Oil Maybe The Easier Problem

With so much in the news about Iraq, the Presidential
candidates, the debates and the veto today by Pres.
Bush, a short piece in the news about Chavez
nationalizing the the oil industry in Venezuela goes
almost unnoticed. The production of crude from the
Venezuela oil fields is down because they lack the
skilled people to get the oil out. Unless the Saudis
increase their production, we may well see $4 a gallon
gas before the end of the summer. This will hurt our
economy, and it will hurt those who can least afford
higher gas prices. If you are watching prices when
you shop, you will notice that the higher costs of
fuel are resulting in higher prices across the board.
If ever we needed a bright idea, now is the time.
Energy costs will suck a lot of buying power right out
of our domestic economy. Unfortunately, this is going
to hit those families that can least afford a price
increase of basic necessities.

The above paragraph I wrote to someone I had worked with in the investment business when I worked for the State of Ohio. It was an e-mail dated May 1, 2007.

When I was a teenager back in the late 1950’s, I would take a bus to my Dad’s hardware store to spend time with him, and after I got my driver’s license, to be able to drive him home after we closed the store at 6pm. I remember my father commenting to me as he pointed to all the cars on Interstate I-75 that had only one occupant in the car, that some day America would be sorry for having wasted so much money to move one person in a big car from one place to the next. Naturally, having just got my driver’s license and enjoying the freedom that that driver’s license brought me, I thought my Dad was a bit over the top with his appraisal of the current situation. That was 50 years ago. Today, his words make a lot more sense to me than they did then. We did waste a lot of energy, gas, moving one person from one place to the next in a big inefficient gas guzzling car in the 1950’s. In fact, we continue to do that right to this day.

We, here in the United States, get upset and even angry about a lot of things that do not directly affect our economic well being, but America’s love affair with the car and the freedom to just pick up and go when you feel like getting out of the house or apartment is something that is part of each one of us that has experienced the joy of just taking a drive. We have not demanded better of ourselves in our use of energy, because we have not made it an important issue.

Now that we have made everyone’s business our business and spread ourselves too thin, those that helped to addict us to cheap gas have slowly let those economic forces coming from around the world, as well as our own addiction, tighten around our collective economic necks. We have been our own worst enemy when it comes to energy conservation.

It does not take an Einstein to realize what effect $4 a gallon gas would have on the United States’ economy. Any sudden increase in the price of any commodity used throughout the economy would produce like results. Gasoline and diesel move people and produce and manufactured products every day and their sudden price increase would have to mean a price increase in everything that is transported. This country has run on cheap inexpensive energy for generations. In the past the price increases that resulted in inflation were simply monetized as price levels simply ratcheted upward and wages eventually followed. What was a first-class stamp selling for in 1958 and what is it selling for today?

The big difference this time is that there are more countries in the world that are using more and more gas and diesel. This may be the time when the United States can no longer monetize the debt without having to pay a price. That price may come in the form of a longer and deeper recession. With all the other economic problems that the United States is dealing with right now, the price of gas may be one of the easier ones to fix. Gas prices and the other drags on the economy have made the inelastic demand for gas much more elastic this time around. As a result, the slow growth rate of the economy will be with us as seen in the recent movement of our stock markets downward. This recession will most likely last more than two consecutive quarters unless oil prices fall or the dollar gets stronger. There are only two ways oil prices can fall. One is if the production of oil is increased, or two, the demand falls off and the price of oil retreats. If Iraq pumps their oil night and day to take advantage of world wide demand, perhaps supply can over take demand and the price of oil can come down. But that is a big if.

The lack of leadership in the United States at this point in our history is historic. Are there no more leaders left to lead this once great country out of its economic plight? Stay tuned.