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May 31, 2007
America's fragmented gasoline market
Roll the tape.... On May 10, I wrote:
Of course, the Balkanization of the U.S. gasoline market into geographic regions with different fuel requirements contributes to the market power of the remaining refineries in different geographic regions. If the U.S. gasoline market was really one large market with 142 refineries, would it be profitable for a firm (probably an existing one) to build a new refinery? Talk about a "good question"... that's the one they should have asked.
I was referring to this article from WCCO (Minneapolis).
Anyway, Don at Cafe Hayek today spotlights this paper by Andy Morriss that is apropos to the question. Here is the abstract:
Rising gasoline prices have brought energy issues back to the forefront of public policy debates. Gasoline markets today are the result of almost a hundred years of conflicting regulatory policies, which have left them dangerously fragmented. In this article, I analyze that regulatory history, highlighting the unintended consequences of regulation that have pushed the United States into a series of loosely connected regional markets rather than a broad, deep national market. This fragmentation leaves the American economy is vulnerable to natural disasters, terrorist attacks, and foreign dictators in ways that it need not be. It also produces higher prices for consumers and reduced innovation by refiners.
I intend to read this paper with great interest.
UPDATE: I have now read the paper. Frequent commenter "spencer" takes me to task and I respond in the comments.
Posted by William Polley at 09:24 PM | Comments (11) | TrackBack
May 30, 2007
FOMC Minutes
Minutes from the May FOMC meeting were released today. Here are a couple of key paragraphs.
Market participants had largely anticipated the FOMC's decision at its March meeting to leave the target federal funds rate unchanged. Nevertheless, the expected path for monetary policy moved lower on the announcement, as investors apparently interpreted the accompanying statement as suggesting that the Committee's economic outlook had become somewhat more balanced. However, subsequent FOMC communications--including the Chairman's testimony before the Joint Economic Committee, speeches by various FOMC members, and the minutes from the March meeting--were generally seen as emphasizing the Committee's concern about upside risks to inflation....
...
... Meeting participants anticipated that real GDP would advance at a pace a little below the economy's trend rate of growth through the remainder of this year and then pick up to a rate broadly in line with the economy's trend rate in 2008. Most participants continued to expect core inflation to slow gradually, although considerable uncertainty surrounded that judgment and the Committee's predominant concern remained the risk that inflation would fail to moderate as expected.
...
...most participants agreed that, although the level of inventories of unsold homes that homebuilders desired was uncertain, the correction of the housing sector was likely to continue to weigh heavily on economic activity through most of this year--somewhat longer than previously expected.
...
Nearly all participants viewed core inflation as remaining uncomfortably high and stressed the importance of further moderation. Although readings on core inflation in March had been more favorable, this followed several months of elevated inflation data and price pressures were not yet viewed as convincingly on a downward trend. Most participants expected core inflation to moderate gradually, fostered in part by stable inflation expectations and a likely deceleration in shelter costs. Some participants also expected the anticipated slight easing of pressures on resources to help nudge inflation lower, although others felt that small movements in resource utilization were unlikely to have discernible effects on inflation. All participants agreed that the risks around the anticipated moderation in inflation were to the upside; and some noted that a failure of inflation to moderate could entail significant costs particularly if it led to an upward drift in inflation expectations.
... Members continued to view the risks to economic activity as weighted to the downside, although with turmoil in the subprime market appearing to have remained relatively well contained and business spending indicators suggesting a more encouraging outlook, these downside risks were judged to have diminished slightly. Members agreed that considerable uncertainty attended the prospects for inflation, and the risk that inflation would fail to moderate as desired remained the Committee's predominant concern.
... While readings on core inflation were lower in March, members felt that it was appropriate to emphasize that core inflation remained somewhat elevated. The Committee agreed that the statement should continue to note that their predominant policy concern was the risk that inflation would fail to moderate as expected, and that future policy adjustments would depend on the evolution of the outlook for both inflation and economic growth.
Look at the number of times that upside risks to inflation is cited as the "predominant policy concern." There is also an acknowledgment that the correction in the housing market is likely to go on "somewhat longer than previously expected."
Also, next month, the FOMC will continue its review of communication issues. It will be interesting to see what comes of that as it is a topic that I have mentioned many times on this blog, and I know that many of my readers are interested. All in all, my expectations for interest rate policy have not changed much in the near term from what I have mentioned in the past. I see the Fed trying to talk down inflation expectations as much as they can while they wait for a clear signal to move. Absent a clear shift in the data, I expect that to continue for a while. But if (when?) that shift comes, there will probably not be a lot of warning.
Posted by William Polley at 02:38 PM | Comments (0) | TrackBack
Most intriguing sentence I've read today
From In-Forum (Fargo, ND)
If you can hold a flame to your faucet and the water catches fire, the North Dakota Geological Survey wants to know about it.
Indeed.
Posted by William Polley at 02:24 PM | Comments (2) | TrackBack
The wait for bumped fliers is getting longer
The NY Times reports on one of the traveler's perennial annoyances--overbooking. From the article, here's a statistic that, if true, is quite remarkable.
US Airways had revenue of $11.56 billion last year and would have lost out on $1 billion or more of that had it not overbooked, the company said.
The article does not mention the sort of situation that I recently came upon. For one reason or another, my flight got moved to another gate. I believe it was because the aircraft on which we were scheduled to depart had not yet arrived. This meant that we would be departing on an aircraft that was originally intended for another destination.
The problem was that the aircraft was already fueled for that destination which was quite a bit further away.
Since this was a commuter airplane (Saab 340 for those who would recognize that), weight and balance is more of a factor. The extra fuel put us over the desired weight. We all boarded the plane, but after they weighed it, they asked for a couple of volunteers to leave and fly the next day. Enough folks took the bait, and they weighed us again. We were still overweight so they asked for more volunteers.
At that point, it occurred to them that they should just wait until the bags of the bumped passengers were removed as well and weigh us again. This they did, and no others needed to be bumped.
Unfortunately, cases like that do not fit neatly into their computer model.
Posted by William Polley at 01:54 PM | Comments (0) | TrackBack
May 29, 2007
The price of tequila may be heading up
In a global marketplace, U.S. energy policy has effects on the Mexican agricultural markets. With higher demand for corn due to increased ethanol production, Mexican farmers are choosing to plant corn rather than agave.
MEXICO CITY - Mexican farmers are setting ablaze fields of blue agave, the cactus-like plant used to make the fiery spirit tequila, and resowing the land with corn as soaring U.S. ethanol demand pushes up prices.
The switch to corn will contribute to an expected scarcity of agave in coming years, with officials predicting that farmers will plant between 25 percent and 35 percent less agave this year to turn the land over to corn.
"Those growers are going after what pays best now," said Ismael Vicente Ramirez, head of agriculture at Mexico's Tequila Regulatory Council.
More at MSNBC.
Posted by William Polley at 07:25 PM | Comments (0) | TrackBack
Another leading indicator?
Daniel Gross looks at the bottom lines of some steakhouses and ponders what it means for the broader economy.
Via Slate.
Posted by William Polley at 07:02 PM | Comments (0) | TrackBack
Google does it again
Google Maps will soon have street level views good enough to read the "no parking" signs by the curb. Check out the demo.
Via Wired.
UPDATE: Not everyone is happy.
Posted by William Polley at 06:56 PM | Comments (1) | TrackBack
May 28, 2007
Memorial Day
"Here rests in honored glory, an American soldier known but to God." --inscription on the Tomb of the Unknowns at Arlington National Cemetery
I took this photo in April 1989.
Posted by William Polley at 12:15 AM | Comments (0) | TrackBack
May 21, 2007
Fight the power
Usually we hear about big corporations telling the "little guy" to cease and desist because of an alleged trademark infringement. As the saying goes, turnabout is fair play. But can they lay claim to all possible variants of "capture" in their slogan?
General Electric will likely get a cease and desist letter from a Moorhead [Minnesota] Public Service Commission attorney requesting that the corporate giant stop using the phrase “Capturing the Wind.”
“Capture the Wind” is the trademarked name of Moorhead’s wind energy program, Public Service Commission General Manager Bill Schwandt said. He believes GE is infringing on the commission’s trademark of the phrase.
Via In-Forum
Posted by William Polley at 01:23 PM | Comments (0) | TrackBack
May 17, 2007
The "forever stamp"
When the Post Office introduced the "forever stamp", the first question on many people's minds was whether this would be a good investment. Should they buy a bundle and save them up for the next time rates go up? Of course, the economist in me figured that if such a strategy would benefit postal customers, it would be unlikely that the Post Office would offer the new stamp. Indeed, the reverse should be true. The fact that the post office is offering the forever stamp suggests that it's a good deal for the Post Office, not for you.
So should you invest in the "forever stamp"?
No. Not as payment for mail services. Slate explains why.
Not being a stamp collector, I can't say whether it would be a good investment from a philatelist's point of view. But my guess is that there will be a lot of them out there, so the scarcity value should not be great. I suppose, however, that I would want a first day cover if I was a serious collector. I'll probably buy a couple to put away for a while and drag them out in twenty years to show to my classes and to my kids. I might even order a first day postmark for the novelty and historical value of it, but that's about it.
UPDATE: ErikR makes a comment that allows me to elaborate on something that the Slate article misses.
Posted by William Polley at 11:15 PM | Comments (4) | TrackBack
May 11, 2007
Commencement
Tonight, WIU held its graduate commencement exercises. I believe we had about eight of our MA students walk across the stage to receive their hoods. At our commencement ceremonies (both grad and undergrad), graduates are seated by major subject area. This is the first place where I have been (as student or faculty) that does this, and I like it. Maybe I just noticed that I like it more because this group of grad students was such a close-knit bunch and such a pleasure to work with. I haven't had that much fun at a commencement ceremony in a long time. Lots of pictures. Lots of handshakes with family members of the grads. Lots of excited talk about jobs and Ph.D. programs.
This is why we do it.
It's just a shame that the ceremony was indoors because the weather was perfect.
Posted by William Polley at 11:58 PM | Comments (0) | TrackBack
May 10, 2007
Retail sales make a miserable showing in April
From Reuters:
NEW YORK (Reuters) - Retailers reported the weakest April sales results on record on Thursday after cold, stormy weather and an earlier Easter holiday sapped demand for spring merchandise.
Sales at 53 U.S. retailers fell a combined 2.4 percent, according to a preliminary tally by the International Council of Shopping Centers -- the biggest monthly decline since the group began tracking the figures in 1970.
Doesn't exactly inspire confidence. But then,
Brean Murray, Carret & Co. analyst Eric Beder said a rebound in sales in the fourth week of the April period was a "bright spot" for many retailers.
But given that the fourth week was the only one that was materially warmer than a year ago, "it is unclear if this upside was a function of temperature, increased levels of discounting or a return by the consumer to the mall," he wrote.
I think we'll be watching this closely over the next few weeks.
Posted by William Polley at 01:49 PM | Comments (0) | TrackBack
Best FOMC link summary
Macroblog today is a must read. My intermediate macro class I wrote about a few days ago would fit very nicely across that spectrum.
Anyway, go read Altig's post, and enjoy.
Posted by William Polley at 01:42 PM | Comments (0) | TrackBack
At least it's not a measured pace
Felix Salmon links to my analysis of the FOMC statement (as well as Mark Thoma's and Barry Ritholtz's). He writes:
For instance, the markets spent much of yesterday wondering exactly what the difference is between these two sentences:
Recent readings on core inflation have been somewhat elevated.
Core inflation remains somewhat elevated.
This is a waste not only of the FOMC's time, but also of the time of hundreds of analysts who suddenly find themselves in the position of rune-readers.
While I am sympathetic to Salmon's general point, this particular sentence did not exactly cause me to agonize for hours--more like seconds. Two months out of the last five have seen pretty decent readings on the core PCE deflator and the trend seems to be in the right direction. Nevertheless year-on-year inflation is still higher than they'd like it to be. Especially given the March number, the first sentence doesn't really ring true. The second one fits the bill a little better. Personally, I would not read anything more into it than that. Your mileage may vary.
I don't think much of Salmon's suggestion to have a different committee member write the statement and sign it each time. That would be even harder for the market to deal with. Salmon then concludes:
In any case, I think the best solution would be something which would concentrate the markets on the substance of what is being said, rather than on the silly differences between what is said this time and what was said last time. Surely that must be possible somehow.
Well, there's inflation targeting, I suppose.
Posted by William Polley at 01:11 PM | Comments (0) | TrackBack
Gas prices and refineries
The website for WCCO-TV has a "Good Question" feature. They ask, "Why not build more oil refineries?"
Average gas prices in the Twin Cities are flirting with $3 per gallon again. They have already topped that in other states and hit a new national average record of $3.07 per gallon. Experts said it's a supply problem. We're paying more because our refineries can't pump out enough gas to meet our demand. So why don't we just build more of them?
"We're dealing with the same spigot," said Dr. Akshay Rao, a business professor at the University of Minnesota.
He said the last refinery built in the United States was in 1976 and many have since closed. In fact, in 1985 there were 254 operating refineries. Today, there are approximately 142.
"There were marginal refineries that weren't making enough money closed," said Rao.
I would imagine that many of those were just too costly to maintain.
...
A new refinery would cost $2 billion to $3 billion. Today's environmental regulations help keep our air clean but also make it much more expensive to run a refinery. Finding land is tough because nobody wants to live near a refinery.
Indeed. It is not the cost that is the barrier. $2 billion to $3 billion is the price tag for an offshore oil platform too, and those are being built. Finding a suitable location is certainly a problem. Environmental regulations probably increase the initial outlay somewhat, but mostly affect the operating cost over time. Those two factors are probably enough to discourage that sort of investment.
...
There's also no doubt that current gas prices are making oil companies and refiners gallons of money. So some speculate that they don't want to build more refineries because that would increase supply and depress prices. That would cost them money.
"They would be in effect be depressing prices and margins and hurting themselves," said Rao.
If they have market power, this is certainly the case. Of course, the Balkanization of the U.S. gasoline market into geographic regions with different fuel requirements contributes to the market power of the remaining refineries in different geographic regions. If the U.S. gasoline market was really one large market with 142 refineries, would it be profitable for a firm (probably an existing one) to build a new refinery? Talk about a "good question"... that's the one they should have asked.
Yes, the firms have market power. Is it due to market failure, government failure, or both? My vote is for both, and the government failure here is not trivial.
...
However, not all American refineries are owned by oil companies. Some are owned by refining companies and that business isn't as good as it used to be. In fact, the energy department said refineries' profit margins peaked in the 1980s.
That actually doesn't surprise me.
As for the present situation, spring maintenance will finish up and we'll be switched to the summer blend of gasoline. This too shall pass, at least in the short run. But the refinery situation isn't going to change anytime soon, except that with each passing year it is only going to get worse. Given the way that gasoline markets are divided up, one or two refineries wouldn't be the solution (even if they could be built). Reversing the tide of geographical restrictions on various types of gasoline is probably not going to happen. The price system will provide the right signals and incentives to explore alternative fuels and so forth. But no one said it would be easy.
Posted by William Polley at 01:18 AM | Comments (8) | TrackBack
May 09, 2007
FOMC statement...status quo... for now
Today's statement is slightly more terse with only very minor changes from the last one. Want to parse the words? Be my guest. Here's the statement with old language struck through and new language in bold.
The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.
Economic growth slowed in the first part of this yearRecent indicators have been mixedand the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely tocontinue toexpand at a moderate pace over coming quarters.
Core inflation remains somewhat elevated.Recent readings on core inflation have been somewhat elevated.Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.
In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh.
The statement on the web has a typo in which "Voting for the FOMC monetary policy action were:" is repeated--a classic cut-and-paste typo. Ooops. [UPDATE: This has been fixed.]
Anyway, the only changes in this statement are of the sort that acknowledge recent data. The first change is a direct reference to the slow growth in the 1st quarter. That acknowledgment requires deleting the words "continue to" in the next sentence. Since growth has slowed, it cannot continue at a moderate pace.
In the next paragraph, they take out the mention of "recent readings" on core inflation to reflect the fact that we have seen a couple of encouraging data points, but even so it is not enough to knock the hawk off of its perch. Most notable though is the fact that they retained the language that singles out inflation as the predominant policy concern. Of course it will not surprise you to hear me say that I'm not surprised. Why?
Here's the bottom line. A shift in the stance of the press release would be interpreted as tantamount to an admission that a rate cut is coming at the next meeting. I say this based on how I have seen the markets react in recent months. A shift in the language would cause such a realignment of the financial markets (some of it justified, some of it bound to be overreaction) that they won't do it until they absolutely have to. It's not optimal, but I don't see how it can be avoided now. Look at 2000-2001. Before the unscheduled policy action in January 2001, there was one warning in December. The November statement warned of inflation risks. Read it for yourself if your memory is fuzzy.
Inflation is still the main concern, but it is more of a known quantity. The problem is less a fear that inflation will spike (though that is not ruled out) but that it will remain above where a lot of people want it to be. The spending (i.e. demand) side of the equation is more of an unknown. As long as that remains the case don't expect anything to change. At the very least, we'll probably have to wait through a couple of revisions of 1st quarter GDP and a couple more inflation data points. Stay tuned. If something changes for the worse, there will probably not be a lot of warning. On the flip side, if you're waiting for an "all clear" you have a long, nerve-wracking wait ahead of you.
Posted by William Polley at 01:35 PM | Comments (0) | TrackBack
May 04, 2007
Wolfram Demonstrations Project
I received a notification in my e-mail today about the Wolfram Demonstrations Project. If you don't have Mathematica 6.0, you will need to download the free player for the demonstrations. (I have version 5, and it doesn't play the files--you need the new interactive interface in version 6 apparently.)
There are some really nice demonstrations available, including many in for economics.
Take some time this weekend to download the player and experiment with some of the demonstrations. Many would be great for use in classes in math, economics, and the sciences. Enjoy!
Posted by William Polley at 03:09 PM | Comments (0) | TrackBack
Other shoe poised to drop?
Last week, James Hamilton led off a post with the line,
Let's admit it-- the other shoe is not yet dropping.
Opinions differ on what it will sound like when it does. April employment numbers came out day (+88,000 non-farm payroll jobs), and PGL doesn't like what he heard.
The fall in the household survey reporting of employment was 468,000. The unemployment rate would have risen even more had it not been for the fall in the labor force participation rate (LFP). The decline in the employment to population ratio (EP) was disappointing. Maybe it’s time that the Federal Reserve lower interest rates.
Then Craig Newmark points us to a Bloomberg article that says,
April 30 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke's assertion that interest rates may need to increase to curb inflation is wrong. That's what Goldman Sachs Group Inc., Merrill Lynch & Co. and UBS AG are saying.
While Bernanke warned last month that the odds of worsening inflation have increased, chief economists at the three firms say the worst housing slump in a decade may drive the U.S. economy into a recession and stifle consumer prices. Their chief economists say the Fed will cut its target for overnight loans between banks at least three times this year.
...
Bernanke is missing ``the linkage between residential housing investment and the broader economy,'' Jan Hatzius, chief U.S. economist at New York-based Goldman, the world's most profitable securities firm, said in an interview. ``The housing downturn is of the first order of importance.'' Hatzius says the Fed will cut rates three times this year, to 4.5 percent from 5.25 percent.
Kash says it's too early to tell if and when rates will fall.
While disappointing, it is hard to imagine today's data having any impact on the outcome of next week's FOMC meeting, at least in terms of the policy action. Whether it will cause policymakers to prepare to soften their stance in the coming months is another question. My guess is, not yet. The change in language in the last FOMC statement made a lot of people thing that rate cuts are now off the table. I don't think that is the case, but rather that a rate cut in 6 to 9 months is more likely than it was a few months ago.
After today's employment report, my subjective probability assessment for the funds rate in 6 to 9 months has edged even a bit more towards a rate cut.
So as we head into the week of the FOMC meeting, the question is whether and when they will make a more direct reference in the press release acknowledging that the risk of slower growth is greater than the risk of inflation. Predicting when and if that will come is like predicting when "measured pace" would disappear last year. Lots of people will call it before it happens, and a few will be surprised. But the Fed knows that they have to choose their words carefully, and in this instance it may mean that a rate cut will come without a lot of advance warning provoking speculation in the financial markets. The relevant reference for you is January 2001. If a rate cut comes, it could very well take us by surprise in terms of its timing. If, on the other hand, things improve this summer and a rate hike becomes necessary, the signs will be much more clear.
And so we sit, still waiting for the other shoe to drop.
Posted by William Polley at 02:07 PM | Comments (0) | TrackBack
World sunlight map
The Dead Parrot Society links to this map of world sunlight and cloud cover with the comment, "This is very cool."
Ditto.
Posted by William Polley at 02:00 PM | Comments (2) | TrackBack
May 02, 2007
Most worrisome news article I read today...and why I'm not as worried in the end
From Reuters:
NEW YORK (Reuters) - Hedge funds may now pose the biggest risk of a crisis since 1998, when the implosion of Long-Term Capital Management threatened the global financial system, the New York Federal Reserve said on Wednesday.
The statement represented the bank's sternest warning to date over the possible fate of the $1.4 trillion industry.
"Recent high correlations among hedge fund returns could suggest concentrations of risk comparable to those preceding the hedge fund crisis of 1998," according to a paper written by Tobias Adrian, capital markets economist at the central bank.
So I looked at the paper and the abstract says in part:
...A comparison of the current rise in correlations with the elevation before the 1998 event, however, reveals a key difference. The current increase stems mainly from a decline in the volatility of returns, while the earlier rise was driven by high covariances—an alternative measure of comovement in dollar terms. Because volatility and covariances are lower today, the current hedge fund environment differs from the 1998 environment.
I'm still concerned, but I'm not yet losing sleep over it.
Posted by William Polley at 01:26 PM | Comments (6) | TrackBack
May 01, 2007
What will the Fed do? (According to my class)
Each semsester, my intermediate macro class does an FOMC simulation. Today was the day. The have been researching current economic conditions, the speeches by Fed officials, and so forth. At the end, I polled the class on what action the Fed should take. Of my students, 13 voted to hold interest rates steady. 2 voted to raise, and 2 voted to lower the funds rate.
This is, of course, a completely unscientific poll, but they learned a lot from it. It is the first time in all the semesters that I have assigned this project that there were people favoring three different possibilities.
Posted by William Polley at 11:11 PM | Comments (3) | TrackBack