Brennaman’s Four Points for the Week

1.       The Politics of Oil – The Keystone XL Pipeline – The price of crude oil is below the level last observed over four years ago (Sep 21, 2010 for West Texas Intermediate (WTI)) as persistent slowing global demand and the resurgent U.S. domestic oil production industry contribute the glut of crude oil.  The recent mid-term elections have spurred the U.S. Congress to resurrect the stalled legislation approving the construction of the Keystone Pipeline.  The House passed a bill late on Friday and the Senate is expected to take up the issue with nearly identical language early this week.  The passage of the bill by both houses will put the President in a quandary:  vote with the majority and sign the bill or veto the bill in support of his stance on climate change.  But we should not overlook the political and economic ramifications.  While the Republicans will control the Senate in the next Congress, Sen. Mary Landrieu (D, LA) is in peril of losing her seat as the pipeline has become a pivotal issue in her runoff election (Dec 6) with Republican challenger, Rep. Bill Cassidy, R-La.  Both support the pipeline but Landrieu is at risk.  On the economic side of the equation, passage and subsequent presidential signature could aid in the creation of nearly 42,000 new jobs in the U.S. (admittedly many of these jobs will wither way after the pipeline is completed) and up to another 20,000 in Canada.  A more important impact is the direct contribution to North American independence from foreign oil producers.  Oil has been a major currency in world affairs since the early 19^th century and the prime driver of economic growth globally.  This is true today and will be for some time.

2.       The Economy – “The New Normal?” – Are we seeing a new normal in employment?  While the unemployment rate continues to decline (5.6%) we are continuing to see lower rates of participation, lower wages paid and still fewer full-time jobs than we had prior to the great recession.  A scant ten years ago an unemployment level of 4.6% was considered full employment level and supportive of a robust, growing economy.  This level is well below the long run natural unemployment rate of 5.2%.  So will our economy settle in at the 5.2 – 5.4% range as the economy continues to recover?  The jury is still out but we need to see wage growth better than we are witnessing at present as well as the participation increase from the historic low of 62.5%.  Another issue is the quality of jobs reflecting the shift from a manufacturing / industrial economy to a service oriented environment.  Innovation and creativity are highly prized in the U.S. and we are proud of these but we also need to see a direct correlation between these two items and manufacturing in order to break the gridlock low wages and unemployment has on the U.S at present.

3.       Russia and the Ukraine Situation – Putin Hears The Criticism From Abroad – But does he care?  Vladimir Putin senses weakness in the NATO and EU resolve in dealing with the Ukrainian situation.  So Putin is in no hurry to help reduce tensions in Eastern Ukraine as Russia continues to send in materiel and troops in to the region in support of the Pro-Russian Separatists (NATO – Reuters Nov 13).  Putin is willing to ratchet up the stakes with continued military flights near the borders with the European Union (EU) states and the latest announcement that Russia may position Backfire bombers in Cuba for possible flights near U.S. and Canadians shores more frequently.  He also realizes that his situation at home is precarious with the slipping economy beginning to weigh on the people of Russia.  He feels he needs to appear to be in control and be a major player in the global arena.  Therefore the actions of the Russian military are clearly directed towards the Western nations that levied economic sanctions against Russia for the annexation of the Crimea and the continuing conflict/tensions in Eastern Ukraine.  While the supply of natural gas to the EU has resumed (Russia desperately needs the revenue) it remains a silent blackmail tool as Putin has backed the EU into a corner.  If sanctions are again increased as discussions at the G20 summit will detail on November 17, the Russian economy will be dealt with another blow to an already reeling situation.

4.       Healthcare – Premiums go Down But People May Pay More – As the Affordable Care Act implementation is set to begin its second year, premiums are coming down in many states as new insurers enter these markets.  As planned by the architects of the act competition is fostering lower premium costs.  This is a good thing as costs to the individual will go down, right?  Not so fast.  In order to capture these lower premiums individuals may have to change their plan which is always a challenge.  So yes, if individuals change plans they can capture the lower premiums.  If they choose to stay with their current plan (experience tells us that customers do like to change plans) and keep their current insurance premium; they may in all likelihood pay higher premiums as the subsidy paid to them by the government could well be lower as a result of new methods of determining the subsidy payout level.  So competition is a good thing but for the thousands (if not millions) receiving subsidies the competition comes around to haunt them.

“It is hard to fail, but it is worse never to have tried to succeed” Theodore Roosevelt

Have a good week and be careful as cold weather is upon us.

Steve