Long-term interest rates made another run at the lows of the year, the 10-year T-note approaching 4 percent, mortgages briefly below 5.75 percent, but today both moved back up toward the baseline bottom of the last couple of months, aided by a speech by Federal Reserve Chairman Alan Greenspan in which he indicated little concern for oil supplies or prices.
Economic data continued on the soft side. Two near trend-changers: new claims for unemployment insurance popped up to 352,000 last week, the very top of this year’s range; second, the University of Michigan’s consumer confidence survey abruptly sank from 94.2 (and months in the mid-90s) to 87.5 in early October.
September retail sales surprised on the upside, but two-thirds of the gain was a spike in auto sales. Industrial production has been flat for two months, and capacity in use has once again fallen back from any increase beyond 77.5 percent.
High energy prices “acting like a tax” get the blame for a shaky economy, but Greenspan today said only a .75 percent shortfall in GDP was traceable to oil – relative peanuts. If energy was the sole cause of slowdown, why have auto sales just jumped back to record levels? Why did consumer confidence just slide off the table? Energy prices have been way up for months.
Greenspan’s speech is a remarkable document (www.federalreserve.gov for full text). It is in ordinary English, not Fedspeak, and readers should know that before Greenspan’s current job, he earned his spurs as a top-notch oil-market economist. Readers should also remember that one of the chairman’s primary duties is to appear calm when everyone else is jittery, and studying his wisdom is very much a between-the-lines exercise.
Greenspan’s tone throughout was reassuring: supplies will be OK into the far future; prices will rise naturally, as they have for 30 years with the exhaustion of easy oil; replacement technologies will emerge before depletion is significant; price rises will continue to alter consumption patterns; …on and on and on…oil upon troubled waters.
The speech did not include a single reference to $55/bbl oil as a source or current threat of inflation, or a threat to economic expansion, or as a matter of interest to monetary policy in any way. [Wow.]
Some of the chairman’s numbers truly are reassuring: since the first big oil shock in 1973, U.S. oil consumption has risen only one-half percent per year, about one-sixth the rate of GDP growth. At $55/bbl, in constant dollars, oil prices are only 60 percent of the 1981 peak.
Some other numbers are cautionary. At $55/bbl, there is an immense spread between light oil, easy to crack into gasoline, and heavy grades – a $17/bbl spread. Wonder why? Of total global oil consumption today, 11 percent is burned in American automobiles. Lifestyle and labor-mobility adjustments lie in our future.
Oil prices may be only 60 percent of the 1981 peak, but that spike caused the worst recession in my lifetime, and long-term futures contracts for oil stayed sub-$20/bbl in real terms for the next 20 years. Those contracts are now $40/bbl, clear out to delivery in 2010. The chairman’s reassuring “…Part of the recent rise in spot prices is expected to wash out over the longer run” will make all the headlines, but the full text indicates that the washout will stop at the $40 future price.
More between-line blanks: the chairman’s “replacement technologies” referred to extraction and synfuel, not a word on alternate or renewable supply; not a single mention of the environmental consequences of fossil-fuel dependence; not a clause on U.S. oil-import dependency; and, of course, no one may use the word, “nuclear.”
Oil upon the waters.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
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