipping, where are we now?

lmost all US recessions in the past 50 years have had a component of an “oil shock.” This has a stagflationary effect: driving up prices, and constricting the ability to spend on other things. Typically that stagflationary effect has kicked it at about a 40% increase in price YoY. For example, here is what YoY gas prices have looked like this Millennium:

While there’s no graph for gas prices going back before the 1990s, here’s the same comparison substituting oil prices instead, going back to 1970:

 

Typically it has taken an 80% or higher YoY spike in oil prices to correlate with a recession. Before the Iran war, oil was selling for about $60/barrel. That would imply that oil prices would need to rise to $108/barrel for a sustained period of time to be consistent with triggering a recession.

But it isn’t just the increase per se; rather, it is a function of how much that price increase hits consumers’ wallets. A 40% or 80% increase from a very low price is different from a 40% or 80% increase from a price that already was slightly constrictive. To show that, here is what oil prices look like divided by average hourly nonsupervisory wages. Think of this as “how many minutes of work would it take to by a barrel of oil:

As you can see, the big increase this past spring doesn’t look like much in comparison with several earlier oil prices shocks. 

Now here is the same graph using gas prices instead of oil prices:

Again, the spike earlier this year doesn’t even compare with the 2022 spike associated with Russia’s invasion of Ukraine, nor even the “oil choke collar” that typified the early years of the economic expansion after the Great Recession.

And indeed even with the increase in prices during August, the Cleveland Fed estimates that CPI inflation when it will be reported Friday is likely to only show an increase of 0.3%-0.4%, in line with my back of the envelope method for forecasting monthly inflation, which divides the monthly average gas price change by 16 and then adds 0.15% for the average background ‘core’ inflation:

But that only takes us through the end of last month. GasBuddy shows that as of this morning, average gas prices have risen to $4.22/gallon, still well below May’s peak of $4.50/gallon:

And per CNBC oil prices have risen to about $96/barrel as I write this:

But even the $112/barrel oil this past April and May, with gas prices briefly hitting $4.50/gallon did not create a recessionary shock. Compared with this past spring, the US economy (driven by manufacturing) is in somewhat stronger shape. Under those circumstances, for that to happen,such price levels would have to continue on a more sustained basis, and gas prices would probably need to exceed the $5/gallon level they reached in 2022. Engaging in a completely insane trade war with our biggest trading partner, Canada, certainly won’t help.