What’s In Store For The Economy?

May 17, 2011

In July of 2008, I wrote an article explaining why I thought gas prices would come down while all the experts were predicting that gas prices would soon reach $5.00 a gallon. You can read part 1 and part 2. While social engineers, like Obama’s appointment Stephen Chu, makes the American economy his guinea pig, natural laws will super cede their influence. Just as in 2008, our economy can not sustain $4.00 per gallon of gas.

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So who are the social engineers and why are they doing this? Could it be the speculators? Possibly, and considering that a speculator is working on behalf of companies like Exxon, it stands to reason that a speculator is trying to max out the profit for big oil. Theory good so far. Speculators purchase oil from the world market on behalf of the mislabeled oil companies. Speculators purchase barrels of oil and try to predict the future price of the commodity and attempt to purchase the oil at the lowest possible price. The lower the price they can get it for, the more oil available to the company to refine, and thus a much bigger profit. So it stands to reason that speculators do not affect the outcome of the price, and if they did, they would lower the price, not increase the price.

So what would drive the price of oil up? The same thing that decides the price of every single product you ever bought — Supply and Demand. The more the demand for a product, the more expensive the price is, the more the supply, the lower the cost. If more people wanted milk than cows could produce, what do you think would happen to the price? Obviously it would go up. If cows were producing too much milk and people weren’t buying, the price of milk would go down.

Oil, being a world wide commodity, is bought and sold all over the world. Like farmer co-ops, oil goes to a central market where it is bought and sold on the world stage. European countries pay the same price for oil that China, India, Costa Rica, Venezuela, and yes, the United States. Unfortunately we do not have an “addiction to foreign oil” or a “dependency on foreign oil”, because even if we drill for oil, we don’t get to “keep it”.

Recently, Donald Trump made the suggestion that as President, he’d only be interested in Libya if we get to keep their oil. Unfortunately this is not how it works. We do not get to go to other countries like Iraq, Libya, Afghanistan and keep their oil. If we did, we’d be affecting the supply to the world markets and denying the rest of the world equal right to purchase oil. Do you really think the rest of the world, every single country, would sit back and let us take oil to lower our own prices and artificially keep their prices high? All oil must go to the world market and allow all countries equal access to purchase those products.

So drilling for our own oil would not cure our “dependence on foreign oil”, but what we would be doing is contributing to the world’s supply. We could actually give something back to the rest of the world by drilling and increasing the supply of oil, thus driving down the price and making oil more affordable. Or we can do something other than contribute, feel good about our selves, be self – righteous, or whatever else makes us feel good by not contributing to the world supply. When we choose the prior, prices will go down. When we choose the latter, price of oil is beyond our control.

Before President Obama attempts to take credit for gas prices decreasing, we’re going to explain why gas prices are about to come down below three dollars a gallon, (a prediction not nearly as bold as when I made it in 2008). We have not contributed to the world’s supply of gas, and if anything, have pushed drilling out of this country. The drilling moratorium put in place in the Gulf by Obama appointee Ken Salazar has negatively affected our production, but has only temporarily affected the world supply. When the rigs could not drill of the Gulf Coast, these rigs merely floated to other parts of the world, took the jobs with them, and began drilling again. It did drive up the price of gas, obviously.

Oil prices have been coming down, although there’s really no reflection in at the gas stations yet. At the end of Aprile, RBOB gasoline was at $3.40 a gallon, which would translate into $4.00 per gallon at the pump, but since that time has fell below $3.00 and continues to drop. This is despite the rising Mississippi River which could affect production of gasoline by oil refinery companies along the Mississippi. Once this threat has passed, and/or refinery companies get back to production, the supply of gas would increase, and the price of gas will come down to even lower prices.

The reason prices are coming down isn’t because supplies are up (they are), but because demand is down. In 2008, I stated that we will see a contraction in the economy, but I did not foresee the collapse in the economy. As in 2008, we are going to see a contraction in the economy for the same reasons. People are putting too much money into their gas tanks. People have to adjust their lifestyles to purchase the gas necessary to go to work. They’ll adjust their extra spending habits away from certain entertainment, and move it to less expensive entertainment. Vacations will be canceled before they are purchased, eating out may take a back seat to a backyard bar-b-q, and a night at the movies will be swapped out for a dollar movie from RedBox. People will still drive to work, but eateries will suffer, entertainment industry will suffer, and hotels and travel agencies will suffer. Those industries will lay people off.

Unlike 2008, the economy will not sustain $4.00 a gallon of gas nearly as long. In 2008, people had a savings account to dip into to pay for and to allow for the adjustment in their lifestyles. They did not necessarily give up many things, and they didn’t give it up over night. And though many 401k’s might have recovered from their 2008 levels, savings or accessible funds are not up.

Also, 2008 is still fresh in people’s minds and they are better prepared to handle $4.00 a gallon of gas without it having the same dramatic impact on their lives that it did in 2008. Companies are better prepared to lay people off if necessary and many companies still have not brought their employment expenses back to 2008 levels. Likewise, the average Joe still hasn’t returned to the style of living that he had become accustomed to in 2008 and his spending has adjusted. The economy will not sustain $4.00 a gallon of gas nearly as long as it did in 2008 since people are better prepared. The real question is, how prepared are they to pull back?

I don’t believe we’ll see a panic in the stock market like we did in 2008, and hopefully our Federal government won’t panic either. What I believe we’ll see is as unemployment numbers reaching double digit levels, possibly 15-18%, but at the same time we will see gas prices continue to drop.

We need to allow unemployment numbers to peak, causing gas prices to come down. Had we did that back in 2008, just left the economy alone, we would have already seen the peak, gas prices would be lower today, and our economy would have roared back.

Instead, we artificially held up the economy, kept gas prices artificially high, and the average Joe did not get to enjoy the lower gas prices very long and was not allowed to recover from his financial predicament. If we allow the economy to recover on it’s own, the lower gas prices would be a great relief to the average Joe, allow him to catch up some debts, and soon enough he’ll be spending and enjoying life once again. This would lead to companies hiring again, and unemployment numbers would be on a steady decline.


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