Thursday, December 18, 2008

Oil and Money are Commodities

Yesterday I saw on the 6:30pm news that the Federal Government’s program to help people avoid foreclosure on their homes has not helped one single home owner from foreclosure. All the people pulling down a salary and not one home owner has been helped. They must have gotten their play book from FEMA. It is hard for me to believe that in this big country that a Federal program that was designed to prevent people from losing their homes, after all these months, has helped no one. Try to get your mind around that one. That means, if the Obama administration comes in and saves one home owner from foreclosure, that would be a 100% increase! Our Government is not working. People are drawing salaries and nothing is happening. Sad.

Back to talking about economics. The commodity oil is down in price. Yesterday a barrel of oil reached just below $40. OPEC has decided to cut back on production because of the slowing of the world’s economy. This may or may not happen, let me explain. OPEC is not a country. OPEC is an organization that stands for Oil Producing Exporting Countries. OPEC may call for a reduction in production to try and keep oil prices from falling even further, but each oil producing exporting country has their own bills to pay and programs to fund. OPEC does not have any of this stuff to worry about. The oil producing countries in the past have been know to “cheat”. Cheating is when you produce more oil than your quota. But, sometimes a country’s quota for output is out of line with its need for cash. Remember, OPEC is not a country and has no people to keep from causing a revolution. It will be interesting to see if OPEC is able to keep its members together and cooperating during this period of a world wide economic downturn.

The decline in the price of oil has lead to a decline in the price of gas. This is a good thing for the United States that has no energy policy to speak of. With the price of gas at the pump coming down, families have more money to spend on other consumer items like food, clothing, mortgage payments and health care. High gas prices work like a tax on the consumer as they take money out of the economy. Why does it take money out of the economy? It takes money out of the economy because the United States imports 70% of the oil it needs. Those dollars we use to pay for imported oil leaves our domestic economy. This adversely effects our economy because the dollars taken out of circulation do not create demand for more goods and services. The creation of more goods and services and the money to pay for them is what drives our domestic economy.

The price of oil will go back up, but not so fast this time. The world wide recession has taken a grip on several economies and it will take time before those economies are back to full employment. By the time the Obama administration takes office, oil prices may have even declined further. The smart thing to do if and when the price of oil starts back up, is for the Obama administration to counter this by selling oil from the Government reserve. But, before they do that, they should start buying up oil to stabilize its price so alternative forms of energy are not priced out of the market. Then when the price of oil starts back up, and if our economy is still on its way up to full employment, the Government can sell oil to force the price of oil down, or at the very least stabilize the price.

Oil and money are commodities, and if handled correctly can help bring back our economy to full employment. When the economy gets going again in a few years, it will take a smart central banker to realize that it is time to raise interest rates to slow down the expansion of the money supply. Monetary policy can work, we just need people smart enough and courageous enough to do the job.

Stay tuned.

1 comment:

LceeL said...

Hah!! You just said an oxymoron - you said "smart" and "courageous" in the same sentence referring to government policymakers.