Economic Turmoil, Local And Abroad

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.

Against Government, Yet Cashing The Checks

A brief Alaska snapshot to put the anti-spending Governor Palin in context:

Of the 50 states, Alaska ranks No. 1 in taxes per resident and No. 1 in spending per resident. Its tax burden per resident is 2 1/2 times the national average; its spending, more than double. The trick is that Alaska’s government spends money on its own citizens and taxes the rest of us to pay for it.
. . .
As if it couldn’t support itself, Alaska also ranks No. 1, year after year, in money it sucks in from Washington. In 2005 (the most recent figures), according to the Tax Foundation, Alaska ranked 18th in federal taxes paid per resident ($5,434) but first in federal spending received per resident ($13,950). Its ratio of federal spending received to federal taxes paid ranks third among the 50 states, and in the absolute amount it receives from Washington over and above the amount it sends to Washington, Alaska ranks No. 1.

This should include the $223 million federal transportation earmark money–originally designated for the bridge to nowhere–which Palin kept.
I’m not surprised to see some of the biggest beneficiaries of government spending railing against the public sector. I hear it all the time in East Tennessee. It’s ironic once you consider the list of the area’s largest employers:

  1. U.S. Department of Energy – Oak Ridge Operations
  2. The University of Tennessee, Knoxville
  3. Knox County Public School System
  4. Covenant Health
  5. St. Mary’s Medical Center
  6. University of Tennessee Medical Center
  7. City of Knoxville
  8. County of Knox
  9. Clayton Homes
  10. State of Tennessee, Regional Offices

Seven of the largest ten employers are government-related. Add TVA, the Great Smoky Mountains National Park, and all the highway spending to the mix and it becomes clear that government spending fuels this region’s economy.
But bashing government institutions sure makes for a good sound bites.

Sarah Palin, The Trojan Moose

It’s been entertaining listening to the right-wing noise machine the last ten days. After weeks of depicting Senator Obama as a “celebrity” candidate, they have been fawning over Governor Palin like a school boy with a crush.
Since no one knew about Palin prior McCain’s selection, rightists been busy constructing a glowing caricature out of what had been a blank slate. And so we are presented with a wonder-woman hockey mom who fights corruption and government spending. Talk radio has been praising her because she lives the “American life,” whatever that is. She even wears a skirt!
Some of the bloom may finally be coming off the Palin rose, at least in print and on TV news:

We’ve now had a week of blaring headlines and one-liners about Sarah Palin as the mavericky, pork-busting reformer from Alaska. But we seem to be witnessing the first stirrings of a backlash and a dawning realization that the ‘Sarah Palin’ we’ve heard so much about over the last few days is a fraud of truly comical dimensions.

But regardless of what we learn about the true Palin, she has served a purpose. As Arianna Huffington notes, she’s been a useful distraction from the real problems confronting America:

The point is that Palin, and the circus she’s brought to town, are simply a bountiful collection of small lies deliberately designed to distract the country from one big truth: the havoc that George Bush and the Republican Party have wrought, and that John McCain is committed to continuing.
Every second of this campaign not spent talking about the Republican Party’s record, and John McCain’s role in that record, is a victory for John McCain.
Her critics like to say that Palin hasn’t accomplished anything. I disagree: in the space of ten days she’s succeeded in distracting the entire country from the horrific Bush record — and McCain’s complicity in it. My friends, that’s accomplishment we can believe in.

I’ll be more specific–every day not spent discussing the economy is a victory for McCain. It was no accident that the economy was barely mentioned at the Republican convention. The fact is that it is in worse shape than government statistics indicate. It’s the trump card in the Obama hand, if the campaign stays on message. Therefore Obama must resist the temptation to be sidetracked by the Trojan Moose.

The American Oil Refinery Shortage Myth

According to rightists, the second-most common response to energy crisis, behind “Drill! Drill! Drill!”, is that gas prices are high because environmentalists have prevented America from building any new oil refineries in 30 years (or whatever duration it is).
How does this claim square with marketplace reality? According to an oil industry executive, it doesn’t:

U.S. refineries will continue to run at current reduced utilization rates in the next few years due to slowing demand for fuel, a ConocoPhillips executive said on Wednesday.
“Utilization rates have come off from their highs of the last few years… we expect this trend to continue for the next few years,” James L. Gallogly, ConocoPhillips executive vice president of refining, marketing, and transportation, said in a presentation to market analysts.

So at a time of record high gasoline prices, refineries have not been running at full capacity?

Refineries had been operating at an average above 90 percent of capacity, but this year refineries have been operating at much lower capacities nearer to an average of 85 percent, according to Gallogly.

Why have refineries slowed down? (Emphasis added)

Historically, utilization rates peak during the U.S. summer driving season to meet demand, but this year, refineries failed to ramp up production due to poor profit margins and weak demand.

Ahh, there’s a key phrase rightists never seem to mention: profit margins.
Unlike rightist pundits, I’m not going to pretend to be an oil industry expert, when I’m not. Perhaps we should build a refinery somewhere. But clearly there are more factors to the this economic equation (e.g., industry consolidation and profitability) than simply the evil environmentalists scapegoats that we always hear about.

Bold 2012 Election Predictions

  • Advocates will refer to the contest as “the most important election of our lifetimes.”
  • Candidates will proudly proclaim their outsider (of Washington, DC) credentials, while simultaneously embracing the long-time politicians and interest groups that make the capital what it is.
  • Whoever the Democratic nominee is will be described as one of the most liberal members of X group in America.

Future of Suburbia

The Freakonomics blog has a quorum: “What Is the Future of Suburbia?“. Simply put, it presents to group of “smart people” the following question: “What will U.S. suburbs look like in 40 years?”
It’s an interesting read. Like several of the experts, I believe the future of suburbia will be significantly impacted by rising oil prices. I think more expensive gasoline will be the death knell for continued suburban/exurban sprawl. Instead we will see higher density growth along public transportation infrastructure (“transit oriented development”).
It would be prudent to allocate our public resources accordingly.