Focus: High prices
>> washington this week all consumed boo oil prices and the possibility they might cause some lawmakers their job. kevin hassett with the american enterprise institute said it might help if policymakers thought like winemakers. kevin is here to explain. you’re comparing oil to pinot noir.
>> that’s right. i’m a pinot noir drinker and after the movie “sideways” came out, everybody else decided they wanted to drink pinot noir, too, and that was terrible news for me because i could get it for $8 a bottle and now everybody’s buying it and the prices have come up. i think that demand surge doesn’t mean the government needs to enter the pinot noir market and figure out ways to make pinot noir from corn and subsidize the cultivation of pinot noir grapes, but let the market work. that’s the same thing with gasoline. right now gasoline is very expensive, oil is very expensive because demand has gone up for lots of good reasons and now those high prices are causing us to change the way we do things and high prices are the best cure for high prices, not government action. it’s disturbing to see everyone in washington falling all over themselves to figure out what to do. nothing the u.s. does can affect the calculation.
>> nothing the u.s. does, but is there anything we can do longer term at this point?
>> i think that longer term, you know, we obviously, as a people, need to gradually move towards other technologies. government, however, doesn’t need to tell us which technologies to adopt. and so right now they’re telling us to make ethanol from corn, but really because the corn lobby is so powerful here in the u.s., ethanol could probably be more efficiently made as it is in brazil with sugar but i guess the sugar guys aren’t as powerful as the corn guys. that’s the kind of thing that happens when government is involved. you need to sit back and let market forces work. the high prices will force people to buy hybrid cars and turn down the thermostat and search for alternatives, causing companies to invest their hard dollars in research and development. the government doesn’t need to get involved.
>> you expressed disappointment in president bush, because as a former oil man he should know better?
>> yes, president bush gave a speech today and i can understand it politically because politically everybody’s mad at the oil companies. so he went out and made a speech and rather than bash the oil companies, he extolled the virtues of alternative fuels and sure it would be great to live in never-never land where there were things other than oil to support energy. those things are really far away. the fact is that people are posturing now to pretend they’re doing something about it because people are unhappy about the high prices but people should get over it. the prices are high because the prices are high, adjust your consumption to the high prices but don’t ask washington to do anything because if they do, it will be a bad idea.
>> the interesting thing is that people are not adjusting consumption to high prices. they’re still driving like mad and the economy is moving forward. do you have concerns that the high prices should be acted on by the government because otherwise we’ll be in economic trouble?
>> the question is what the government will do. in the past history of recessions, all but one happened after a spike in oil. but the past recessions happened because of supply disruptions. this time around, there’s a tremendous amount of economic momentum in the world economy and that momentum is driving the price of everything up. and so really in some sense the high prices are good news, they’re a sign that the economies are vibrant and nothing we can do in the u.s. can change that that much. we’re about a quarter of the world economy and we’re not going to move things around enough to affect those prices.
>> there have been suggestions that the president and congress should establish a nationwide relaxation of air quality rules in the short run and also perhaps reinstate the mtbe liability waiver. those things might have an effect in the short run, would they not?
>> they would have some effect on gasoline prices, that is true. that is one area where policy is messed up so there might be room for policy because it could take away a bad thing. but what’s going on, we don’t have a lot of refining capacity in the u.s. and every area, local area has their own rule about what gasoline you have to use and it makes it very difficult to make supply meet demand so you can get local shortages. i was in new york city yesterday and the prices were in the high $3-something a gallon. you go from place to place and the price changes a lot because of local shortages based on local air quality rules so i think some sensible changes there could happen but they’re not going to make a big difference. the bottom line is that the oil price determines the gasoline price after you smooth through all that junk and the oil price is really, really high and not likely to go down very soon.
>> one last question and that is, we’ve heard a lot of criticism from politicians over the last couple of days of the oil companies. anything they’re actually doing wrong?
>> that the politicians are doing wrong or oil companies?
>> the oil companies are doing wrong.
>> there have been some academic studies that suggest that gasoline prices might look like they aren’t perfectly competitive. but it’s a really, really hard thing for economists to figure out because, in a perfectly competitive market where something’s a commodity, if you want to buy a bushel of wheat, it costs the same here as there. if people are colluding, then their prices are the same. how are you to really tell the difference between collusive action and competitive markets ? i’ve not seen convincing evidence that the oil companies are doing anything wrong.
>> thank you very much, bloomberg columnist kevin hassett, director of economic policy studies at the american policy institute. the chrysler unit of daimlerchrysler is expanding the number of flexible fuel vehicles it produces. flexible fuel cars can run on a combination of gasoline and as much as 85% ethanol.
>> today we’re announcing that in the 2007 model year we’ll put our popular jeep grand cherokee and jeep commander on our list of flex fuel vehicles for both fleet and retail sales.
>> u.s. shares of daimlerchrysler rising today. speaking of flex fuel, how about vegetable oil? in our “poll of the day,” do americans really worry about gasoline prices? stay with us.
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Listen Focus: Homebuilder
>> the surprising rise in home sales today may provide one indication that the housing market is not slumping as much as some predicted this year. but you would have known that before today if you were keeping a close eye on the bond market . connell mcshane is here to explain.
>> it’s an interesting one. what we did is we took a look at the trading in homebuilder bonds and we found that those bonds have been performing pretty well of late. before today’s number, you were talking about, there have been fears of slowdown. there are still fears because of rising mortgage rates but what we’re seeing in the corporate bond market is a different picture. debt from companies like d.r. horton or pulte homes has been appreciating in value this month. it’s outperformed other corporate debt as well as government debt and some would say that means fears of a big housing slowdown might be overdone. if you talk to richard dekaser at national city, the credit markets have been useful guides to industry prospects, he says, and whatever reassuring signals they’re sending shouldn’t be ignored so pay attention to the bond market . one other interesting point about this is it’s a different picture for housing stocks. they beat housing bonds for three years in a row from 2003 to 2005 and this year that has changed. s&p 500 homebuilding index is what you’re looking at right now, 11% lower on the year. compared to that drop, housing bonds are up, on average, about 1.75% for the year. as for today, the renewed concerns about higher interest rates that we’ve been talking about all day long, many of the stocks have moved lower. d.r. horton down 2.5%, pulte down 3.5% and lennar lower, as well. what it comes down to is the angle you want to take on all of this, housing stocks telling us the slowdown in the market may be here already or coming soon but the bonds, a different story, one that says the situation may not be as dire as you think it is.
>> in his second day on the stand, former enron chairman ken lay challenged the government’s allegations that he lied about enron’s financial health as it teetered toward collapse. june grasso is covering the trial from houston and gines us with the latest. june?
>> lori, it was all about former enron c.f.o. andy fastow. ken lay testified that the people at enron trusted fastow and they believed that the newspaper stories coming out, the critical stories about his off-the-books partnerships were part of a witch hunt until they discovered in a board meeting that fastow was making $45 million off those off-the-books partnerships. lay said at that point they began to suspect their trust in fastow was unfounded. that was just six weeks before the collapse of enron. after an emergency board vote, lay asked fastow to leave enron immediately, but fastow hesitated. he wanted to discuss a severance package saying he wasn’t going to be greedy, but looking in the neighborhood of $5 million. lay’s response to that, “hell no, andy, pack up your stuff and leave the building.” lay maintained it was newspaper stories damaging investor confidence in enron and driving down the stock price at a time when the company was doing extremely well. this afternoon, lay’s attorney is taking him through the indictments count by count to deny the government’s allegations. for example, the government accuses lay of misleading employees in an open email forum in september, but lay denied that, saying that at the time “i
