Wednesday Highlights

Good morning (and yes, I’m on the left coast, it’s still morning here)

  1. Evil and theology.
  2. For valentines day, belated I guess.
  3. On the Obama = Socialist term.
  4. A pre-Xi primer.
  5. How soon will you walk/bike to work? At what cost/price of gas do you change your habits substantially?
  6. Or its just a nod to their buddies installing cat-5 in walls.
  7. No taxes raised on those making less than 250k? Oh, wait by 250k that’s not dollars, he means micro-dollars. Didn’t you read the text, when he said 250k he didn’t specify units. You just assumed he meant dollars.
  8. Well, as Freddy Mercury said, get on your bike and ride! (or run up the mountain 7 miles a day).
  9. MLK Jr and Zombies, they value you for your brains not the color of your skin, eh?
  10. The snow tortoise.
  11. For the cook.
  12. Gold value.
  13. National defense and the nearby star.

27 Responses to Wednesday Highlights

  1. #7 Not sure what you’re referring too, where is a tax raise proposed on those under $250K?

  2. 5.How soon will you walk/bike to work? At what cost/price of gas do you change your habits substantially?

    I agree with her about walking….when I walked a lot because I commutted by train, it seemed to do little for my ‘fitness’.

    She doesn’t say how her husband gets to work, but she says he takes 2 hours whereas if he used a car it would only take 35 minutes.

    OK here is where my inner economist comes in. Her husband takes an extra 1.5 hours to get to work. Why? Because US gas prices are say $4 per gallon (I’m rounding up, right now they are like $3.45 where I am). How much gas does his car burn in 0.5 hours? One gallon? So he saves $4 by not using the car to go to work, but he looses 1.5 hours of time! What is his time worth? $2.67 an hour? The man must be a professional bum working not even a min. wage job or he must hate being with his wife and would rather use two hours of biking or walking to get away from her while using high gas prices as an excuse to her!

    What does she think gas prices should be? Say $1.50 a gallon? OK then what’s causing him to burn 1.5 hours instead of 1.0 gallons of gas is a differnetial of $2.50. That makes sense if you value your time at $1.67 an hour! At this point the problem I think is not that he is paying too much for gas but that his boss is paying too much for him!

    This just reinforces my belief there’s something wrong with us psychologically….we perceive gas prices as being much more important than they really are….sort of like that old retailer’s trick with pricing something $9.99 instead of $10 to make us think it’s cheaper….

  3. Boonton,
    So, you didn’t actually answer my question. At what cost gas will you change your plans or habits?

  4. Commuting to work? Probably $8 gal would be a point where you’d see large shifts in my habits. For non-work driving it would probably be much less, say $5 a gal. I would imagine your price would be even higher as you’re striving to drive a car that takes one gallon of gas per ten thousand miles. You wouldn’t care if gas was $35 a gallon.

  5. Speaking of habits, check out the graph here
    http://modeledbehavior.com/2012/02/16/oil-and-the-structural-recession/

    Seems like we were on a steady increase from the early 70’s until about 2006 in terms of total miles driven per year, then in 2006 it flatlined at about 3.0T miles.

    An interesting companion graph would be to divide by population to get miles driven per person per year. That would factor out the portion of the increase that is due to there simply being more people in the US each year. On way to read this is the sudden Bush era gas price spike to $4 or so per gallon finally triggered not a huge cutback in miles driven but a ‘economizing’ of driving. But then we won’t know for a while how much the recession was a factor, we are likely to see that over the next few years as the economy recovers but gas prices will remain closer to $4 than $2 IMO.

    Another factor, though, might simply be satuation. No matter what gas prices are, there’s a limit on how much driving most people want to do in a day. If the trend of moving closer to cities and denser urban areas continues to hold, then you’ll see miles driven going down even if gas prices are very low.

  6. Boonton,
    A co-worker was mentioning this morning that we expect $5 gas early this summer.

    you’re striving to drive a car that takes one gallon of gas per ten thousand miles

    10,000? Hmm, energetically unlikely. 120+ would be what I’m looking for.

    Seems like we were on a steady increase from the early 70′s until about 2006 in terms of total miles driven per year, then in 2006 it flatlined at about 3.0T miles.

    Which highlights why I want a higher efficiency car, … I put on 10k or so per year driving for work. That was slightly higher when I was driving the Insight which had a lower gallons/100miles-people than other modes of transport (specifically planes).

  7. OK so you need to drive 10,000 miles. A 100 mpg car means you need to then buy 100 gallons per year. Difference between $3 gal and $5 gal? $200 a year for you. Roughly $3.85 per week. Not even equal to eating out a cheap fast food place once per week for lunch.

    If gas went to $10 per gallon, you’d be spending about $19.23 per week or $13.46 more than if it stayed at $3 per gallon or so. Again that’s smaller than the payroll tax cut that Obama has to keep fighting Republicans to extend.

    So with that in mind, before Obama there was no payroll tax cut, was your behavior dramatically different? Did you refuse to earn a living? If not then it seems like it would be irrational for you to dramatically alter your behavior even if gas went up dramatically.

  8. Boonton,
    Actually that’s not quite right. As gas prices increase, IRS business renumeration for miles increases dramatically. So it pays me to drive more (for work) the more gas prices go up. On the other hand, that pleasure trip to Wisconsin for skiing (New Hampshire/Vermont/Upstate NY for you) just went up in cost by quite a bit. That 300 mile round trip (at a US average 20mpg) went from 90 to 150 bucks (to to 300 at $10), which might make the difference between going and not going.

    And he’s not fighting me to cut (any) taxes. Corporate taxes are just a consumer use-tax and probably should be eliminated.

  9. Boonton,
    “IRS business renumeration for miles increases dramatically” I should explain what that means. My company allows mileage reinbursment (sp) as expense. The amount of that renumeration is set to what the US government allows … as we (our company) figures that the IRS will not complain if the remuneration is what the US gov. itself uses. If we went higher they might complain.

  10. IRS is $0.555 right now, to the degree you think you’re ‘getting paid’ to drive it’s probably a combination of you having better than average mileage on your car….and quite possibly you’re not considering that the $0.555 per mile also covers wear and tear on your car, not just the gas.

    On the other hand, that pleasure trip to Wisconsin for skiing (New Hampshire/Vermont/Upstate NY for you) just went up in cost by quite a bit. That 300 mile round trip (at a US average 20mpg) went from 90 to 150 bucks

    A differential of $60. According to http://www.devilsheadresort.com/dhr/info/w.lift.tickets.aspx, just one example, a multi-day lift ticket for an adult costs $85, but hitting it Thursday nigh costs just $16, just shy of saving $70. Is it really rational to make the trip hang on the price of gas? I would contend it isn’t but for psychological reasons we ‘feel’ the price of gas more than other prices.

    But again if you got that 120 mpg car, the increased cost can be countered by just cutting back one Dunkin Donuts stop.

    as we (our company) figures that the IRS will not complain if the remuneration is what the US gov. itself uses. If we went higher they might complain.

    Well they probably would just want the difference counted as income to you and taxed accordingly. In theory they could pay you nothing for mileage and provided you kept careful track you could simply deduct it directly yourself. Most businesses, though, opt to just cut checks. People don’t manage their money well so the mileage check feels like a bonus. To the degree that companies can use it as compensation rather than just reimbursement, it’s tax free compensation to them.

  11. Boonton,

    IRS is $0.555 right now, to the degree you think you’re ‘getting paid’ to drive it’s probably a combination of you having better than average mileage on your car….and quite possibly you’re not considering that the $0.555 per mile also covers wear and tear on your car, not just the gas.

    So, when gas is $1.50 the IRS payback is 38 cents, when it’s $3.50 it’s 55. I realize that the “wear and tear” argument is made, but apparently gas is a far bigger fraction/impact on that payback than you suspect, unless car repairs/wear and tear track closely with gas prices. Again, run the numbers a bit. How much wear and tear do you think my used Honda was costing? Gas was 3-5 cents a mile, do you really think “wear and tear” costs were reasonably set at 45 cents per mile when gas was $3.50 and was only 30 cents when it was $1.50?

  12. See http://www.irs.gov/newsroom/article/0,,id=232017,00.html

    The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.

    http://www.irs.gov/pub/irs-drop/n-10-88.pdf also mentions the study but doesn’t link to it so we can’t talk about their methods. I think the ‘wear and tear’ portion also includes depreciation. If a typical car has a useful life of, say, 200,000 miles then you basically have to divide the cost of the car over those miles, whether or not you actually sustain any direct damage while driving it. By driving a car that’s below average in terms of cost above average in terms of mileage you’re ‘beating the system’ to a degree. On the other hand you’re offset by someone whose driving a more costly than average car that gets worse than average mileage whose $0.555 isn’t enough to cover them.

    That number though is just to make life easier. You’re free to directly track all actual expenses incurred using your car and deduct that. Of course that would be a lot of record keeping for a car that’s split between personal and work use but if you, say, had a taxi cab dedicated to only business it might make more sense.

  13. Boonton
    I think the salient detail is “on average” … which if correctly calculated means the “average” drive replaces his car much more frequently, never changes his oil and horribly maintains it so repairs are expensive, and gets horrible gas mileage.

    I recall when I got my first car in 90 (Ford/Kia Festiva). My mileage expenses easily covered both gas and my monthly payments.

  14. The average probably hides a lot of moving parts. For example, what about the mix of cars used for business? If there’s a lot of newer cars (i.e. real estate dealors, well compensated sales people) you’re portion of wear and tear expenses is going to be lower. If that shifts to people who are driving lower end cars being asked to do more business driving, that too will shift. Over the last 3 years how many real estate agents have we lost who drive nice cars in a low impact manner as part of their job? How many people started using their beat up used cars for pizza or auto parts delievery? I suppose it might be very interesting to get a hold of that survey and see just what the weights are on the averages.

    You made your car payments on your mileage checks? You must have always had a lot of driving to do for your job.

  15. Speaking of gas prices and inflation, http://www.slate.com/blogs/moneybox/2012/03/01/sorry_inflation_isn_t_quot_really_quot_8_percent.html has a good discussion of actual inflation versus perception of inflation:

    People buy different kinds of things on different schedules. The typical American buys gasoline and groceries much more frequently than he buys cars or washing machines. But the rare purchases are more expensive, and turn out to be a very large share of overall household expenditure. Our perceptions, however, are dominated by the things we buy frequently. That often leads us to overestimate the overall quantity of inflation based on rapid increases in the price of gas or milk or eggs or something else we buy all the time. The irony is that the durable goods purchases are probably the better guide to whether you’re really looking at monetary inflation. Oil and food can get more expensive for all kinds of reasons—bad weather, civil war in Libya, demand from China, whatever. By contrast, the world is not facing any severe supply-constraints regarding toasters. If people want more toasters, we can build more toasters. It’s no problem. So if the price of toasters is rising in the country you live in, that’s almost certainly a reflection of your currency’s purchasing power declining. But most people go so long between purchases of toasters (I’ve had mine four years and it’s going strong) that they have no idea what the toaster price trend is.

  16. Boonton,
    And I don’t disagree with a bit of that. The price of gas at the pump is the tip of the iceberg. Look. Everything you buy. Those high price items you mention (cars, houses, boats) to consumables like food, gas and gadgets. Every single one of them has oil as a major ingredient in its manufacture, its distribution, its production, and its components. When the price of oil goes up … if everything doesn’t go up as well, then there is a big stress on the system that needs to give, because it all should be going up and it isn’t. And that stress will release.

  17. I think you’re making a bit of a conceptual error here along the lines of our discussion about air temps and total heat. You’ll recall the dense oceans may asorb a lot of thermal energy and see their temps raise only a fraction of a degree, yet the air being much less dense is able to see its temp. swing wildly with much less energy being moved around.

    You’re right, the cost of gas/oil is part of a toaster. Maybe it’s 2% of the cost, though. If the price of gas doubles, goes up 100%, you’re going to expect to see a very underwhelming increase of 1/100th that in the cost of buying toaster.

    You’re wrong that oil is a ‘major ingredient’ in many goods and services, it isn’t. What is it as part of your services? It’s your mileage reimbursement at most. Which is the larger cost to your employer, your salary or your mileage? If you had to give up one which would it be?

  18. Boonton,
    Look at these two lists: here and here. The “cost” of a toaster is 2% from oil? Let’s see, the plastic outer is completely oil based, the metal stamping used oils extensively in its stamping (not to mention oil/diesel burned in the mining and refining), the epoxies in the intelligence/electronics where oil based … so not 2% but it seems most of the components depend on oil. So, say 30% of the cost of your toaster depends on oil.

    And no, oil is not the major ingredient in the service industry. I’ll agree with you there. It is however a major ingredient in all goods that you purchase.

  19. We didn’t have toasters before we had plastic? Certainly not. Come to think of it, we also had toast before we had oil. So how did that happen?

    Well you’re confusing components with cost. Toasters have plastic oil-based outer covers because it’s very cheap to make them out of that as opposed to other materials, but you could use other materials if the cost of plastic suddenly went way up. If you really want to push things, you could worry about a hypothetical of what would happen if all the oil in the world suddenly disappeared, but that’s not very sensible.

    And no, oil is not the major ingredient in the service industry.

    Err well here’s a problem for you as maybe 50% of the economy is service based you’ve just undercut your own thesis. On top of that, even physical goods have a large markup for services. For example, most of the stuff in Wal-Mart costs only about 50% of the price you see at the register. Half the cost of what you pay at Wal-Mart and other retailers isn’t for the actual physical product, which you say is very oil intensive, but the ‘service’ added to the physical product by the retailer (i.e. the work of getting it to one store so you can easily find it, managing inventories, stocking the shelves, keeping the product fresh, clean, safe etc.)

    So now you lost 50% of your thesis to services, of the remaining 50% half of that goes to markup so only 25% is the actual physical goods. So now you’re down to a cap of just 25% of the economy being ‘oil based’ which means if oil pries go up 100% overall prices can only go up 25% due to the weighted average effect.

    But then that only works if the only physial product we buy is gallons of actual oil! Most physical products we buy are only a tiny portion oil or oil based. So how much? Well it’s not so easy to compute this for an individual thing like a toaster but you can do it pretty easily for the economy as a whole. http://oilandglory.foreignpolicy.com/posts/2012/03/02/the_weekly_wrap_march_2_2012 says we spend about 6% of our GDP on oil. So there you go, for oil to raise inflation 6%, its actual price needs to go up 100%.

  20. Boonton,

    Well you’re confusing components with cost.

    No. You’re confusing current products being sold today with historical ones. Yes, you could use other materials if the cost of oil/plastic suddenly went up … but then, the cost would have gone up, eh?

    Err well here’s a problem for you as maybe 50% of the economy is service based you’ve just undercut your own thesis.

    And you’re equating “major” with “none”.

    Most physical products we buy are only a tiny portion oil or oil based.

    Really. Check. I’ll bet that oil touched and was involved heavily in the production of everything you bought this week … or for the last month.

    You do realize that the reason that our economy can be 50% service based is that our manufacturing base is in South East Asia … which products wouldn’t get here cheaply without, what? Answer, inexpensive oil.

    So there you go, for oil to raise inflation 6%, its actual price needs to go up 100%.

    If you’re going to believe in mythical multipliers on stimulus, why don’t you figure that there wouldn’t be the same for oil … in that when the marginal cost of the fundamental stuff goes up, your margin (which is often a percent of base cost) will also go up.

  21. Let’s explore how a multiplier with oil might work. The price of oil goes up so I, the taxi cab company, give the gas station an extra $500 a week. The gas station passes that to the oil refiner who passes it to the guy who owns the oil well. And then…? What? Does the guy who owns the oil suddenly decide he is going to use more oil himself beause he just got an extra $500? Will he commission a giant plastic bubble to be put over his home beause, well oil prices are higher?

    You do realize that the reason that our economy can be 50% service based is that our manufacturing base is in South East Asia … which products wouldn’t get here cheaply without, what? Answer, inexpensive oil.

    As I said, about 50% of the cost of stuff in Wal-Mart is Wal-Mart actually getting the physial products. So that means $100 item in Wal-Mart is $50 when Wal-Mart buys it. At that point the manufacturing and transportation has already been paid for, you’re essentially paying Wal-Mart for the service of getting it to you in a manner that works for your lifestyle.

    So of that $50 that Wal-Mart pays, how much is the transportation from Asia to the ports of the US? I’m guessing maybe 10%. Of that 10%, of course, it’s not all oil. True fuel costs are a concern if you’re running a massive cargo ship but the ship, the crew, port fees and so on also take up a lot of your spending. Say fuel is 20% of your costs. So you got 20% of $5 or $2 on an item that’s $100. If the price of fuel doubles, you need to charge $102 to offset it on the store shelf in Wal-Mart.

    You’re doomsday scenaro maybe works if you’re talking about sudden and rapid extinction of all oil. Even there you may not really be talking about inflation but simple price adjustment as oil intensive consumption would become very expensive but oil-light consumption would become very cheap.
    Contrast this to the multiplier as it operates in stimulus. $500 goes to the store as people spend their stimulus money, which then either becomes income to the store owner or becomes income to the companies that supply the store which down the line becomes more consumption spending hence more income. If, though, stimulus was spent on, say, giving monks money to say masses for the dead and the monks simply take the money and bury it under a rock then yea stimulus wouldn’t work.

  22. Boonton,

    Let’s explore how a multiplier with oil might work. The price of oil goes up so I, the taxi cab company, give the gas station an extra $500 a week.

    Or … alternatively … The price of oil goes up, so the gas retailer raises the price of gas. His markup passed on to you the taxi cab company is, say, 20% of his cost of gas. So when gas goes up by 25% his 20% markup (take home money) also goes up. He passes this on to you. You set meter prices as a percentage of your costs, gas went up, so your meter price goes up by more than just the cost of the gas. That’s how this multiplier works. When his cost for gas was say $3.50 (pump prices at +20% you paid $4.20) When his cost goes to 4.50 your cost goes up by not a dollar but a $1.20.

    Your doomsday scenaro maybe works if you’re talking about sudden and rapid extinction of all oil.

    No. My logic is far simpler. We are a petrol-based economy. That is not transparent to us. We don’t realize how dependent for virtually every facet of our life fossil fuels (mostly oil) is based. Everything we produce and consume is impacted and depends on oil (and more generally fossil fuels … except for nuclear power and the dribble of green energy). If the cost of what we base our entire civilization goes up, it stands to reason that the cost of things in our civilization will be impacted in ways that we don’t see because we forget its oil dependence. When you look at your the flash drive, for example, you don’t think “gee … oil made this possible.”

    Somebody also noted the last four recessions we had … were preceded by an oil price shock. Yes, correlation is not causation but it also shouldn’t necessarily be ignored … and given the oil dependence as material with a singular place on our society that just makes it more likely.

  23. I think your error is here:

    So when gas goes up by 25% his 20% markup (take home money) also goes up.

    Let’s say it works out like this. You want to get $20 per hour for driving a cab. Gas initially costs about $20 per hour of operation and various other things like equipment, pro-rated garage storage, license fees etc. work out to $40 an hour. You must set fares to bring in $80 an hour (ignore complications like downtime and different rates of gas consumption for different types of trips etc.).

    What is your take? Well $20 for every $80 in fares or 25% of your revenue. To the general public the price of a taxi is about $80 per hour.

    Ok so now say gas prices explode by 50%, it now takes $30 an hour to keep the cab fueled. Your costs are $20 for you, $30 for gas, $40 for everything else. That’s a fare of $90. While gas went up by 50%, the price of the cab goes up by only 12.5%.

    So where’s the error? Well you initially got $20 per $80 in revenue or 25%. The ‘everything else’ category got $40 per $80 or 50% and the gas station got $20 or 25%. You’ve assumed the percentages are set in stone. If the fare is now $90 you must get $22.50 per hour, ‘everything else’ $45 and the gas station $22.50. But the percentages are not set in stone. There’s no reason why you shouldn’t continue to get $20 per hour and the everything else $40. The percentages change, now the gas station takes 33.3% ($30 of $90), you get 22.22% ($20 of $90) and ‘everything else’ gets 44.44%. Competition would more or less say the cost of manning the cab is based on the price people are willing to take for it, not the percentage. If taking home $20 an hour made the cab driver willing to work before, it will probably after.

    You may object that in a world of higher gas prices the cab driver and ‘everything else’ have to pay for their own personal fuel too. They will be less willing to work an hour unless they can cover the cost of increased gas prices in their personal lives. But even here the impact is muted. Gas prices are only a portion of the spending for the driver in his personal life as well as ‘everything else’. They won’t demand 50% more pay unless 100% of their income is spent on nothing but gas.

  24. Somebody also noted the last four recessions we had … were preceded by an oil price shock. Yes, correlation is not causation but it also shouldn’t necessarily be ignored

    Generally an ‘oil shock’ is an increase in the price of oil that suddenly falls after….(no one is ‘shocked’ today at $2-$3 gal gas…even though that would have shocked someone from the 70’s or earlier). Why would oil shoot up then collapse down? Well if the economy was running very hot, and the market didn’t recognize that, then it would assume demand for oil in the near future would continue to explode which means the price should shoot up in anticipating that. When a bubble bursts (dot coms or the housing bubble), then the market sees demand is not going to keep rising. Unemployed people aren’t going to drive as much, major construction projects that get cancelled mean less diesal fuel getting burned, fewer exports to the developed nations mean factories in Asia run less intense and so on. Now you got a glut of oil so prices fall dramatically. People look at $5 gal gas right before and $2 gal gas right after and assume the recession was caused by gas shooting to $5. In reality gas shot to $5 because they didn’t see the recession coming.

  25. And the same process works in reverse. If the economy is recovering unexpectedly, the market is going to get caught having planned for less gas and oil onsumption than really happens. Take a peek at http://www.slate.com/articles/business/moneybox/2012/03/economic_recovery_the_overlooked_data_that_reveal_the_economy_is_bouncing_back_.html

    Auto sales are up 14% from Feb of 2011. If people are buying new cars they are going to be driving them regardless of what gas costs. If the market had planned on another year of people driving their cars once a week to cash their unemployment check and pick up necessaities then it’s going to find itself with less gas and oil in inventory than the market demands.

  26. Boonton,
    Not my error, yours. I don’t see people doing that. They don’t say, my cost is $15/hour and I want to make $5/hour so I’ll charge $20. More often than not, I’m seeing prices for stuff figured as a precentage of the base, when my cost is $x/per I’ll charge $x+15%. Vendor discounts to companies like ours are always as a percentage. Our price to customers is figured as cost + %. This not your cost + fixed is the norm not the exception. That is why I noted it as such.

    The other thing your forgetting, is that oil sneaks in all over the place. Yes, your widget took 20% in costs from direct oil/petrochemical substances. But delivery too took oil. Display took oil. Advertising took oil and so on. There are additional oil costs, which you pretend are all “service” fees and profits which are impacted by oil.

  27. It does sneak in all over the place, to the tune of about 6% as that is the total GDP spent on oil.

    Cost plus % is a popular pricing strategy but it’s only a rule of thumb. The taxi driver in my hypothetial is working for $20 an hour. If he tries to demand $22 he will find himself undercut by others who would happily take the job. Percentage based pricing works as a rule of thumb when the underlying relationships do not alter that much…

    For example, the retail rule of thumb has traditionally been ‘50% markup’ which means if you buy something for $50 you put a $100 price tag on it and you’ll make enough money to meet your costs and secure a decent, if not extravagent profit. But that varies and can change (see http://www.nytimes.com/2005/07/17/business/yourmoney/17costco.html?pagewanted=all Costco marks up 14-15%, supermarkets 25% and department stores 50%)

    So I think where you’re going wrong here is forgetting the ‘sneak’ part of oil’ sneaking’ into the process. Lots of things ‘sneak’ in. Gold, for example, is used on computers and eletronics. Soaring gold prices can and should impact the price of ipads and notebooks. But it’s going to impact more the prices of the inventory of a jewelery store. Since computers and electronics are used in the milk production process, soaring gold prices should ‘sneak’ into milk too. Oil is not special in the way you’re trying to make it out to be.

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