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February 23, 2015
Are Oil Prices "Passing Through"?
In a July 2013 macroblog post, we discussed a couple of questions we had posed to our panel of Southeast businesses to try and gauge how they respond to changes in commodity prices. At the time, we were struck by how differently firms tend to react to commodity price decreases versus increases. When materials costs jumped, respondents said they were likely to pass them on to their customers in the form of price increases. However, when raw materials prices fell, the modal response was to increase profit margins.
Now, what firms say they would do and what the market will allow aren't necessarily the same thing. But since mid-November, oil prices have plummeted by roughly 30 percent. And, as the charts below reveal, our panelists have reported sharply lower unit cost observations and much more favorable margin positions over the past three months...coincidence?
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December 04, 2014
The Long and Short of Falling Energy Prices
Earlier this week, The Wall Street Journal asked the $1.36 trillion question: Lower Gas Prices: How Big A Boost for the Economy?
We will take that as a stand-in for the more general question of how much the U.S. economy stands to gain from a drop in energy prices more generally. (The "$1.36 trillion" refers to an estimate of energy spending by the U.S. population in 2012.)
It's nice to be contemplating a question that amounts to pondering just how good a good situation can get. But, as the Journal blog item suggests, the rising profile of the United States as an energy producer is making the answer to this question more complicated than usual.
The data shown in chart 1 got our attention:
As a fraction of total investment on nonresidential structures, spending on mining exploration, shafts, and wells has been running near its 50-year high over the course of the current recovery. As a fraction of total business investment in equipment and structures, the current contribution of the mining and oil sector is higher than any time since the early 1980s (and generally much higher than most periods during the last half century).
In a recent paper, economists Soren Andersen, Ryan Kellogg, and Stephen Salant explain why this matters:
We show that crude oil production from existing wells in Texas does not respond to current or expected future oil prices... In contrast, the drilling of new wells exhibits a strong price response...
In short, the investment piece really matters.
We've done our own statistical investigations, asking the following question: What is the estimated impact of energy price shocks in the second half of this year on investment, consumer spending, and gross domestic product (GDP)?
If you are interested, you can find the details of the statistical model here. But here is the bottom line: the estimated impact of energy price shocks is a very sizeable decline in investment in the mining and oil subsector relative to baseline and, more importantly, an extended period of flat to slightly negative growth in overall investment relative to baseline (see chart 2).
In our simulations, the "baseline" is the scenario without the ex-post energy price shocks occurring in the third and fourth quarters of 2014, while the "alternative" scenario incorporates the (estimated) actual energy price shocks that have occurred in the second half of this year. These shocks lead to a cumulative 8 percent drop in consumer energy prices and a 6 percent drop in producer energy prices by the fourth quarter of this year relative to baseline. By the fourth quarter of 2017, 2 percentage points of these respective energy price declines are reversed. In chart 2 above, each colored line represents the percentage point difference between the "alternative" scenario and the "baseline" scenario.
As for consumption and GDP? Like overall investment, there is a short-run drag before the longer-term boom, as chart 3 shows:
So is the recent decline in energy prices good news for the U.S. economy? Right now our answer is yes, probably—but we may have to be patient.
Note: We have updated this post since it was originally released, clarifying a sentence in the paragraph above chart 2 and providing the data for the charts. The original sentence stated: But here is the bottom line: the estimated impact of energy price shocks is a very sizeable decline in investment in the mining and oil subsector and, more importantly, an extended period of flat to slightly negative growth in overall investment (see chart 2).
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July 08, 2013
Let’s Talk about Oil
Given its role in touching nearly every aspect of life across the globe and given the higher and volatile prices over the past half-decade, oil supply has been an incessant topic of conversation for much of our recent memory. Yet the tone of the conversation has dramatically pivoted recently from arguments about whether peak oil or sky-high oil prices could spur a global economic meltdown (anyone remember 2008?) to the shifting energy balance as a result of rapidly growing oil production from North America.
Chip Cummins and Russell Gold recently published a piece in the Wall Street Journal discussing how new supply from U.S. shale oil and Canadian oil sands is helping to steady global oil prices.
Crude prices have remained remarkably stable over the past year in the face of a long list of supply disruptions, from Nigerian oil theft to Syrian civil war to an export standoff between Sudan and South Sudan. The reason in large part is a thick new blanket of North American oil cushioning the markets.
This chart helps demonstrate how quickly the oil landscape in the United States has indeed changed. The U.S. Energy Information Administration (EIA) expects national crude oil production to exceed net oil imports later this year, marking a rapid turnaround from the trend of ever-increasing reliance on imports.
However, despite the increase in U.S. oil production, global oil prices have stabilized at relatively high levels, as the chart below shows.
However, the two seemingly opposing narratives—that of high oil prices and that of an emerging oil and gas abundance—are fundamentally linked. In fact, if it hadn’t been for such high oil prices, this new surge in North American oil production may not have happened. It is much more difficult to rationalize drilling activity in deep offshore areas, hard shale, or tar sands—from which, by nature, oil is expensive to produce—without high oil prices. (West Texas Intermediate, or WTI, oil averaged $31 per barrel in 2003, which, even in real terms, is only about 2/5 of today’s prices.) Analysts at Morgan Stanley estimate that the break-even point for Bakken (North Dakota) crude oil is about $70 per barrel and that even a price of $85 per barrel could squeeze out many of the unconventional producers.
What does all this mean for prices? Well, keep in mind that oil is a global commodity. So the roughly two million barrels of oil per day that have entered the market from the U.S. fracking boom represent a big shift domestically but only just over 2 percent of global oil consumption.
And while the United States is seeing growing oil supplies and moderating demand, a different trend is taking place globally, with rising demand from China and other emerging economies coupled with declining supply from older fields and OPEC efforts to keep prices higher through production limits.
However, not everyone believes that higher prices are here to stay. Some analysts have begun to warn that a price crash may be looming. Paul Stevens, an energy specialist with Chatham House, argues that we may be headed for a replay of the price crash in 1986 when high prices triggered demand destruction while bringing new, more expensive sources of supply to the market from the North Sea and Alaska.
Only time will tell where global oil prices will ultimately shake out, but for now, the larger supply cushion has certainly been a welcome development in the United States. Back to the Wall Street Journal article:
The new supply...is acting as a shock absorber in a global supply chain that pumps 88 million barrels of oil to consumers each day. That helps everyone from manufacturers to motorists, by steadying fuel prices and making budgeting easier.
By Laurel Graefe, Atlanta Fed REIN director, and
Rebekah Durham, economic policy analysis specialist at the New Orleans Branch of the Atlanta Fed
Authors’ note: We didn’t touch on the difference between WTI and Brent oil prices in this post, despite the fact that the changing global oil production landscape has undoubtedly contributed to that spread. For those interested, we recommend some recent analysis from the Energy Information Administration on the narrowing spread between WTI and Brent.
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May 10, 2010
Estimating the oil spill's impact in the Gulf
In this past week's SouthPoint, the Atlanta Fed's regional economics blog, we discussed some of the economics behind the oil spill in the Gulf of Mexico. We were careful to note that determining the impact of the spill is impossible because there are simply too many variables at work: the amount of time before the leaks are capped, the direction of the wind, wave action, water currents, the amount of oil that reaches the coast, the effectiveness of dispersion efforts, the efficiency of clean-up efforts on shore, the amount of federal spending, etc. Measuring the cost of the spill is simply out of reach at the moment.
We can measure the number of jobs at risk, however. Across Florida, Louisiana, Alabama, Mississippi, and Texas—the states likely to be affected most directly—total employment in tourism-related industries and agriculture was about 2.6 million (in 2008), or about 14 percent of total employment in those states. However, if we narrow our scope to metropolitan statistical areas along the Gulf Coast of the most affected states, the numbers are much smaller—just under 132,500—with most being in the accommodation and food services industry.
At the Atlanta Fed, like most Reserve Banks, we not only monitor statistical data, but we also seek out anecdotal information from business contacts within the Southeast. We are hearing mixed reports on hotel cancellations, which could have a significant impact on not only employment in the region but also sales tax revenue. While there has been a flood of inquiries, cancellations are not widespread to date. But some areas are seeing an inflow of clean-up workers into their hotels. Although rather insignificant at this point, it does lead to a larger measurement issue. That is, it's also impossible to measure the degree that clean-up and containment efforts will offset losses in other industries.
Econbrowser estimates the cost of the spill to British Petroleum (BP) by measuring the change in the company's stock price:
"Stock prices give us a yardstick for the markets perception of a company's long run profitability. When an event, such as this oil spill, impacts a company it will also impact its long run profitability. The divergence of the stock price from what we would have expected had the event never happened is a measure of the net present value of the cost incurred by the oil spill. Event study analysis gives us a framework to answer just this question."
While the approach to determining the cost of the spill to BP is much more straightforward than guessing wind and sea currents, it doesn't get to the more complicated endeavor of determining the cost to local communities. For that we will have to wait and see what happens next. Here are some useful links to help keep up with events:
The U.S. Department of the Interior's Minerals Management Service, along with other agencies, has created a Web page dedicated to the Gulf of Mexico oil spill response that features regular updates, maps, and fact sheets. You can also register to receive e-mail notification of updates.
The National Oceanic and Atmospheric Administration is providing coordinated scientific weather and biological response services to federal, state, and local organizations.
A joint effort is under way from the Ocean Circulation Group and the Optical Oceanography Laboratory at the University of South Florida's College of Marine Science to track and predict the Deepwater Horizon oil spill in the Gulf of Mexico.
The Wall Street Journal is also providing regular updates and coverage.
Finally, the Washington Post published a graphic of the spill and the affected areas of economic activity along the Gulf Coast.
By Mike Chriszt, assistant vice president, and Mike Hammill, economic policy analysis specialist, both in the Atlanta Fed's research department
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September 09, 2008
Hurricanes put energy on center stage
Hurricane season is in full swing here in the Southeastern United States. The Atlanta Fed pays particular attention to hurricanes for two reasons: (1) they have significant impacts on the local economies they strike, and (2) they can potentially have big impacts on the national economy.
For example, in 2005, even though the Katrina and Rita storm-damaged area of Louisiana represented only a small fraction of the nation’s gross domestic product (GDP), it cast an outsized shadow because of its very large role in oil and gas production and processing. Katrina and Rita’s disruptions of this production and processing spilled over into the national economy, destroying 113 offshore oil and gas platforms and damaging 457 oil and gas pipelines. This damage generated uncertainty about the availability and price of energy products, causing prices to immediately jump.
After relatively quiet hurricane seasons in 2006 and 2007, 2008’s hurricane season thus far has been quite active, with potentially significant national implications. That’s because the Gulf of Mexico remains a substantial source of oil and natural gas production—just as it was three years ago. In addition, coastal Louisiana is the home to upwards of 50 chemical plants, which produce 25 percent of the nation's chemicals that are used in a wide variety of products such as medicines, fertilizers, and plastics. Compounding the Gulf Coast’s concentration of oil, gas and chemicals is the fact the U.S. economy is in a weaker state today and, as a result, more vulnerable to economic shocks than in 2005, a point made in a recent CNNMoney article about Hurricane Gustav.
One of the questions we are often asked is, “what is the effect of a hurricane on the economy?” Not surprisingly, the answer depends on what “the economy” refers to. From a national accounting perspective, GDP is a measure of the nation’s current production of goods and services; thus GDP is not directly affected by the loss of property (structures and equipment) produced in previous periods.
However, there are usually second-round GDP effects that arise because of disruptions to production, income and consumption flows. The Bureau of Economic Analysis provides a good description. For example, in the short run after a hurricane, incomes in many industries are likely to decline because of cuts in production, while some industries involved in the cleanup and repair may see activity increase. Similarly, incomes and spending could increase in areas that are the recipients of evacuees. The net effect of these flow disruptions on GDP over time is often not large because lost output from destruction and displacement is offset by a big increase in reconstruction and public spending later.
But even if the effects are neutral on a national scale a storm’s impact can be long-lasting in an affected locale. For instance, the flooding associated with Katrina left the economy of New Orleans devastated, and in many dimensions it has not fully recovered three years after the storm. Air traffic through New Orleans International Airport increased 13 percent in June 2008 compared to a year earlier but still remained well below pre-Katrina levels. Hurricane Gustav resulted in another evacuation of the city and the cancellation of numerous tourist and other events. Clearly storms like this have the potential to wreak havoc on the prosperity of the Crescent City.
The Atlanta Fed regularly reports on regional economic conditions on its public Web site. As part of its efforts to monitor storm effects—both local and national—the Atlanta Fed is also providing information on post-storm conditions in the affected areas. So far, these reports have focused on Hurricane Gustav’s impact on key energy and transportation infrastructure. The Bank will provide similar updates on other storms, including Hurricane Ike, which had entered the Gulf of Mexico at the time of this posting.
Note: Macroblog will not feature postings on monetary policy issues during the Federal Open Market Committee meeting blackout period, which runs from the week before the FOMC meeting until the Friday after it. Also, David Altig, senior vice president and research director of the Atlanta Fed, will not post during this time frame.
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May 08, 2007
Pump It Up
From Reuters, the unhappy news that you already knew:
U.S. average retail gasoline prices rose to an all-time high over the past two weeks, due to a number of refinery outages, according to the latest nationwide Lundberg survey.
The national average price for self-serve regular unleaded gas was $3.0684 a gallon on May 4, an increase of 19.47 cents per gallon in the past two weeks, according to the survey of about 7,000 gas stations.
The prior all-time record was an average price of $3.0256 per gallon, that was reached on August 11, 2006.
One of the first things you learn in macro class is that these sort of figures can be extremely misleading if you don't adjust for inflation, so kudos to the Reuters folks for this:
However, the current price is 6.4 cents short of the inflation-adjusted high that was reached in March of 1981, at that time regular grade self serve gasoline was $1.35 per gallon, but on an inflation-adjusted basis today that would translate into $3.13 per gallon.
That said, feel free to file current gas prices in the "ouch" category.
Crude-oil futures dropped to their lowest level in almost seven weeks and appeared ready to extend their five-session loss of nearly 7%. Traders were betting that U.S. data, due later this week, will reveal ample supplies of crude and little or no decline in product inventories...
John Person, president of NationalFutures.com, attributed the recent price weakness to “massive hedge-fund liquidation.” He points out that the Commodities Futures Trading Commission report shows non-commercial traders are long by a net 65,000 contracts and commercial traders are net short.
At the same time, he said, “last week’s tensions eased regarding Iran’s nuclear program, and as refineries come back on line, we are expecting gasoline supplies to build. Crude-oil inventories have climbed in recent weeks, so there is plenty of [inventory]. … [And] if refineries do get back up to speed, we will potentially see gasoline builds in the next few weeks.”
That last sentence is a big "if", and Mr. Person does advise you to temper the celebration:
Even so, Person said he doesn’t expect a massive decline in prices or any break below $58.
Hey, we can dream can't we?
UPDATE: The Energy Information Administration's update provided no comfort:
Continuing problems for refineries in the United States and abroad, combined with strong global gasoline demand, have raised our projected average summer gasoline price by 14 cents per gallon from our last Outlook. Retail regular grade motor gasoline prices are now projected to average $2.95 per gallon this summer compared with the $2.84 per gallon average of last summer. During the summer season, the average monthly gasoline pump price is projected to peak at $3.01 per gallon in May and again in August, compared with $2.98 per gallon last July.
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April 25, 2007
Some Inconvenient Truths
The Financial Times has uncovered some stumbling blocks on the road to carbon neutrality. Its multi-part report starts with a useful tutorial:
Offsetting is a fundamental principle of the Kyoto protocol – an agreement among more than 160 countries that came into force in 2005. It allows developed nations to meet emissions reduction targets by funding projects such as wind farms or solar panels in poorer countries through the so-called “clean development mechanism”. This awards such projects “carbon credits”. The credits, which can be traded on the international carbon markets, sell for between $5 and $15 (€3.66-€11, £2.50-£7.50) per tonne of carbon dioxide. To aid comparison, other greenhouse gases – such as nitrous oxide and methane – are measured as equivalents of CO2.
Carbon markets have grown rapidly since they were brought into being by the Kyoto treaty and the start of the European Union’s emissions trading scheme in 2005, under which companies were issued with tradeable permits to emit carbon. The price of carbon in the EU scheme more than halved last year after it was revealed that more permits had been issued than were needed in the first phase, from 2005 to 2007.
In the first nine months of 2006, according to the United Nations and World Bank, up to $22bn of carbon was traded. About $18bn of this was through the EU’s emissions trading scheme, and $3bn through the Kyoto mechanism.
The third element, the voluntary market, is where most offsets are bought. Businesses participating in this are not bound to reduce emissions, unlike companies under the EU trading scheme or governments under Kyoto. In 2005, the World Bank estimates, the voluntary market formed under 1 per cent of global dealings, trading fewer than 10m tonnes of carbon a year. But by 2010, the consultancy ICF International forecasts it will grow 40-fold to be worth $4bn.
Most companies going carbon-neutral use intermediaries to buy offsets on their behalf.
According to the FT, however, all has not gone well:
The FT investigation found:
■ Widespread instances of people and organisations buying worthless credits that do not yield any reductions in carbon emissions.
■ Industrial companies profiting from doing very little – or from gaining carbon credits on the basis of efficiency gains from which they have already benefited substantially.
■ Brokers providing services of questionable or no value.
■ A shortage of verification, making it difficult for buyers to assess the true value of carbon credits.
■ Companies and individuals being charged over the odds for the private purchase of European Union carbon permits that have plummeted in value because they do not result in emissions cuts.
The Kyoto protocol to fight climate change expires in 2012. The shape of a successor treaty is still in doubt, but one aspect seems certain: carbon trading will play a major role. A Financial Times investigation today reveals that carbon markets leave much room for unverifiable manipulation. Taxes are better, partly because they are less vulnerable to such improprieties.
I'm waiting to hear a good case made to the contrary.
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April 04, 2007
No Relief At The Pump -- For Now
If you read Lynne Kiesling today you will receive some very good advice to go pay the Wall Street Journal's Energy Roundup blog a visit. And if you follow that advice, you will find yet more good advice, this time in the form of a link to a item on "This Week in Petroleum" at R-Squared Energy Blog. And from there you will be informed of this story, from CNN Money:
... the Energy Information Administration said gasoline stocks, closely watched ahead of the summer driving season, plummeted by 5 million barrels. Analysts were looking for a small drop of just 300,000 barrels, according to Reuters.
The fall in gasoline supplies pushed gasoline stocks to the lower end of their average range, the first time in several months the supplies have dipped below average...
"We're nowhere near where we should be in terms of inventories," said John Kilduff, an energy analyst at Fimat in New York, who also pointed to strong gasoline demand numbers in the report. "We're seeing the kind of numbers we only see during the peak summer season."
Kilduff also noted the relatively low rate of refinery operation, which EIA said was at 87 percent capacity last week.
"The failure of the refinery rate to go to 90 percent is spelling lots of trouble for us," he said.
For years, the typical summer driving season was considered to occur between the Memorial Day and Labor Day holidays, with peak summer gasoline demand occurring sometime after the Fourth-of-July holiday. While this characterization still holds, in recent years, demand patterns have shifted somewhat to include more robust levels of gasoline demand earlier in the season with a pre-summer peak in gasoline prices.
Add it up and what do we get? One more stress point for the economy in the near-term, and hopeful thinking about what the rest of the year will bring:
Consequently, as gasoline demand began to grow in earnest in April, gasoline supply has failed to keep pace, resulting in continued significant stock declines and sharp upward pressure on gasoline prices in recent weeks. Nevertheless, while the short term outlook for gasoline markets appears to be tight, the longer term outlook remains unclear. Thus, spring breakers will most likely notice higher gasoline prices during April, compared with last year. Following spring break, however, Memorial Day, Independence Day, and Labor Day vacationers may face different, possibly softer, markets.
Somehow I just dont find an "unclear" outlook and "possibly softer, markets" all that comforting.
Side note: For a discussion of new research on the historical effect of oil price changes on economic growth, check out Econbrowser.
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January 08, 2007
Are We Really Less Dependent On Oil?
Austin Goolsbee made a little noise last week, writing in the New York Times that the answer is yes:
... the data shows that much has changed since the wrenching days of the 1970s, for American industry at least. The energy used for each dollar of gross domestic product in 1980 was almost 70 percent greater than it is today. While we have collectively wrung our hands over the decline of manufacturing in the country, it has also reduced the relationship between energy prices and growth.
Greg Mankiw accepts the claim that
... energy prices have a smaller impact today than they did in the past.
... and Mike Moffatt was prompted to muse:
The relationship between the decline of manufacturing in the United States and the reliance on foreign oil is an interesting one.
The facts are the facts on the fairly dramatic increase in energy efficiency in US production, but if there has been a declining impact on economic activity, that looks like a fairly recent development:
The shaded bars in that picture are NBER recession dates. You only have to go back a few years -- to the 2001 recession -- to find a significant energy shock looking for all the world like the partner of an economic downturn. Just like the four recessions that preceded it.
Of course, as I have noted here before, it's possible that the correlation of energy price spikes and recessions in the 70's, 80s, and 90s was just a coincidence. But it's also possible that the run up in energy prices over the past five years has indeed had a significant negative impact on economic activity, despite the fact that the tipping point into recession has not yet arrived. Let's call the effect of energy shocks on the economy an open question.
As for a decline in dependence on foreign oil, it hasn't happened. Here's an updated version of a picture I showed some time ago, capturing energy consumption relative to GDP versus production relative to GDP:
As I wrote in my earlier post:
As we entered the latest series of oil shocks in 2002, energy efficiency -- measured by the quantity of energy usage per inflation-adjusted dollar of GDP -- had fallen significantly from 1970s levels. Energy dependence -- measured by the gap between consumption and production per unit of GDP -- has, on the other hand, remained remarkably constant. That says to me we should not be so quick to dismiss analogies with the situation in the 1970s.
The headline to Professor Goolsbee's article was "A Country Less Dependent on Oil is Free to Make Other New Year's Resolutions." I think maybe we shouldn't change that resolution just yet.
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September 13, 2006
A Warning Sign In The Deficit Report?
I guess how you feel about today's news on the August federal deficit report depends on your perspective. Reuters led with the observation that the ink was a little redder than expected...
The U.S. government posted a larger-than-expected $64.61 billion federal budget deficit in August as outlays for the month were at a record high, a Treasury Department report showed on Wednesday.
The August deficit compared with a $51.33 billion deficit in August 2005.
Wall Street economists polled by Reuters were expecting a $61.15 billion deficit for the month.
... while AFX News Limited (via Forbes) kicked off with a cheerier perspective:
The federal deficit through August held below last year's level and continued on its course for a smaller yearly deficit this year than last, the Treasury Department said.
The government posted a budget deficit of 64.6 bln usd in August, compared to expectations of a 67 bln usd monthly deficit.
Through the first 11 months of the budget year, the deficit was 304.3 bln usd, down 14 pct from the same period in 2005, when it totaled 354.1 bln usd.
I don't doubt that someone out there in blogland will point out that, in the even longer run, the federal budget remains in a state of some disrepair. But, for the moment, I am decidedly focused on the short run, and trying to figure out exactly how the economic outlook is evolving. From that perspective, this detail from Action Economics (subscription required) is not encouraging:
Receipts were weak, declining 1.0% or $1.6 bln to $153.9 bln. Weakness was led by a drop in individual income. This marks the first time since April of 2004 that receipt growth has been negative.
OK, I'll remind myself that one month does not a trend make, and maybe encourage myself with this report, from Greg Ip and Christopher Conkey at The Wall Street Journal Online:
The recent drop in oil prices could provide a welcome and surprising boost to consumer pocketbooks this fall, cushioning the economy from a falloff in home prices and construction while venting an important source of inflation pressure.
The easing of energy prices is an unexpected -- and little-noted -- positive amid economic anxiety over falling housing activity, previous energy-price increases and the possibility of recession.
Crude oil was at $77 a barrel as recently as early August. Yesterday, the price of the October crude-oil future contract settled at $63.76, a near six month low, down $1.85 from Monday, on the New York Mercantile Exchange.
Ahh. I feel better already.
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- Are Shifts in Industry Composition Holding Back Wage Growth?
- Are Oil Prices "Passing Through"?
- Business as Usual?
- What's (Not) Up with Wage Growth?
- Are We Becoming a Part-Time Economy?
- Contrasting the Financing Needs of Different Types of Firms: Evidence From a New Small Business Survey
- Gauging Inflation Expectations with Surveys, Part 3: Do Firms Know What They Don’t Know?
- Gauging Inflation Expectations with Surveys, Part 2: The Question You Ask MattersA Lot
- Gauging Inflation Expectations with Surveys, Part 1: The Perspective of Firms
- Chances of Finding Full-Time Employment Have Improved
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