Reality Check (Energy)

  • Janet Yellen: Biden apologist
  • Why is U.S. oil refinery capacity down?
  • Alarming escalation in conflict (Russia vs. NATO)
  • Congress and your rainy day fund
  • A CPA on “incorrect” IRS letters… The Fed’s “solution”… And more!

Times are tough all over…


True, the national average price for a gallon of regular unleaded gasoline is back below $5 this morning. But the effects on one’s standard of living? They still sting.

It fell to Treasury Secretary Janet Yellen to take the bullet on the Sunday talk show circuit this past weekend… and deny that Biden administration policies have anything to do with it. (Which only reaffirms our ongoing suspicion she’ll “resign” sometime before the midterm elections.)

“Actually,” she said, “consumption of gas and fuels are currently at lower levels than pre-pandemic, and what’s happened is the production has gone down. Refinery capacity has declined in the United States and oil production has declined.”

Well, that’s true, as far as it goes. As we said last week, the number of U.S. refineries has plunged from 301 in 1982 to 129 as of Jan. 1, 2021.

But Yellen begs the question why refinery capacity is down.

“The last major refinery to be built in the U.S. was in 1977,” says the anonymous blogger who goes by the pen name Doomberg. “And by major, I mean more than 100,000 barrels a day. There’s been some small ones put in, and some specialty ones here and there. But by and large, because of environmental pressure, the U.S. has not made a new refinery at scale in 40 years, 45 years, which is pretty incredible,” he said in a recent interview with Real Vision.

Adds Mike Wirth, the CEO of Chevron, “I personally don’t believe there will be a new petroleum refinery ever built in this country again.

“At every level of the system, the policy of our government is to reduce demand, and so it’s very hard in a business where investments have a payout period of a decade or more,” Wirth said at a conference earlier this month. “And the stated policy of the government for a long time has been to reduce demand for [petroleum] products.”

Precisely. “Refineries and pipelines have a 30, 40, 50 or more year service life,” says statistics maven and financial blogger Karl Denninger. “Nobody in their right mind is going to put forward capital investment with a 30-year payback when you’re told that investment will be destroyed.”

And that threat is totally credible — indeed, a rare campaign promise that’s being kept. “I guarantee you, we’re going to end fossil fuel,” said Joe Biden in September 2019.

Which brings us to the bait-and-switch: “As a medium-term matter,” Yellen said, “the way in which we can assure reasonable energy expenses for households is to move to renewables to address climate change.”

The White House’s “climate czar” John Kerry is keen to accelerate the medium term: “We have to deploy renewables five times faster than we are right now,” he said last month at a conference in London. “We have to transition to electric vehicles about 20 times faster than we are right now.”

Dream on, says Doomberg: “That our politicians would think despite all the evidence before them, that somehow, we can wave a magic wand and accelerate the adoption of electric vehicles by a factor of 20 when we don’t have enough lithium, nickel or cobalt to even support the current growth trajectory. It’s just crazy. Where’s the diesel going to come from to mine all the cobalt and nickel and lithium that we’re going to need?”

Denninger again: “To make an EV battery you must dig up 500,000 pounds of earth. For one battery. Which has a service life, after which it must be replaced. Which has no current means of economically recycling the components either, so unless you’d like the price of the pack to wildly exceed the crazy levels it is at now you will throw the old away and buy another one with another half-million pounds of earth dug up. All of which are dug up, transported and processed using fossil fuels because there is no other rational way to do so.”

Yes, it’s bonkers. Not that it’s going to stop this bunch from trying, right?

➢ An ironic footnote from overseas: How well is Europe’s green transition going? Well, for lack of Russian natural gas at the moment, Germany, Austria and the Netherlands now plan to restart coal-fired electric power plants.

To the markets — which are rallying hard despite an alarming escalation in the conflict between Russia and the NATO alliance.

On Friday, NATO member Lithuania announced it would bar the shipment of sanctioned goods through its territory between Russia and Kaliningrad — the sliver of Russian land that’s cut off from the rest of the country.


Kaliningrad: Stranded… and now blockaded
[Map from CIA World Factbook]

Many goods are shipped west via rail through Russia’s ally Belarus and then through Lithuania. The only workaround would be via ship on the Baltic Sea.

“If the transit of goods between the Kaliningrad region and the rest of Russia through Lithuania is not fully restored,” warns the Russian Foreign Ministry, “Russia reserves the right to take action to protect its national interests.”

Exactly what that action is, the ministry would not say. Lithuanian leaders profess to be unconcerned: A military response “is highly unlikely because Lithuania is a member of NATO,” says a top member of parliament.

Just swell…


Coincidentally or not, the commander of Germany’s air force says NATO must be ready to use nuclear weapons if Russia launches a first strike.

So goes the climb up the ladder of “escalation” — something we warned about last month and back in March too.

But as far as Wall Street’s concerned, it’s party time.

At last check, the Dow is up nearly 2%, well past the 30,000 mark again. The S&P 500 is up 2.7% to 3,773. The Nasdaq is up 3.3% and back above 11,000.

Not sharing in the rally are the U.S.-traded shares of Bayer — down 1.4% after the Supreme Court rejected Bayer’s appeal to halt thousands of lawsuits alleging that the weed killer Roundup causes cancer.

We still don’t know what Bayer was thinking when it acquired Roundup maker Monsanto a few years ago. The litigation risk was well-known. Bayer shares trade for 40% less now than they did when the deal closed in 2018.

But there was precedent: As we said at the time, it reminded us of when Dick Cheney was running Halliburton in the late 1990s and he swung a deal to acquire Dresser Industries — even though Dresser faced a metric crapton of asbestos lawsuits. HAL shares collapsed 80% in nine months.

Bond yields are moving back up, the 10-year Treasury over 3.28%. Crude is back above $110. Precious metals are little moved, gold at $1,837 and silver at $21.79. The major cryptos are rallying smartly after a big weekend scare, Bitcoin back above $21,000 and Ethereum over $1,100.

➢ No, home prices aren’t cooling off yet: Indeed, the median price of an existing home leaped above $400,000 for the first time in May, according to figures just out from the National Association of Realtors. Not coincidentally, the pace of sales slowed for a fourth straight month, falling 3.4% from April to May.

From the “What’s the Catch?” Department: “Congress Has a Plan to Link Your Retirement and Emergency Savings Plans,” says a headline from Yahoo Finance.

Under a bill proposed by Sens. Cory Booker (D-New Jersey) and Todd Young (R-Indiana), workers would be automatically enrolled in a plan to set aside up to 3% of pay for emergency expenses. Presumably enrollment would come at the same time as enrollment in a 401(k) or similar retirement plan.

“Workers could opt out,” says the Yahoo article, “but enrollment would be the default. The accounts would be capped at $2,500 with workers able to access the funds quickly for an unexpected expense, without penalties.”

We have many questions, all left unanswered for the moment: For small businesses, what’s the maximum headcount you can have to escape this new requirement? For workers, are there any limits on withdrawals? And for everyone, what are the investment options? Any interest paid on these savings?

The whole thing smells. We’ll stay on top of it…

“The IRS is sending us out a multitude of letters, most of which are incorrect!” writes a CPA reacting to the Child Tax Credit fiasco that’s ensnaring millions of Americans, Emily included.

“If people receive a letter they should check it over carefully, as over 90% of the letters our clients have received are incorrect for one reason or another.

“One of the reasons appears to be they cannot figure out how to cash payments and post them correctly to taxpayer accounts in a timely manner. Do you know that some checks mailed on or before April 18 may not have been cashed and posted to accounts at this point — two months later?

“Another reason seems to be that their system is calculating certain things incorrectly. And if you call them, you cannot stay on hold indefinitely — they hang up on you if they are too busy — which is every day!

“Tax practitioners have a separate number that they can call to try to get help from the IRS. However, most of the time they tell you the volume of calls is high and to call back later. Then they hang up on you! So the chances of getting any issues resolved in a timely manner are next to impossible.

“It is absolutely ridiculous how things are being handled at the IRS at the moment! Something needs to change — for one maybe get your employees all back in the office so they actually can get their work done?”

“Emily is a hoot,” writes a reader who appreciated her take on the nasty surprise sprung by the IRS.

“I really like her lighthearted, down-to-earth approach to a very serious subject. Keep up the good work, Emily!”

The 5: Emily’s approach once or twice a week is a valuable tonic for your managing editor’s jaded if not jaundiced outlook. To wit…

“I have read your constant criticism of how the Fed is mishandling inflation,” a reader writes.

“I believe they have stated that they are willing to let the stock market slide in order to curb inflation, which affects the poor much more than the portfolios of the wealthy stockholders.

[To be clear, that’s our interpretation of their actions. But go on…]

“Apparently a net-worth disappointment is not as dire as the inability to pay bills and put food on the table. As a market expert like yourself, I’m sure this solution is difficult to accept, as well as for myself, who is retired and depends long term on the value of my stock portfolio.

“So if the Fed solution of raising the interest rates is not the solution, what is? Besides just criticizing every move the Fed makes, what would you suggest either they do or the current administration do to solve this problem?

“As an older reader, I remember my home mortgage in 1979 at 10.25% and my first car loan in 1980 at 16%. And we all survived. A current mortgage now up near 6% doesn’t sound so apocalyptic to me. Your thoughts?

“The current Republican Party is notorious for criticizing every Democratic movement, yet they are on record as having no platform themselves and obviously no solutions to offer. If they could come up with a better solution, I’d love to be able to evaluate that come November. The old proverbial ‘cutting expenses’ doesn’t ring true since both parties spend like drunken sailors, just differently. The Trump administration didn’t put a dent in the national debt nor do I expect the Dems to ever do so either. Maybe we’re just all screwed!”

The 5: We are. But your missive deserves a more thoughtful reply than just that…

The immediate problem is that the Fed waited far too long to start raising rates and shrinking its balance sheet, proceeding on the assumption last year that inflation would prove “transitory.” Even mainstream figures like Mohamed El-Erian say that was perhaps the biggest blown forecast in the Fed’s century-plus history.

The bigger problem is the notion that a bunch of eggheads can tweak the economy like a machine — push a button here, pull a lever there, get a predictable result.

The economy is far more complex than that. Indeed, it’s the sum total of millions of people making decisions that no model, no matter how sophisticated, can possibly account for.

And as the brilliant James Grant has pointed out, interest rates are the most important prices in the whole universe of prices. They’re quite literally the price of money. Yet even hypothetically “free market” economists like the late Milton Friedman thought interest rates were too delicate to be left to market forces and had to be placed instead in the hands of a brain trust.

Yes, we’re among those radicals who’d just as soon “end the Fed.”

But that’s not the sort of policy proposal that gets a hearing in Washington. So we content ourselves instead to tease out the consequences of what the central bankers and the politicians do… and stay faithful to the ethos of our founding editor Addison Wiggin. He’s long been fond of the French expression Sauve qui peut: “Let he who can, save himself.”

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. Hat tip to our former colleague Doug French, still holding forth at the Mises Institute, for scaring up some of the quotations that made it into our main topic today.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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