It’s been an interesting weekend of economic stories. Locally, people have been focused on a temporary, yet jolting gasoline shortage. In just two days prices shot up as much as $1.30 a gallon, pushing the price at some stations over $5/gallon. A few stations are completely out of gas. It’s a costly reminder of how fragile our system is.
The always-informative Oil Drum forecasts what we can expect in the gasoline market in the aftermath of Hurricane Ike. Notably,
It is likely that we will have product shortages for at least the next three to four weeks, because of shut in refinery capacity and reduced refinery runs.
I have said that it is likely to take a week or two to get refinery production up to pre-Ike levels. Suppose it takes 10 days. Adding 10 days to the date of the hurricane (September 12) brings us to September 22. If it takes an average of 18.5 days to get product from Texas to New Jersey by pipeline, it will take until approximately October 10 before supplies are back to normal. It could be a little shorter than this, or quite a bit longer.
Hopefully a shipment or two of gas will calm the Knoxville market down in short order. I certainly don’t want to pay $5 a gallon until October.
The much larger story, however, is the continued meltdown of the financial sector. Lehman Brothers is filing for bankruptcy, Bank of America is taking over a faltering Merrill Lynch, and American International Group is seeking a huge infusion of capital.
Nouriel Roubini warns that more dominoes may fall:
If Lehman does not find a buyer over the weekend and the counterparties of Lehman withdraw their credit lines on Monday (as they all will in the absence of a deal) you will have not only a collapse of Lehman but also the beginning of a run on the other independent broker dealers (Merrill Lynch first but also in sequence Goldman Sachs and Morgan Stanley and possibly even those broker dealers that are part of a larger commercial bank, I.e. JP Morgan and Citigroup). Then this run would lead to a massive systemic meltdown of the financial system.
. . .
This is indeed the most severe financial crisis since the Great Depression and occurring at a time when the US is falling in a now severe consumer led recession. The vicious interaction between a systemic financial and banking crisis and a severe economic contraction will get much worse before there is any bottom to it. We are only in the third inning of a nine innings economic and financial crisis. And the only light at the end of the tunnel is the one of the incoming train wreck.
Even the cautious Alan Greenspan today described the crisis as a “once-in-a-century type of event.”
We’ve got serious economic problems, and few good solutions. This is a particular problem for presidential candidate John McCain, who fails to redress the woes facing working-class Americans. As I noted before, look for the McCain campaign to continue to grasp at lipstick distractions in an effort to avoid discussing the economy. Ultimately, I don’t think this ploy will succeed–the economic malaise is too widespread. But it won’t be for a lack of trying.