Fed Raises Rates

Fed raises rates As expected, the Federal Open Market Committee raised its target for the Federal Funds Rate a quarter point to 2.75%. Here is what they said:

The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Output evidently continues to grow at a solid pace despite the rise in energy prices, and labor market conditions continue to improve gradually. Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident. The rise in energy prices, however, has not notably fed through to core consumer prices. The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

Some translations

The stance of monetary policy remains accommodative…

We’re still expanding the money supply fairly quickly in order to stimulate spending and demand growth.

Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident. The rise in energy prices, however, has not notably fed through to core consumer prices.

We have inflation in check for now, but we’re worried about the current uptick in oil prices. It hasn’t shown up in consumer prices yet.

The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal.

We’re charting a middle course between stimulating economic growth and fighting inflation.

With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured.

We’re going to continue slowly raising interest rates.

Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

However, if inflation scares us we reserve the right to change our minds and rapidly increase interest rates.

Arizona may mandate investments in renewable energy

Solar, wind energy may get push from state

By 2025 renewable energy could be powering a million Arizona homes. State regulators are considering a plan to make utilities boost the amount of power they generate from solar, wind, biomass and other renewable sources to 15 percent of their total supply by 2025. Such a mandate would be a boon for the renewable-energy industry in Arizona, providing capital to develop wind farms and solar power plants.

It goes on to discuss efforts in a number of states. However, look at the costs.

The chief argument against solar has been that it is expensive. Indeed, early solar plants produced electricity for about 35 cents per kilowatt-hour. But Tom Hansen, head of the TEP renewable energy program, estimates with subsidies the plant can generate electricity for 10 cents a kilowatt over the long term. "That's getting competitive with conventional electricity," he said. Natural-gas-fired power plants now produce electricity for 5 to 7 cents a kilowatt-hour.

That’s not very competitive, and that’s with the subsidy paid to the producer!

Some additional data. These are historical costs for various kinds of electrical power generation. It’s actually limited to investor owned utilities.

Hydro is far and away the cheapest at .75 cents. (Yes that’s three fourths of a penny.)

Nuclear and Fossil (coal primarily) are close at 1.8 cents and 2.2 cents per kwhr.

The newer natural gas plants are the most expensive at 4.9 cents – primarily due to the run up in natural gas prices.

For electricity generation, not capacity, coal provides 50%, nuclear provides 20% and Natural Gas provides 16%.

Consumers keep spending more

Retail sales rose 0.5% in February

WASHINGTON - Retail sales, bolstered by a rebound in demand for autos, rose a healthy 0.5 percent in February, the Commerce Department reported Tuesday. In addition to a solid sales performance last month, the government revised sharply higher its estimate for sales activity in January, showing a gain of 0.3 percent rather than the original estimate that sales had fallen by 0.3 percent at the beginning of the year. Taken together, the two months showed that the consumer buying spree that began with a 1.3 percent sales surge in December was continuing in the new year

The January revision is interesting. Everyone was talking about how things seemed to falter in January and now we see that it was bad data. As for the source of the increased spending, they blame decreasing marginal tax rates (which increase disposable income) and lower interest rates which help consumers buy big ticket items.

Since the recession ended in November 2001, consumers have been the standout performers for the economy, a surge in spending that was bolstered by President Bush's sizable tax cuts and easy credit fostered by the Federal Reserve's low interest rates.

Get ready for $2.50 gasoline

U.S. refiners falling short

"With all the growth in the American economy in the past decade, with the growth in the American population, we have not been able to build a new refinery in 30 years, and it's increasingly difficult to add new capacity to existing refineries," said Bob Slaughter, president of the National Petrochemical & Refiners Association

We don't currently have enough capacity to meet demand in the summer. We've been getting around that by building inventories in the spring and using them up over the summer. Now even that is getting more diffucult. Also

The refiners' low-sulfur projects will wrap up in 2006, but significant capacity expansion may be three to four years beyond that.

Why some countries stay poor

An interview with Peruvian economist, Hernando de Soto, founder and President of the Institute for Liberty and Democracy (ILD) in Lima.

…in business, it takes you 549 days to get a license to operate a bakery in Egypt and that is with a lawyer. Without a lawyer, it takes about 650 days. In Honduras, it costs an individual entrepreneur 3.765 dollar and 270 days to legally declare, register, and start up a business. To create a mortgage in Mexico it takes 2 years. It takes 17 years to get a title on a house in Egypt; in Peru it used to be 21 years before we corrected that, and in the Philippines it’s 24 years. These are but a few examples of complicated ownership legislation. The procedures for getting official authorization to build are so formidable that people chose to build without authorization. The entire phenomenon forces poor people into illegitimate and informal negotiations. It forces them to create extralegal means to gain access to a home or a business.

With those kinds of obstacles it’s amazing that they get anything done. It also explains why a lot of them want to come to the US. And for a reason to study history:

The reason I study the 18th and 19th centuries of Europe and North America is not because I like the past, but because they provide me with lead to understand the present with regards to developing countries. There is a sense that individualism becomes clearer with the Renaissance. Before, people could not envisage themselves as being anything other than part of a whole. That phenomenon of individualism is now starting to take shape in Latin America. In Mexico, for example, where we are currently doing our biggest project, one of the areas we have to focus on is the ejido, which is an indigenous collective property system. We found out that the average age of the Mexican farmer is 65, which means that most of the young people have already left to the city and are becoming individuals. In other words, we are at that stage of individualization that you in Europe were at a couple of centuries ago. Europe’s 18th and 19th centuries intellectual debate are very relevant to developing countries informer Soviet Union nations in the 21st century.

I found this via Arnold Kling

Making money on heavy sour cude

'Sour' oil fetching profit for refiners

Like bartenders putting cheap alcohol into their cocktails, some U.S. oil refiners are reaping huge profits these days by relying on lower-quality crude to make everything from gasoline to diesel.

It’s interesting to see how big the price differential between light sweet crude and heavy sour crude has gotten. We’re talking discounts of between 15% and 35%. Normally, these run 5% to 10%.

I can think of a couple of possible reasons why things have changed.

First, from the supply side, the new supplies are coming in the form of heavy sour crudes, primarily from Saudi Arabia. Any supply that was held off the market was probably the heavy sour type. That’s because the lighter stuff sold at a premium and the OPEC quotas didn’t take crude quality into account when parceling out quota. Given a choice, you hold the heavy and sell the light because it gives you more revenue.

Second, a big part of the price run up is being driven by demand. Worldwide demand is now 84 million barrels per day (Mbpd). A few years ago it was 75 Mbpd. The additional demand is coming from countries that don’t refine oil very well. It takes extra equipment, processing, time and expertise to refine heavy sour crude as opposed to light sweet crude. Hence, they’d rather have the light sweet crude.

Also, if you want maximum output, you need to use a light sweet crude. In those countries where demand for petroleum products is increasing rapidly, the fastest way to expand refining capacity is to use a lighter sweeter crude.

US refineries have been switching over to handling heavier sour crudes for some time now. On the west coast, one reason is that North Slope (Alaskan) crude is heavy and sour and the oil companies were not allowed to sell it to anyone other than US refineries. Around the Gulf coast, it was easy to get Venezuelan crude (it’s right across the gulf). However, it’s heavy and sour. PDVSA, the Venezuelan national oil company even invested in US gulf coast refineries so that they could handle Venezuelan crude.

Now the US refineries are reaping the rewards of prior investments. For the US economy it also means that $50 oil isn’t really $50 oil. It’s more like $42 oil. At 18 Mbpd or so, that $8 a barrel is $50B a year in lower costs.