Extraordinary Observations

For those of you absolutely convinced that oil companies are manipulating gasoline prices and stealing all of your money, I want you to consider the following.

If you were sitting in early March thinking, "hey, these gasoline prices seem suspiciously low right now," and had a feeling they were going to go up during the summer (again) you could have gotten free gasoline from that moment until the end of summer. Lets say you buy gasoline once a week at an average cost of $50 (which I think is reasonable unless you drive a monster). Given that number, your gasoline bill from March - August will be $1200. Now lets say at the moment you had that insight about the suspiciously low gas prices you bought an out of the money call option for Valero (one of the biggest gasoline refining companies in the world) expiring in September at a price of $400. If you sell that option when the stock market opens on Monday morning you would make a total profit of, drum roll... $1200. And who knows, the value of the option could continue to appreciate and you could get free gasoline well into the fall.



I still don't think oil companies are colluding to rip off the consumer; but I know there are some people who believe deep in their hearts that such is the case. To those people I say: invest in the oil companies so that when they make money, you make money! Its all about thinking ahead and planning for the worst. Simple hedges like the one I mentioned are a great way to put a little more spending money in your pocket if things get more out of control than the mainstream wants to accept.

One thing that I love about The Simpsons is that the writers aren't afraid to take jabs at Fox. Yesterday night's season finale had one of the best Fox News slams I have seen on the show yet. Thank you, Lisa Simpson, to opening the eyes of the mainstream to the silliness of Fox.

So I was thinking about the price we pay for stuff these days, and it dawned on me. We are willing to pay a lot of money for luxury items but refuse to accept that staple items are subject to inflation just like everything else. Take a look at this graph of the relative price of certain goods:


How many people do you know who must have their Starbucks coffee every morning? Or who guzzle down can after can of Pepsi. Ever take a trip to Cedar Point, a Major League Baseball Game or the zoo? If you have, you better enjoy that bottled water, because you are paying over $15 per gallon of it. When you think about it, you'd be hard-pressed to find any liquid product that you can buy for less than $3.20 per gallon.

We don't mind paying so much for luxury goods because we get some sort of immediate gratification from them. Pepsi goes great with pizza and chicken wings; bottled water at the ball game quenches our thirst; and a Starbucks Java Chip Frappuccino is the most delicious way to wake up in the morning. We want our cars to go but don't want to pay to make them go. In retrospect, it could be a lot worse. Imagine what the world would be like if cars ran on Starbucks lattes instead of gasoline...

Michael Moore's new documentary Sicko is coming out this summer and like his other films, I plan to see it upon release. As just about everyone knows, Moore is considered one of America's most outspoken liberals, and he makes people like Bill O'Reilly cringe; which is why I am confused as to why Fox News is endorsing his new movie. According to their film critic:

Filmmaker Michael Moore’s brilliant and uplifting new documentary, “Sicko,” deals with the failings of the U.S. health care system, both real and perceived. But this time around, the controversial documentarian seems to be letting the subject matter do the talking, and in the process shows a new maturity.”

Has an editor at Fox accidentally let an endorsement of Moore's new movie leak out? Has Moore changed his ways and become born again? Or is America's health care system in such bad shame that even Fox News gives two thumbs up to Michael Moore's criticism of it? Make the situation even more suspicious is an article written in The Guardian. According to the British newspaper:

The film has already caused Moore - who won the Palme d'Or at Cannes in 2004 with Fahrenheit 911 - to clash with the American authorities. Now, according to movie mogul Harvey Weinstein, whose Weinstein Company is behind the film, the US government is attempting to impound the negative. According to Weinstein, the US Treasury's moves meant "we had to fly the movie to another country"- he would not say to where. "Let the secret service find that out - though this is the same country that thought there were weapons of mass destruction, so they'll never find it." He added that he feared that if the film were impounded, there might be attempts to cut some footage, in particular the last 20 minutes, which related to a trip to Cuba. This, said Weinstein, "would not be good."

What is going on here? Fox praises Michael Moore... US government tries to censor a documentary about health care... I think there are still a lot of questions left to be answered.

Happy National Gas Out Day Eve everyone! I plan to fill up tomorrow morning to protest the silly protest which is going on; and plus, if I am wrong, the prices should be dirty cheap since all the stations will be hurting for business (or so the theory goes). On an inflation-adjusted basis, gasoline is no more expensive now than it has been before, and is certainly nowhere near its peak; say what you like, but the numbers don't lie.

So here is my theory about why all this gasoline protest nonsense is going on and why we are barking up the wrong tree. First, take a look at the real price of gasoline over the past 50 or so years. The general trend is downward and only in the past few years have we seen a little spike; still, the real price is lower than in the 1950s and the 1980s.



No, the problem isn't with the cost of gasoline... the problem is with the wages Americans make today. Consider that the people most likely to be hurt by the price of inelastic goods like gasoline are low-incomer earners. Now look at the graph of the real federal minimum wage in the United States over the past 50 years.


Low-income workers are now earning less, on an inflation adjusted basis, than at almost any other time since 1950. Here is the implication: both gasoline and no-skill labor are economic goods which are tradable on a market. In the case of gasoline, the market is very liquid and is volatile because there is no government imposed price ceiling or floor. Minimum wage, on the other hand, is heavily restricted by a price floor set by the government. So theoretically, all of the protesters angry about the price of gasoline shouldn't be wasting their breath trying to teach the oil companies a lesson, they should be lobbying for the government to increase the minimum wage! The government already has its hands tied up in the labor market, so using the state to increase wages would be much more beneficial than using it to subsidize energy; and both would have the same end result. Lets start a new revolution - every time you get an email, text message, myspace comment, or whatever, telling you to boycott Exxon stations, send along a rallying call for the government to increase the minimum wage in this country. At least there is some hope for wage change if we exert our energy correctly.

When people used to ask me what I thought about the British oil company BP, I used to respond that I thought it was probably the least shady of the oil companies (if that means anything). At least BP was bold enough to run a series of advertisements basically conceding that global warming is a real problem and that we can do something about it. Regardless of whether BP cares about the environment, at least they went out and told consumers that something is wrong and we can do something about it. These are two examples of these advertisements:





About a week ago I saw new BP advertisements running on TV. The new commercials feature cute little cartoon characters looking for a fun gas station to fill up an empty tank. In this rather distrubing ad, toddlers are on a road trip and need gasoline; they spot the happy BP station and the dancing iPod fills their car up with gas. How wonderful!



In BP's press release from last month the company says it aims to change the negative perception of the "gas station experience" and make a commitment to be "a little better" than the other oil companies. These cute cartoony advertisements are a smoke and mirrors effect that ignores the realities of BP's problems. These new advertisements tell consumers that BP's top priority right now is making its filling stations fun. Instead of earning respect by actually doing something to clean up the environment or make an impact on alternative fuels, BP is trying to win the hearts of Americans with lovable characters. The problem with oil and gasoline isn't that the filling stations aren't fun, I mean come on. The problem is that we refuse to reduce our dependence on oil and instead prefer to focus our energy elsewhere. When someone asks me about BP today, I tell them that they are just like every oil company, and I don't know why I even thought they deserved a little more respect.

Wal-Mart wonders why people who make more than $50,000 don't shop at their stores. Well, now this demographic has yet another reason not to go there. Wal-Mart started selling organic groceries recently to compete with upscale grocers like Whole Foods Market and Wild Oats Market, who cater to wealthy, upscale consumers. The thing about people who buy organic food is, they are extremely picky about what goes in their stomach; and why shouldn't they be?.. they're buying organic stuff after all. So when Wal-Mart mislabeled its groceries and tried to pass off the regular junk as organic, consumers were not happy at all. In quite a few stores months have passed since Wal-Mart has been asked to remove the organic label and nothing has been done. Naturally, angry consumers took to the blogosphere in protest.

Wal-Mart needs to figure out that when you try to branch out and bring in people outside of your core demographic that you have to do it right. The organic food disaster is just more proof that Wal-Marts attempts to bring in new customers "on the cheap" has just driven those customers away.

I could blog every day about how much the Christian right in this country annoys me. But sometimes the smartest show on TV does a much better job than me. Yesterday Stephen Colbert had a little something to say about intolerant people in this country. I have to say, this stuff is gold.

When CNBC first announced that Rupert Murdoch's News Corp. offered to buyout Dow Jones & Company at a 50% premium I thought I could mark my calendar as the day mainstream media died. Fortunately, it looks like the Bancroft family, who control most of the voting shares at Dow Jones & Co. are not going to accept the offer. Did New Corp make an outrageously high offer that is probably way above market price? Yes. Anyone concerned about the bottom line would be a fool to reject offer like this; but sometimes there are things more important than money, and it looks like the Bancroft family is making that statement.

Dow Jones & Co. is probably best known for the Dow Jones Industrial Average, a stock index algorithm that calculates the average of the 30 biggest companies in the United States. The company also owns Barron's, MarketWatch, and most importantly, The Wall Street Journal. Dow Jones is a company with about a $5 billion market cap, which is peanuts compared to News Corp's $70 billion market cap. So why does Murdoch want Dow Jones? He wants the company as a trophy asset, and more importantly, he wants control of the editorial page in The Wall Street Journal. The WSJ's editorial page is obviously right of center, but at least the newspaper and its editorial page is respectable. Compare this to Fox News Channel and The New York Post (two conservative media outlets owned by News Corp) which are the laughing stock of mainstream media.

Murdoch wanted to use Dow Jones & Company to give credibility to his new Fox Business Channel, scheduled to launch later this year; but News Corp would have simply tainted a well respected media company. Dow Jones has talked in the past of merging with the Washington Post Co. and Wall Street has suggested a good match between Dow Jones and the New York Times company. Dow Jones is arguably the only remaining successful newspaper media company, maintaining a strong advertising base and consistently large circulation. It is one thing for a conglomerate to suck up struggling companies or companies that it is driving out of business; but it is another for a conglomerate to buy-out the most successful company in the sector. I hope for the best for Dow Jones & Company, a lot is on the line here.

Eric Bolling made a great point on Fast Money yesterday night. Gasoline prices are going higher, a lot higher. How does he know and why do I believe him? Because the fact is that we are facing a major supply shortage. Talking heads go on TV all of the time and say... its not that we're running out of oil, there is plenty! the problem is that the oil companies aren't refining enough of it. This is true.


However, these pundits always want to lead you to believe that since crude oil is readily in supply that gasoline should be as well; but the actual supply of crude is irrelevant. If the refiners can't produce gasoline at a pace that equals demand then we have a shortage of gasoline, its that simple! What congress and all these anti-oil activists want you to believe is that these oil companies are producing under capacity and gouging us with high prices. Not true. Refiners are operating at their maximum efficiency and pumping out as much gasoline as possible. The problem is that these refiners are old and as Dylan Rattigan said, "are pieces of junk." The result is that the wholesale price of gasoline is going up, a lot.


Gasoline futures traded on the New York Mercantile Exchange are now at their highest price EVER. Yes, they are now trading higher than after Katrina, and we know what happened back then. Since the May futures don't expire for a few more weeks, we still have a little bit of time to enjoy gas at $3.00. Enjoy it while you can, I think gasoline is going to $4.00.

So here's the bottom line. Demand for gasoline is high because Americans refuse to give up the SUVs and suburban lifestyle. We sure complain about gasoline prices a lot, but when it comes to taking action we prefer to complain some more. Supply of gasoline is low because refiners can't produce it fast enough to meet demand. No, oil companies are not under producing to rip you off. No, oil companies are not holding off building new refineries to rip you off. Think about it, oil refiners have every incentive to sell as much gasoline on the market as they can. Gasoline refiners aren't like hiking tents; you can't just decide to build a new one and have it operating withing a month. Refineries are expensive and take a long time to build. The problem with supply is a flaw in infrastructure. Instead of complaining about high gas prices and pointing the finger at oil CEOs, maybe we should learn how the industry operates and why we are stuck in the position that we are in.

And one final thought. All of the traders on Fast Money think that gasoline prices are too low (despite all of what I just said). Sound familiar? Maybe its time for the necessary gasoline tax.