Resistance Begins at Ohm!

Friday, April 22, 2011

Energy as a factor in recession

I offer this interesting chart to back up my assertion that the last crash and therefore the next crash are driven by the cost of energy.

Perhaps historically, the price of food contributed. Today, the price of food is inexorably connected to the price of energy. Beyond getting food to market, agribusiness relies heavily on energy for current productivity levels. Energy is the force magnifier. The difference between an ox-driven plow and John Deer-driven plow - the power of the internal combustion engine. They both do the same thing. Food prices have increased 6.5% since January, which if you do the math, is over 25% a year.
So why is the price of gas going up? According to a SME on C-SPAN (sorry, don't have that reference it was morning edition either Monday or Tuesday), American refineries (or I should say refineries located in the U.S.) purchase oil on the spot market, not the futures market, so WTF.
April is the month that refineries change from the winter formula to the boutique summer formulas (driven by state regulation). So, refining capacity is down and the supply of gasoline is broken up into smaller "buckets." None-the-less, sooner or later the spot market catches up with futures (like in the inevitable future). Therefore, don't expect that May or June are going to provide any relief. These are two components driving the supply and demand side of the equation.
The other component that is driving both futures and spot markets is the value of the dollar. Today (April 22) it hit a 15 month low. Last time we saw this was (no surprise) Q2 2008. If the dollar is worth less, then it requires more of them to buy a barrel. Doesn't matter which market.

And the value of the dollar affects the cost of other goods imported by this country. On the other hand, it makes goods that we export more affordable in those markets. Which brings more valuable currency here. From those countries that we export to. Which are..... ummmmm.... what exactly are we making anymore?

CNBC source for chart 1
FX Street source for chart 2
IC Mark source for 2008

Update: Another source to back up my analysis - Financial Times which claims we are at a 2.5 year low against the dollar index - lowest since (drum roll please) August 2008.

No comments:

Post a Comment