17 July 2009

Are we really in a recession?

As you know, everything is relative depending on your point of view and the way it effects you. For example: here in West Texas, we produce i believe about 13% of the oil that America uses. Naturally oil is the engine that drives our economy. I don't mind paying higher prices for gas at the pump because that means we are working.

Out here we can gauge the economy by the rig count. The rig count is published daily in the local paper. The rig count is simply how many rotating drilling rigs are punching holes in the earth. If the number is high, everyone is working. If it's low, we have high unemployment.

When i moved out here in 1997 my boss asked me why it was called the Permian Basin. I started researching and i remember back in 97 that OPEC had a target price of $24 per barrel of oil. At $24 per barrel, price at the pump was below $1.50

Today oil is hovering around $60 a barrel. This is a good price. Companies can make money at this price but they remember the money they made when oil was $146 a barrel. August of 2005 oil reached $60 a barrel and the economy exploded. Oil continued to rise until July 2008 where it peaked at $147 a barrel. After that, the bottom fell out and oil prices plummeted to $35 a barrel in February 2009. From then it clawed it's way back up to $60 a barrel where we are now.

When the oil boom hit, i told everyone that it was a bubble. I didn't increase my spending or borrowing just because the economy was rocking. I stayed put both at home and at work. We didn't boost wages real high so when the economy collapsed, we were sitting good. This is why i question if we are in a recession. The oil bubble was based on speculation only. Oil is where it should be. We simply aren't making what we were in 2008 but that doesn't mean we are in a recession.

Companies out here say the the lift price of oil is $40 per barrel. That is the cost to bring a barrel of oil to the surface. Now take an oil company like Exxon that has their own exploration and production. They drill for their own oil. The lift cost is the lift cost no matter what oil is selling for on the open market. What they do is adjust the price at the pump to match the market price of crude. It still cost them $40 per barrel for the crude so their profits go thru the roof.

Alon, a refinery in Big Spring Texas, can take a 42 gallon barrel of crude and refine it to produce 44 gallons of finished product. Alon is making their fair share of money as well.

So, if oil prices are where they should be, why are we in a recession? Oil companies are not making the high profit margins they were making in 2007-2008 but they aren't losing money either. They simply aren't making as much.

I have been trying to look at unemployment rates and if they correspond with oil prices. i can't really find a pattern. Here is the unemployment stats since 1948. See if you notice anything.

There is definitely a correlation with unemployment and democrats. unemployment peaked in 1982 at 10.5% under Reagan but then they brought it down to 5.3%. I know Reagan was a republican but he took it over from Carter with unemployment at 7.2%. Unemployment stayed between 5 -7% until obama took office. His stimulus plan now has 9.5% unemployment.

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