gasoline demand vs 2 yrs ago

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I use comps from two years ago as last year was unusually choppy.

No sign of gasoline demand picking up that I can detect.

Starting to look like the Saudis decided to give themselves maybe a $10 per barrel price increase,
but too soon to tell.

GDP up some from last quarter but still below last year’s levels.

Inventories contributed .9% after being a drag previously, and motor vehicles contributed 1% to the 3.5% total GDP increase in this initial report.


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31 Responses to gasoline demand vs 2 yrs ago

  1. Matt Franko says:

    Curious, didnt mean to imply the $ would “go away”, its just that in my example the foreign seller of oil took the payment and bought financial assets (instead of real products/services) which net could result in less US domestic demand.

    As per Warren’s plan this could be corrected by govt via fiscal transfer back to the people. Interestingly, this could have been the scenario in 2007/2008 as oil prices took off along with the trade deficit, foreigners seemed to load up on US financial assets, US GDP slowed & Bush admin did $165B ($650 per taxpayer) fiscal transfer in 2Q08 and it seemed to bite, but then when it was not sustained in 3Q the whole thing went down right after the Olympics…it has to be sustained.

    Oil price may/may not be “rational”, but it is definitely too high for me. Again, if the Govt would respond by rebating taxes back to us to pay for increased fuel costs that may take care of it. Or put in policies that would reduce our (foreign) oil purchases. Otherwise at $150/bbl we may be paying for 30M Canadians to sit around all day in toasty electric heated houses eating our food and watching TV, in exchange for their 1M bbl/day ;-)


  2. Warren Mosler says:

    cur- investment spending in the US isn’t generally a function of available investment funds. So the Saudis would have to spend their dollars here to sustain demand, rather than just buy US financial assets.

    Zan- yes, in the 70’s we could have sustained demand with deficit spending but the ‘inflation’ would have still been there. Carter ran a small surplus in 1979, best I can remember. The rising prices and incomes increased tax collections ‘automatically’ and did us in on that score.


    Curious Reply:

    If I buy oil for $1 from the Saudis, that $1 left the US economy and reduced domestic demand.

    Then the Saudis trade me that $1 in exchange for a piece of my house.

    I have that $1 back and US domestic demand is back up to the original level.

    What am I missing?


    Matt Franko Reply:

    The way I look at it: Canada net exports about 1 M bbl/day oil to US. At $80/bbl that is $80M/day divided by 31M Canadians = $2.50/day per Canadian citizen. If Canadians take that USD and buy poultry at 80cents/lb. they can provide 3 pounds of chicken (or protein/vegetable equiv.) to everyone in Canada per day, thus getting their entire country’s daily nutrition/sustenance off the USA for the oil. Buying the poultry helps sustain demand in US agriculture industry. If they take the oil money and instead buy Treasury Bonds, not only will many Canadians now have to work in farming and raise food for the Canadian people, but US farmers will not have the business demand, so Warren’s point is it is then up to US Govt to step in and effect a fiscal transfer so US people have $ to (among other things) raise food and buy food, thus replacing the $ the Canadians locked up in Treasuries.

    Related: To Warren’s point on increase in oil prices hurts our (US) real terms of trade, I think this way: Ive shown above how Canadians could get $2.50 per day per capita at $80/bbl, if the Saudis/OPEC and their useful idiots the speculators run oil back up to $150, then the Canadians could get $5.00 per day off the US for their 1M bbls. For this price increase, if they spent it in the US and not on Treasuries, we would have to send them equivalent of not just their food but for the additional $10/day for a household of 4, then for instance most of their electrical energy as well. It would be good to be them!


    Curious Reply:


    Canadians (nor anybody else) can “lock up” dollars in Treasuries, because for every dollar they spend on them, the seller “unlocks” precisely the same amount from Treasuries.

    Dollars don’t disappear, trade is a 2 way street.

    Regarding oil speculators:
    You calling them useful idiots implies that you consider $150/bbl irrational. But if you know what’s irrational, that implies that you know what price is rational.

    So I have to ask, what price per bbl is rational and why? ;)


    Zaid Reply:

    Curious, it helps to think of treasuries and dollars as different maturities of US government issued “money” with interest paid on longer maturities. In your example, the Canadian merely exchanges one financial asset for another – dollars for treasuries – and the American exchanges treasuries for dollars. Net financial assets for either side haven’t changed when buying/selling treasuries for dollars. Aggregate demand is more influenced by net financial assets – which include dollars and treasuries – rather than zero-maturity financial assets.

    Curious Reply:

    That makes sense Zaid.

    What if Canadians invest in something else, say stocks or real estate?

    Zaid Reply:

    For stocks, the Canadian exchanges one financial asset (dollars) for another (equities); the American exchanges equities for dollars. Net financial assets did not change.

    For real estate, the Canadian exchanges a financial asset (dollars) for a real asset. Net financial assets go down in Canada and up in the US by the same amount. Accounting identity is intact because net financial assets for the combined non-government sectors did not change.

    Is domestic demand affected in either case? It seems to me that the horizontal money could expand if foreign purchases of assets were sufficient enough to raise prices and spur further lending/leveraging activities. But now you’re proposing policies that rely on the foreign sector to restore aggregate demand, which is a waste of time since you can restore aggregate demand much more directly and immediately by exercising your control over vertical money creation.

    Curious Reply:

    What I am not clear about is the distinction between financial and real asset.

    If I buy a house it’s a real asset.

    If I buy all shares in a company that owns just a house, it’s financial asset.

    Why should 1 affect domestic demand and the other not? Isn’t it the same thing?

    Zaid Reply:

    A financial asset for one balance sheet has an equivalent liability on another entity’s balance sheet. In accounting, the basic identity is Assets = Liabilities + Equity. If we aggregate all balance sheets in the economy, including foreign and government sectors, financial assets net to zero. Real assets do not. When we reference net financial assets to be some positive number, it’s because we exclude the government sector because government creates net financial assets – or vertical money – by spending in its own sovereign currency.

    Zaid Reply:

    In your example:

    If you buy a house or shares, your balance sheet remains balanced. You have exchanged a financial asset for a real asset – dollars for a house – or you have exchnaged a financial asset for another financial asset – dollars for shares in a company. The company’s balance sheet is also balanced. It buys a house by issuing shares such that the right hand side of the balance sheet funds a purchase of an equivalent amount of real assets on the left hand side.

    Domestic demand is affected by horizontal and vertical money expansion. Both equities and real estate can be bid up in price due to expansion in horizontal money in a self-reinforcing process. In the 1990s, vertical money was contracting but horizontal money continued to raise equity and real estate prices, thus providing the collateral for even more bank credit. The only problem is that horizontal money nets to zero, and when the process reverses, the contraction in credit causes a crash in asset prices.

    Let’s take an extreme example where the foreign sector not only uses its official dollar reserves but also uses foreign assets as collateral to borrow $1 trillion dollars to purchase US shares and real estate. Will rising share prices affect US domestic demand? Will rising real estate prices affect US domestic demand? Both will have an impact. But then, again, you are just waiting and hoping for the “foreign” sector to restore aggregate demand by undertaking to expand horizontal money instead of exercising your sovereign right to expand vertical money at will whenever the economy needs it.

    zanon Reply:

    ZAID: OK, I get what you mean about financial assets netting to zero.

    But what about real assets? Those go on balance sheets too (marked to market, or to purchase price, or to something). Can’t real assets support equity irregardless and independent of govt spending?

    Zaid Reply:

    I understand how “equity” in this equation can be confusing… If we extinguish all financial claims, what happens? In a 1 sector economy where there are no financial assets/claims, you will still have an aggregate balance sheet where Real Assets = Equity. You cannot net the “Real Assets” to zero because the counter balancing equity is not a financial claim on anyone. What remains is net wealth in the economy.

    If debt or equity is issued to fund real asset purchases, the counter balancing financial asset is horizontal money created by the banking system. The equity in this instance is a financial obligation by the issuer.

    If we add the government sector, the non-government sector can accumulate net financial wealth equivalent to the cumulative government deficit. This is vertical money. Note that financial wealth is different than net real wealth, but in the current environment, it is what will get people back to work to produce real wealth.

    Jim Baird Reply:

    Zaid –

    Forgive me, since I never took basic accounting (which is looking more and more like a major gap in my knowledge…):

    Let’s say I own a house free and clear, no mortgage. From an accounting perspective, does my balance sheet have two entries: one for the house, and an offsetting one for my “equity”?

    Zaid Reply:

    Hi Jim. You’re right about that. The balance sheet has to balance, by definition, irrespective of whether the the asset is a financial asset or real asset. Your net worth is your equity, or assets minus liabilities. If your liabilities are zero, then your net worth is equal to your assets.

    Curious Reply:

    Thanks for the detailed explanation Zaid.

    I apologize for being slow, but I still don’t understand this:

    1. foreigner buys a US house (real asset)

    2. foreigner buys all shares (financial asset) in a company that ownes nothing except the same house.

    In both cases the American lost the ownership of the house and gained the USD.

    Why does 1. increase domestic demand and 2. doesn’t?

    zanon Reply:

    ZAID: OK, I hear what you say, but this is the issue.

    Chartalism says that equity (NPS) can only be created by Govt deficit spending. If you limit assets to financial assets, this is true. If you enable real assets, this does not work. Example: I work hard to improve my house. I book new improved house as an asset, and credit by equity liability to make the books balance. Voila, I have increase NPS and the Govt did not have to deficit spend. I increase NPS by creating a real asset through labor, and booking that on my balance sheet in some reasonable accounting way.

    what’s the issue with that?


    warren mosler Reply:

    right, it’s a case of real assets vs financial assets (in that currency).

    if govt buys real goods and services it ‘transfers’ financial assets to the seller, and takes the real real goods and services for itself.

    govt spending increases non govt nfa (net financial assets)

    Matt Franko Reply:

    Zanon, Would you allow that it is only your labor portion of the home improvement that seems to be missing, as the building materials and energy you bought and assembled were former assets (inventories) of the building supply co. and probably funded originally by deficits?

    Zaid Reply:

    Zanon, Chartalism does not say that about equity. Equity in accounting is not the same thing as Net Financial Asset in the non-government sector. Everything I read hear is still valid when you include real assets.

    Zaid Reply:

    Curious, I think I you misunderstood what I said. If you re-read my statement above, I still believe that they “both have an impact” on aggregate demand if the buying is significant enough to affect prices. But don’t take my opinion as Warren’s because I seem to recall him stating it differently, but it could be that he was referencing Treasury Secrurities, rather than securities in general.

    The way I see it is that rising equity prices provide more collateral for horizontal money expansion, even if the relationship is not as direct and effective as buying the house. However, we are still making an assumption that some of the money the company gets will end up buying a real asset. Let’s suppose a Canadian buys a share in my company instead of buying that treasury security, and I go out and buy a house with that money, it will still provide a bid for the price of the house. Reality, however, gets more complicated, and there’s a lag when a Canadian buys shares in a company. First the shares are bid up in price. Then the company decides to issue shares to raise enough cash to buy that house. Another scenario could see rising share prices providing incentives for people to leverage again, which will also increase aggregate demand.

    Having said all that, I still wouldn’t support policies that encourage horizontal money expansion at the expense of vertical money expansion. Don’t fear government debt. The government can solve the problem much more directly and quickly by providing the net financial assets as needed to get people back to work again. The scenario above makes so many assumptions about the foreign sector’s preferences and domestic sector’s reaction to an improbable flow of investments from abroad.


    zanon Reply:

    MATT: Yes.

    ZAID: This is what I am trying to understand. According to Warren, Net Private Savings is funded by Govt deficits. This is “vertical money” and it shows up as the sum of all equity liability entries in the non-Gov sector. I think I have that right.

    I understand how to manage financial assets, and can incorporate horizontal money (private credit) and make the accounting work. At least, I have not come across a case where I cannot do that yet.

    I am struggling with how to account for real assets made in the non-Govt sector. They seem to add to Net Private Savings but do not require Government funding in any way. In standard accounting, you debit an asset and debit an equity liability.

    I need help in accounting for real assets within the chartalist model.

    Zaid Reply:

    Government deficits would show up as the sum of all net “financial” assets. I have not read anywhere on this site that it would show up as the sum of all equity for the non-government sector. It’s only part of available equity.

    We will always have real assets, natural and what we build, but they will always have a value in some unit of account. That unit of account for us is the US dollar, in which net private savings are measured. The system we have gives this US dollar a value which facilitates commerce and stimulates the productive capacity of this nation to produce real wealth.

    Keynes says it better here:

    “There is a multitude of real assets in the world which
    constitutes our capital wealth – buildings, stocks of
    commodities, goods in the course of manufacture and of
    transport, and so forth. The nominal owners of these
    assets, however, have not infrequently borrowed money
    in order to become possessed of them. To
    a corresponding extent the actual owners of wealth have
    claims, not on real assets, but on money. A considerable
    part of this financing takes place through the banking
    system, which interposes its guarantee between its
    depositors who lend it money, and its borrowing customers to
    whom it loans money wherewith to finance the purchase of
    real assets. The interposition of this veil of money
    between the real asset and the wealth owner is an especially
    marked characteristic of the modern world.” (Keynes, Essays in Persuasion, 1972)

    Zaid Reply:

    By the way, this is the reason why almost everyone here refers to those who worry about the burden of government debt as “deficit terrorists” who do not understand that by limiting the supply of net financial assets, they are preventing the country from utilizing its capacity to produce “real” wealth. This argument that we’re leaving debt for the next generation completely ignores real assets that we build in the process. We, the future generation, are still enjoying real assets like infrastructure built in the 1930s (Hoover Damn, roads, etc) by labor that would have otherwise been idle if it hadn’t been this supposed burden of government debt they left us, debt that doesn’t need to be retired, given that it would elimnate the net financial assets that form the base of modern money.

  3. zanon says:

    I see.

    So if our response to Saudi willingness to exchange dollars for oil is just to run larger deficits, then there is no issue, and if price goes up, the US just runs larger deficits still.

    Therefore, the reduction in domestic aggregate demand is not made up for via higher deficits, so you get lower real output, higher unemployment, etc.

    So you’re saying that the driver for stagflation in the cost-push inflation of the 70s was the fact that the US deficit was too small?! Really?


  4. Warren Mosler says:

    Agreed, if the Saudis simply ‘save’ their dollars there is no real cost to us.

    That assumes, of course that we simply cut taxes or increase govt spending (what you call ‘just prints the money’) which of course we don’t. So the higher prices instead cause domestic demand and domestic output to fall, and unemployment to rise. So our ‘wealth’ and standard of living falls due to lost domestic output.


    Curious Reply:

    Assuming no increase in fiscal deficit nor tax cut:

    1. If the Saudis keep their dollars in cash then yes – drop in domestic demand.

    2. But if they invest their dollars then no.

    Because for every $1 the Saudis invest in the US, the seller receives that $1, which he then spends domestically in the US.


  5. zanon says:

    Why does the US have to export to pay for Saudi oil? Saudi’s send over a bill in US$ (or Riyal, which is pegged to USD) and the US just prints the money and sends it out. US does not need to export to get dollars?

    I see how CPI linked Govt payments could raise incomes overall.


  6. warren mosler says:

    Higher oil prices improve saudi real terms of trade. they get more imports for the same quantity of oil they export. Likewise, they hurt our real terms of trade- we have to export more to pay for the same quantity of oil. if all that happens is our trade deficit increases, and quantities stay the same, our real terms of trade remain the same.

    higher crude prices do tend to find their way to increased incomes in the US. For one thing social security and other federal payments are linked to cpi, which is heavily weighted to crude and products. and business has to pay people at least enough to get to work and eat.


  7. zanon says:

    WARREN: I was thinking about an earlier post, when you said stagflation in the 1970s was cost-push (due to the oil shock).

    If exports are real costs, and imports are real benefits, then wouldn’t higher prices mean that the Saudi’s are exporting more real costs, while the US is importing more real benefits? Isn’t that bad for the Saudi’s?

    Also, is the reason why high oil prices bleed into higher prices overall because everything uses oil as an input (one way or another). Would that depress or raise wages? Usually, higher prices increase nominal wages and prices and wages are tied at a macro level. But, it’s being driven by higher input costs, so shouldn’t that decrease wages?



  8. Vinodh says:

    Warren: What is source for this data?


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