Ed Wallace

Hidden Sales, Distorted Facts

A couple of months ago the Energy Information Administration announced that it would soon be using a new formula to determine how much crude oil the nation had on hand. The unstated logic behind this decision is, apparently, that if one can make oil pumped out of the ground disappear, doing so would lower overall inventories and theoretically could increase oil prices on the futures market. Stories about the public announcement ran on numerous wires, including Reuters.

The September 30th report showed right at 500 million barrels of oil in inventory waiting to be refined. The very next week the EIA reported that we had added another 4.9 million barrels to our crude oil inventories, and yet now they stood at only 474 million barrels. That’s right. Through the magic of the government changing a calculation, in a seven-day period when we were putting excess oil into inventories, around 31 million barrels of crude simply disappeared.

The only clue that this happened could be found on the Weekly US Ending Stocks excluding SPR (Strategic Petroleum Reserve) of Crude Oil. A couple of weeks later the government went in and scrubbed that 31 million barrels of oil from all of its records, going back decades. A few oil reports later, it’s vanished for all time. Best of all, over the past month has any business report covering our oil supplies noted the fact that the government changed how oil on hand is calculated? To the best of my knowledge, no.

Then again, back in 2013 the government changed the way we calculate our Gross Domestic Product. At the time Marketplace.org ran the story under the headline, “U.S. Economy to ‘Grow’ 3 percent under new GDP Calculation.” Again, does anyone remember commentators adding that salient bit of information when the GDP of America was announced after that change? No, it’s as if nothing had ever changed.

During the Clinton years there was the Boskin/Greenspan theory of inflation, which ended up forming part of our official calculations, too. Previously inflation had been based on a set basket of goods. But just over 20 years ago, this basket’s contents became exchangeable; if you had formerly purchased steak once a week, but could no longer afford that so now you purchased hamburger instead, well, you were still eating meat. Therefore, no inflation had occurred.

That re-calculation explains and justifies the so-called guideline for the declining value of the labor of the middle class. Yet this inflation recalculation also had the effect of allowing the government to drastically cut back any hikes related to real inflation — like Cost of Living Allowance, or COLA, raises for people receiving government pensions or benefits. But, as happened with the missing oil inventories, after maybe a month or less the altering of our Gross Domestic Product figures was forgotten; no one remembers that we changed how we calculate inflation, or that the change distorts the real cost of many goods for consumers.

Well, courtesy of Volkswagen, the same event is likely to happen again depending on who won the election this past Tuesday. (This column was written before the election, but it doesn’t matter who won for the following information to be true.)

As you may know, new car sales volumes have fallen for months in a row. These are minor fall-offs, and the pace we are still maintaining will give us the second-best year in our history for sales. Then again, that fall-off in sales may be misleading. In October this year we had 26 selling days as compared to 28 a year ago. That would represent a 7.1 percent drop in selling days, while new car sales fell by only 5.8 percent. (Thus, had we had the same number of selling days this October as last, new car sales would have shown a slight increase.) But, no matter who wins the election, Volkswagen will soon start writing checks to 478,000 owners of its diesel engines built after 2009. Moreover, the vast majority of those VW TDI owners are selling their cars back to Volkswagen instead of taking a nice chunk of money to keep their vehicles and fix them at some later date.

But it gets better. By the end of this month U.S. District Judge Stephen Breyer wants a formal settlement also for owners of VW’s 3.0-liter diesel engine. That adds another 80,000 owners into the mix, including those who purchased that engine in Audis and Porsches.

And it gets even better. According to an article in the Automotive News this week, quoting a column in Germany’s Bild am Sonntag, California regulators have discovered in an Audi yet another defeat device that lowers carbon dioxide emissions if it notices that the vehicle is in emission testing mode. Now, using Bild am Sonntag as a source for any German corporate secrets is a fool’s game. Too often in the past 20-some-odd years I’ve used that newspaper as a story source, only to discover that its fact-checking leaves something to be desired. Strangely, referring to that story, the California Air Resource Board told Bloomberg on Tuesday that the board would not comment on any ongoing investigations. It’s strange because, during the investigation into the Volkswagen diesel fiasco, the board commented every week.

Even leaving that story out of the equation, though, we still have over 550,000 Americans who in the near future, assuming VW finally gets its act together, will be either selling their cars back to VW or carrying sizable checks around while awaiting an approved fix for their cars. Best guess is that this could lead to 500,000 new car sales over the next few months, to individuals who weren’t planning on being in the car market that quickly.

As mentioned in a previous column, Volkswagen doesn’t have enough vehicles on hand even to satisfy the 25 percent of diesel owners who actually would like to purchase another of its vehicles. This means that 350,000 – 375,000 individuals will be purchasing other makes and models, and in a very short period. And, since new car sales are down only 0.2 percent for the year, this situation has the real ability, again assuming VW gets its act together, to make 2016 the best year ever for new car sales, surpassing 2015.

My best guess is that this means newly elected or reelected politicians will point to the car market’s resurgence after the election and take credit for it, when they had absolutely nothing to do with why car sales actually improved. Much in the same way as they now take credit for decent GDP growth without mentioning that we changed how we calculate it three years ago — and as the Fed and the first Clinton administration took credit for lowering inflation, when that too was a sleight-of-hand illusion resulting from a change in how it was calculated.

True, there has been a huge shift in the car market from automobiles over to trucks and SUVs; that’s often a predictable behavior when gasoline prices fall dramatically. America witnessed the same phenomenon back in 1999, when gasoline sold for 99 cents a gallon and Chevrolet dealers couldn’t keep Suburbans in inventory — even though GM built them in multiple factories at the time. The fact that gasoline prices fell during most of the 1990s before collapsing also led to a huge increase in pickup truck purchases and the rise of the luxury pickup truck, which has been put on steroids over the past seven years. Proving that, sales of regular midsized and luxury cars fell a whopping 18.7 percent in October, while pickup truck sales rose by 4.3 percent and large SUV sales were up 51.6 percent.

One has to admire the American public’s optimism and faith; apparently these buyers think that regular gasoline will stay at $2 a gallon for as long as they own their new Escalade ESV.

And that takes us back to the Volkswagen buy-back: It is likely that most of those selling their diesel Jettas back to VW won’t go out and purchase a King Ranch F-150 or a Suburban. But buy they will, and probably the same week they get their check from VW.

And then we will again be treated to all those commentators. They will be making fun of anyone who claimed the stock market would crash based on whoever won the election — or that the public would lock up its credit cards. Those on the winning side, meanwhile, will proclaim for everyone to hear that optimism has returned to the country as a result of their candidate’s winning and as proof simply point to the rise in new car sales across the country.

It’s moments like these that led famed journalist Edward R. Murrow to say, “The obscure we see eventually. The completely obvious, it seems, takes longer.”

© 2016 Ed Wallace

Ed Wallace, a member of the American Historical Association, is a recipient of the Gerald R. Loeb Award for business journalism, conferred by the Anderson School of Business at UCLA. He reviews new cars every Friday morning at 7:15 on Fox Four’s Good Day and hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. E-mail: wheels570@sbcglobal.net