May 29, 2011, Bob Brinker's Moneytalk: Summary, Commentary and Excerpts

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Posted May 29, 2011....Bob Brinker's fill-in host was  Lynn Jimenez.  Jimenez is a business reporter for KGO radio.

The third hour of the program, Jimenez' guest speaker was  oil analyst John Kilduff.  John Kilduff  recently appeared before the United States Senate Committee on Energy and Natural Resources to give an assessment of the energy markets. Here are a few of Kilduff's  CNBC Predictions for 2011:   Emerging markets will falter; energy prices will trade lower;  the dollar will rally;  the US will take military action in Yemen; the Fed will step back from Quantitative Easing.

Jimenez'  interview with John Kilduff was very interesting.  Is it all to be believed? I report, you decide:

OIL PRICES JUSTIFIED?  Jimenez asks John if the prices we are paying at the pump are justified by supply and demand. John said: "It's hard to justify where prices are right now, given the fact that the economy is slowing down; given the fact where   inventories are around the world......prices should be about 20% lower."

WHAT ARE THE SOURCES OF OIL AND HOW MUCH DO WE USE?   John said:  "We consume about 16 million barrels a day. We import  about 10 million of that, so it's about 2/3rds of our requirement comes from outside the United States. Now we've gotten luckier over the years because a lot of that outside the United States increasingly  is coming from Canada....And Mexico as well pitches in with a good amount of oil....Venezuelans are a big source of our oil as well as Nigeria. And of course, we can't leave out Saudi Arabia, Kuwait as rounding out the top players of oil supply to the United States."

ARE WE RUNNING OUT OF OIL......Lynn asked John if the world is running out of oil. John said  "Oh not at all. They're finding more oil all the time, everywhere, but it is in deeper water....." 

IS DEMAND RISING?  John said: "Demand is actually somewhat stable....the US oil industry is worried about a peak situation. But not the peak oil one that we hear so much about. They are worried about peak gasoline demand in this country." Jimenez asked, then why are they charging almost $4 a gallon?  John said he simply had  "no answer to that question." 

ARE REFINERS MAKING PROFITS?   John said: "They are making wildly unbelievable profits right now. The spread is historic. I can remember where they made a dollar or two a barrel of crude that run through their refinery on gasoline. It recently got as high a $40 a barrel....Normal is about $9 to 12....Because they've been running at persistently low run rate or plants have  just sat idle for the past 18 months. It seems like we never quite got back to the historic levels after Hurricane Katrina, but we flirted with them. They have been running as low as 78% capacity."  

THEY ARE EXPORTING OIL AND KEEPING SUPPLY DOWN... John said:  "Yes, there have been significant exports of finished gasoline products out of the Gulf Coast down south while our own US gasoline inventories, instead of building ahead of the summer driving season,  actually plunged for the past six weeks and supplies got tight.....We had a slight increase in the most recent report last week, but we we're still around 84%, which is really paltry ahead of the Memorial Day Weekend......Folks are seeing remarkably high prices for gasoline and it's threatening the economy."

GLOBAL SUPPLY IN JEOPARDY....John said:  "There's no denying that supplies of crude oil are in jeopardy right now in the Middle East because of the revolutions that are going on there.....There's worried buyers besides us out there who are  potentially going to  step up their consumption of it, their storage of it.  The Chinese especially don't want to be left without sufficient supplies."

SHOULD WE HAVE ALLOWED SO MANY REFINERIES TO BE SOLD OR SHUT DOWN.....John said: "I think it needs to be looked at. What's happening right now with the refiners reminds me of what happened in California with the electricity crisis. When we first heard about it I was skeptical that they would idle plants or hold back on power. Sure enough, that is exactly what happened. So I'm not going to be as  quick this time around to say this investigation is without merit. The investigations that are without merit is at the local guy at the corner stand......"

Jimenez interjected  that part of the reason that refineries are holding back on supply is because the government offers them subsidies.

CAN U.S. POLITICIANS AFFECT OIL PRICES...John said: "Well there's only so much they can do. I think keeping the heat on the industry is a good idea, keeping them honest. I've always been in favor of being more aggressive in using the strategic oil reserves in times like this when supplies are threatened or appear to be threatened. But I also keeping it pure in terms a real national security resource like another terrorism attack....Should we go to a one single national gasoline standard that is may be a bit more polluting to bring down prices in times like this." 
 

STATE SALES TAX....John said: "In some of the states it's a percentage sales tax. So as the price gets to $4, the states getting a bigger and bigger piece of the gallon. It's roughly about 18 to 20%. And when we talk about price differences around the country, it's lower in the southeast where taxes are lower."

DROPPING DOLLAR EFFECTS..... John said: "How much the dollar's deterioration has driven these prices up, extraordinarily.....I hope it's as good for exports as they keep telling us because it's really painful. Not only at the gasoline pump but at the grocery store in terms of our basic food stuffs.  Commodities for the most part are globally priced in US dollars. So as the US dollar payment  gets driven down in its value, obviously  you need to have more of them to pay for the value of the food stuff or the barrel of oil.  So its direct inverse relationship. It's not necessarily pure and breaks down a bit from time to time, but recently and earlier this year, over the past two months,  as the dollar has declined, the inverse relationship has been about 90%."


FED PRINTING CAUSING OIL AND FOOD PRICE TO RISE...John said: "So as we sit here and watch the Federal Reserve do what they can to stabilize the economy and they feel the best course of action is to print more dollars and monetize our debt, that's driving the value of our dollar down against all major currencies and its rised the price of  gasoline and crude oil up. We are paying for that policy whether we like it or not.....


INFLATION SCARE IS TRANSITORY? John said: "Federal Reserve economists that I have the privilege to talk with from time to time will sit there and pound their fist on the table and tell you that until  unemployment picks up that this inflation scare is just that, it's not real. When they say it's transitory, that is  what they mean. It may be an artificially inflated commodity bubble because of monetary policy, but it's not real until there is fuller employment or even something approaching employment, and there's real wage pressure. Until that, they are not going to worry about it is what they tell me."  

Honey EC: All I can say to all of the above is, YIKES, YIKES, YIKES. :)

Dixiegeezer's photo of the entrance to a Botanical Garden in Florida (click to enlarge):

 


Moneytalk on demand and to go with Bob Brinker, is available for FREE audio/podcasting at KGO810 radio for seven days after broadcast. I download and save all three hours, including the third hour guest-speaker. (The program is archived in the 1-4pm time-slots.) If you don't download it from KGO within seven day, it's available at bobbrinker.com by paid subscription. KGO Radio Sunday
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