Economy

Journalists need to explain why 'experts' missed gasoline price hike

I’d like to thank President Obama for giving me a $400 payroll tax cut. I’d sure like to help out with the economic recovery.

But that tax cut, thanks to 41 consecutive days of gasoline price increases, now amounts to only $150. Figuring my local commuting habits and trips to visit family and friends, I’ll pay about $700 to fill up my little Scion for the rest of the year at the current national average of $2.62 a gallon. I’ll be spending about $250 more at this price than I would if gasoline had remained near the December average of $1.62.

If the price of gasoline rises more (wanna bet?) over summer, I’ll be handing even more of my payroll tax cut to Big Oil.

So why the sharp, 62 percent increase? Why did the “experts” who are supposed to understand gasoline and oil markets get it wrong? Journalists have indeed been telling us the “experts” were wrong and what factors have been driving gasoline prices higher — but not why the “experts” erred in missing those factors.

According to New York Times reporter Clifford Krauss:

Analysts say the increase is being driven by investor expectations of an economic recovery, the recent fall of the dollar against other currencies and, to a lesser extent, the success of oil-exporting countries in curtailing supplies.

In other words, these are the issues that helped drive gasoline costs well beyond $4 last year. Motorists are accustomed to gasoline prices spiking as the summer driving season arrives. But 62% higher this year when “experts” predicted far less?

Journalists depend on “experts” and base conclusions on their analyses. Here’s CNN business correspondent Christine Romans on March 17:

Gas prices are rising. Experts say they won’t rise much more and the Energy Department sees a summer high of $2.30. Don’t worry: this recent run up is no stepping stone to $3.00 and $4.00 a gallon gasoline. [emphasis added]

From the Energy Information Administration’s “Short-Term Energy and Summer Fuels Outlook” published April 14:

Regular‐grade gasoline prices have increased to more than $2 per gallon, rising slowly but steadily since the beginning of the year in conjunction with rising crude oil prices and refiner margins recovering from recent near‐historic lows. During this summer driving season (April through September) regular gasoline retail prices are projected to average $2.23 per gallon, down almost $1.60 from last summer. The average regular gasoline price for all of 2009 is expected to be $2.17 per gallon, increasing to an average of $2.42 in 2010. Diesel prices are projected to average about $2.27 per gallon during this driving season and to average $2.30 and $2.69 per gallon annually in 2009 and 2010, respectively. [emphasis added]

(Not surprisingly, EIA in its June 3 “This Week in Petroleum” reported the price of gasoline as passing $2.50 nationally. Some wag put this hed on its release: “EIA ‘Stimulated’ to Revise the Annual Energy Outlook 2009.”)

Tom Kloza, chief oil analyst at the Oil Price Information Service, at least ‘fessed up on May 22 that he was wrong that gasoline prices would not pass $2.50:

Prices have moved further and faster than I thought possible five months ago, or five days ago.

What did he miss? What did other “experts” miss? Why?

Mr. Kloza did add perspective about the impact of much-higher-than-predicted gasoline prices on economic recovery:

The increases probably mean that American’s will spend about $925-million or more each day on gasoline through the rest of May. That still compares favorably with last year, when the figure was closer to $1.5-billion per day.

I’m not the only person handing back my payroll tax cut, it seems. Here’s Ms. Romans again on June 8:

[The experts] were saying, “Don’t worry.” They were saying again and again, “Don’t worry because demand is not increasing.” …

Because of the bailout and now concern in global markets about how much money the United States is borrowing and spending, it’s weakening the dollar. And as the dollar weakens, people are concerned about inflation. And the hedge against inflation is commodities.

And so you’re seeing money flowing into crude oil because of concerns about the dollar and the future of this country. So even though you have demand down, we have a recession, we’re using less oil, oil prices are rising.

… And [$18] is how much more you’re paying to fill up your gas tank this year from the beginning of the year to now. … Now, it’s still much less than it was last year. … But keep in mind that takes away pretty much the president’s Making Work Pay tax cut. [emphasis added]

Is Ms. Romans’ report that experts say demand is heading down accurate? She did not say, perhaps because cable news gives her mere seconds to report on a complicated issue, demand is down from what? Or from when? According to Reuters, a May EIA analysis said differently:

The EIA forecast last month U.S. gasoline demand would rise to average of 9.15 million barrels per day (bpd) in June, up from the 9.07 million bpd consumed in June 2008.

It’s difficult for the audiences of journalists (or pundits or “experts”) to know whom to find credible. Yes, predicting the costs of oil at the wellhead and gasoline at the pump is tricky business. And journalists such as Ms. Romans rely heavily on government “experts” or Wall Street “analysts” to forecast such costs accurately. Why haven’t they? The government collects enormous amounts of data on energy. So do investment bankers and other economists. Why the misfired analyses in the past six months?

Analyzing the reasons for a misdiagnosis of an oil-driven economy is a news story. Where is it? There’s some, but it’s soundbite-driven and occasional.

Good journalists should be teaching their audiences much more about the economics of oil and gasoline and the impacts on the broader economy (journalism that is difficult) instead of merely telling audiences that they’re miserable (journalism that is easy and obvious). The oil and gasoline beats ought to consist of much more “eat-your-spinach” journalism rather than video of Joe or Jane Consumer at the gasoline pump, filling the family sedan and complaining about the rising cost.

Oh, I forgot. The newspaper industry has been shedding experienced journalists for nearly a decade. Perhaps there’s no one left to consistently and expertly report on economic issues that are difficult.

21 replies »

  1. I think the real experts here are the gasoline traders and they didn’t miss this move at all. Guys like the aforementioned experrts above, they don’t have their own money on the line, so what’s it to them if they miss the boat. The upward move was so obvious, logical, and totally expected. Heck, I’m far from an expert and I caught most of the move in NYMEX crude and part of the move in gasoline futures. One can expect, however, that while oil and gas prices might continue their upward drift, that they will go down again, oscillating like the free market allows them to do.

    Jeff

  2. Nice work, Denny. I think part of the answer here has to do with the difference between information and knowledge. Way back when I started my doc program in 1993 people were beginning to talk about the Internet and all the information it was going to bring us. I told some classmates that information wasn’t going to be a problem. FILTERS were the problem. The signal:noise ratio has gone to hell and is getting worse.

    Once upon a time “expert” referred to someone who could sort signal from noise. Now an expert is somebody who’s able to generate the most noise.

    Barthes would have loved it.

  3. One big reason why prices dropped from $4 to under $2 was due to reduced demand in the US. As the prices have gone down, demand has increased and the prices are going up again. Republican’ts think that we have to increase the supply of oil to keep prices down but decreasing demand works just as well, if not better, and is something that the people can control by buying more energy efficient cars, using public transportation/ride-sharing more (sometimes that is not an option and I know this because public transportation is pretty limited here in tx) and/or traveling less.

  4. I am 78 years old, and in my teens I think it was the price of steel kept rising for no apparent reason,other than blatant greed on the part of the Steel Company’s. If my memory is correct it was then President Truman who used a powerful tool available to him, he “jAW BONED’ the price down. So where is the outrage on the part of Democrats and President Obama, I have a small Business and were dieing here.Were in the worst recession ever, come on now, letting gas prices go up daily is criminal.

  5. Good journalism is also explaining business concepts.

    And so you’re seeing money flowing into crude oil because of concerns about the dollar and the future of this country. So even though you have demand down, we have a recession, we’re using less oil, oil prices are rising.

    If there’s a cause and effect relationship between the first sentence and the second, Ms. Romans fails to enlighten us. In the past year, I’ve read, at minimum, dozens of articles about the economy and only understood, at best, half the content.

    Also, thanks for your perspective, Mr. Barry. To me, a third world country is one in which the citizens live and die with the fluctuating prices of basic goods like flour and gas. It dominates their existence. Are we that much different in the U.S.?

  6. Bend over one and all… You know I wonder if the Newspapers are being honest. Or are they being like the movies studios running two sets of books. One set of books where they justify not informing the public and the other where their profits from all the lies are racked up?

  7. @Neil,

    The price increse of the steel during the Truman administration was a function of ore prices and not fatter% margins of the steel industry which remained stable. You stated that this is the worst recession ever, is that fact based or your opinion? I could make a rational case that we saw worse recessions in the 1970’s, and certainly during the earlier part of the 20th century. As far as oil prices are concerned, they are subject to free market forces. As a small businessman, would you want to have the government telling what you could or could not charge for your goods and services?

    The original article of gasoline prices that Dr. Denny quoted is false anyway, as there’s never been a 41 day rally in NYMEX gasoline. In fact, here’s a link to a daily chart of the most recent action.
    http://futures.tradingcharts.com/intraday/RBN9

    A 41 day rally in any market would be an outlier.

    What the author did was look at a weekly chart and see 6 weeks of increases and say that there was a 41 day rally(Taking out for the holiday). The author waswrong, but then again, it’s the NYT so what else would you expect.

    Jeff

  8. Jeff Well to some extent the government is setting my prices or at least goverment to a large extent is setting, if not the prices, the environment that we as small business must compete in. When one segment of doing business get so far out of wack that people wont travel or go across town to eat at their favorite restaurant, et all, then this effects the prices we can charge. As to the seventy’s I started in 1974 , Prior to that I was an outside salesman for a display mfg. Raging inflation was the mantra of the day.Prices fluctuated so often we couldn’t even print price lists. You do remember President Carter. So we came up with a sur charge which was changed daily. so did we set the prices,or did government? I don’t know about the early 20th Century, But I lived in the 70’s and we did not live with the fear of the future for our country as that pervades in people today.

  9. The prices were lowered for the election, and now that everything’s back to business as usual again, they are being raised back up.

  10. Recently Bloomburg reported that the use of oil tankers for storage of distillates was at an all time high. 60% of the supertankers are just setting in port, filled to the gills with heating oil and jet fuels. Stockpiling by speculators is the reason prices are rising.

  11. Neil, Perhaps the government is inflating your prices through high taxes, higher workman’s comp, higher capital gains taxes, soial security taxes.

    That being said, you might have fear, but I don’t as I don’t look at government as the cure but the problem. Most people who live in fear expect for something from the government, I expect nothing except defense, property rights, and good roads and infrastructure. And the supreme court has taken away our property rights with the recent Chrysler decision.

    A good read would be Albert Jay Nock’s, “Our Enemy The State.”

    I have a link right here.
    http://www.lewrockwell.com/orig3/nock1.html

    If you think you saw inflation in the 70’s, you haven’t seen nothing yet. Yet, a sagacious, prescient person can profit in these times, and that’s what free enterprise is all about. Risk takers are rewarded.

  12. Personally, I think we’re being Enron’d on a global scale for the second year in a row.

  13. I’m not saying it answers you, but I suggest this bit of journalism casts a little light on your question:
    http://money.cnn.com/pf/features/lists/global_gasprices/

    The price of gas isn’t set by demand in the US alone, or even mainly. It’s a global market. This would still be true even if the US were self-sufficient in production – the *price* would still be set by global demand. The Americas account for around 35% of world oil consumption; Asia/Pacific takes about 30%, Europe another 18%.

    In Europe, the price charged to motorists is deliberately inflated by tax, to encourage people to conserve the stuff all the time, even when the market is loose. As a result, the effect of oil price rises is cushioned – a 50% rise in crude oil prices translates to only about a 20% rise in gas pump prices. This has been true for decades, and so European cities have developed on the *assumption* that motoring is *supposed* to be expensive.

    In many oil-producing areas, such as the Middle East, Nigeria, Venezuela, the opposite happens – the government heavily subsidises pump prices. So again, the consumer is insulated against fluctuations. The higher the world oil price, the more money the government has, so it doesn’t mind bearing the cost for its motorists.

    In fact, the US is unusual in leaving its motorists fully exposed to every twitch and wobble of the crude oil price.

    The International Energy Agency’s figures (http://omrpublic.iea.org/currentissues/full.pdf) show that global demand peaked in late 2007, at 87.2 million barrels per day, and has since dropped to a mere 83.2 Mb/d in 2009. But Asia/Pacific consumption has dropped by noticeably less than US/European consumption (about 4.5%, as opposed to around 7%) and Middle-East consumption has actually gone up over that period.

    In other words: US consumption is less important to global oil prices, now, than it was 18 months ago. That’s a long-term trend.

  14. Jeff Watson; Social Security taxes increased last in 1983. Income tax was reduced as of April this year. Workmans comp is an insurance policy which differs from state to state. Capital gains taxes havent increased either. I know there are people who love to blame government for everything but you really need to find a concrete reason that holds water. As to the supreme court taking away property rights with the Chrysler decision. How exactly? Chrysler was bankrupt, the share holders owned nothing of value, all the Supreme court said was that Chrysler could sell part of Chrysler to Fiat. Big deal, thousands were not fired, Chrysler has a chance of recovering. Chrysler was not prevented from selling part of it’s operations to Fiat. You see this as a negation of private property, looks like the reverse to me. Chryslers CHOICE to sell it’s property was upheld as legal.

  15. It was reported the other day that certain entities like J P Morgan Chase (and other investors) have been leasing oil tankers, buying crude oil and stockpiling this crude oil off-shore, figuring that oil prices will rise and they’ll be able to make a killing when they finally sell this stockpiled crude oil on the world oil markets…kind of like what the oil futures speculators did last year in driving up world oil barrel prices (and gas pump prices) to record levels.

    Gee, nothing like a self-fulfilling prophecy to ramp up profits.

    So, not only have oil producing entities like OPEC cut back on production, thus decreasing crude oil supplies on the world market and at refineries, but certain investors saw an opportunity to also siphon off millions of barrels of crude, buying low with plans on selling high, as their very stockpiling activity leads to decreasing supplies, driving up prices. What financial wizards these crooks are. And I thought someone like President Barack Obama would have had, by now, one of our government’s regulatory agencies stopping this type of scheme, or at least tried to stop it.

    Of course, President Obama could step in and release crude oil from the Strategic Petroleum Reserve, offsetting this stockpiling by greedy, unscrupulous investors, but I get the feeling that he won’t, even as gas pump prices push past $3.00 a gallon on the way to $4.00 a gallon by year’s end. We’ve already seen what corrupt investment purveyors, through Ponzi schemes and repackaged sub-prime mortgage derivatives, can do to our economy under the previous corrupt and criminal Republican administration, so I hope and pray that President Obama and the Democrats will step up and somehow put a stop to these fraudulent, get-rich-quick practices…before things get much, much worse economically.

  16. Angela,

    Nice attempt at a point by point refutation, but you ought to revisit your figures, or better yet, ask a small businessman if his costs due to government have gone up. Since you wax so eloquently, are you an expert on the subject, are you a business person who pays lower taxes, or did you just wiki the whole response?

    As for the Chrysler thing, property rights have been trampled on. The supreme court decision allowed the Obama Administration to screw the bondholders. Bondholders are always near the first in line to collect in bankruptcy situations, as they are secured creditors. Not in this case, where the bond holders got screwed, and Obama’s buddies(who got him elected) in the unions got 60% of the company while the bond holders got a few cents on the dollar. Since bonds are the underpinnings of the entire economy, this suggests a naivete on the administration’s outlook. Already, the entire bond market has puked because of this Obama folly, interest rates are going up and it will be more expensive for the government, businesses, and individuals to borrow money. They have proven that they can render your bonds worthless, what’s next, your bank account or house?

    Oracle,

    It’s nice to live in a country where you have the freedom to speculate like so many do in the oil market. The sagacious and nimble traders who put their money at risk should be admired, not considered pariahs. Remember, these are the same traders who bought oil at $130-140 and pitched it out with huge losses. Are the evil speculators any different than a person who invests his money in a 401-K or mutual fund, hoping for it to go up and finding a bigger fool willing to pay more for it?

    Shouldn’t investing be about greed, or am I missing something here?

    @Libhomo Prices were not kept artificially low during the election….Who would do that and how?. Markets are bigger than governments, as it should be.

    Jeff

  17. So much to comment on, So little time. I have always believed it is much harder to be a liberal than to be on the right. The views on the right, and the thought process is so easy, no mercy, no welfare, cut and dried no nothing. While those of us on left, who have been taught, and believe in The American Dream,yet have compassion,are accused of vacillating. I have a very small business trying to say afloat in the mother of all recessions,and when your small business fails you can’t,as your employees can, collect unemployment benefits. I took the risk and so have many others I see For Lease signs all over town, yet that is no reason to abandon the safety nets for all the disadvantaged as the Governor of California plans to do.Yes Government should provide programs to help it’s citizens live the American Dream that we are taught all of our life is our entitlement. Some of us on the left sometimes lose sight of that entitlement because of the never ending drum beat of the Vary Far Right. I might add, that in the 50’s the drum beat was all about the danger of an “International Communist Conspiracy” to take over the world, didn’t happen, while today we have an “International Corporate Conspiracy” that has taken over the world.

  18. Neil

    The American Dream is a concept that the immigrants seem to be doing a better job of than the native sons. The American Dream is where you work your ass off, and when you think you’ve worked as hard as you can, you work some more. The American Dream is where you save money and live a better life because of your sense of personal thrift. The American dream is where your kids are left better off due to your hard work, whether it be educationally or monetary. The American Dream is all about bold risk taking and prescience. The American Dream isn’t an entitlement, nor is it a government give away….If you want the American Dream, you have to take it.

    The right might seem heartless to the left, but we value individualism over the collective. And yes, there was that “International Communist Conspiracy” in the late 40’s-50’s and was proven when the Eastern walls went tumbling down. There probably is an international corporate conspiracy, with the same players, motives, etc. Only this time it’s the left doing the Paul Revere ride.

    Jeff

  19. There’s not a lot of places to park speculative money. Also, if there is a recovery, it will need oil. So if you don’t know where to put your money, park it in oil.

  20. Ian, Good point, but I will add that in the US, we have the biggest, most liquid casinos, and there’s plenty of places to park your speculative money. In fact, the commodity markets are bigger than the stock market,

    Jeff