Fifty-Dollar-Plus Oil And What It Means
Thomas Dawson
September 22, 2005
A funny thing happened on the way to fifty-dollar-plus crude oil. The oil producing countries have been claiming that they are producing more oil than the world can refine. This week, they said they would produce even more, by a couple of million barrels per day. As it turns out, the problem is not the supply of crude oil at all. It’s just as the Saudi’s have been saying, Peak Oil has not yet arrived; it’s the refining capacity that created the shortfall.
If this is true, then the laws of supply and demand may justify the increase of oil products at the refinery level. Curiously though, if the world is sloshing around in crude oil, the prices for crude should still be quite moderate. Hmmm. Perhaps the fact that the same people that own the refineries also own many of the wells has something to do with it.
If the profits can be forced down to the crude oil level, the refineries become less profitable. By restricting the profit margin at the refinery level, a high capital investment in new refineries by anyone outside the industry would probably be discouraged. Manipulating a vertically integrated business has often been used in the past to keep the competition at bay and thereby acquire really great profit margins. Some very well connected and profitable domestic oil companies come to mind.
If this is not the case, perhaps these oil companies are just trying to help the government maintain the current asset bubble and avoid recession for a while longer. Ha. Don’t laugh. The people running our government and the oil people_ well… they are the same people.
Leaving other probabilities to imagination, someone will surely offer a better explanation.
Is fifty-dollar-plus oil here to stay? It would appear that it is. There may be some questions about how it got to this point, but our government is in no position to allow very much erosion below the fifty-dollar level for any extended period of time.
The domestic economy is extremely fragile. It’s not only caused by the ever-rising National Debt, but corporate and private debts are rising faster than their assets can grow, and have been doing so for a very long time. This bumped-up corporate offer of fifty-dollar-plus oil may be the last bailout our government will get.
In any case, the rise in oil and gas prices does not make the nation as a whole any poorer. It does make many people poorer, but at the same time it makes some others richer. In the long run, this middle and lower class money accumulates toward the investing class who are not in need of money for the maintenance of their lifestyle. Therefore the money will be invested somewhere and will create more jobs somewhere and more profits.
When the cycle is completed, it puts more people to work somewhere and the whole country is better off as can be seen by the rise in Gross Domestic Product (GDP). An ever-rising GDP rate is the current measure by which national economic success is gauged. Without yearly growth in the GDP, our government would have failed the corporate community. Average personal income will never catch up, but that doesn’t have much to do with anything measurably important to the economy.
Of course a large chunk of money goes to foreign countries because we purchase most of our oil from outside our borders. Fortunately, this is to our advantage as well. Most of the developed nations and the oil-rich nations are already awash in American dollars and cannot use them domestically. The money must eventually be used to either purchase American assets or American treasury bonds.
If the money is used to purchase American assets, it increases the value of those assets. By a wonderful coincidence, an increase in asset value is not considered to be inflation, rather is generally viewed by our economists as an increase in the national wealth. When the money is used to buy US Treasury bonds, it allows us to continue deficit spending and allow for decreased taxation for those in the upper brackets. This is obviously worthwhile because these are the people who invest somewhere and put people to work somewhere in the first place.
There will be some inflation of a particular sort. The increase in energy costs will be reflected in the cost of transportation, home heating, and electricity. It will also increase the price of pesticides and fertilizers for farm products and therefore food. A myriad of other products from cosmetics and household cleaners to plastics and rubber will be affected. On a global basis, and on a household basis, we can all recognize this as the pain of inflation. We can thank our lucky stars that it does not affect our economy this way.
Using the government’s accounting system, the higher commodity prices will actually increase the overall GDP, which mirrors the economic health of our economy. The increasing value of commodities will be reflected in still higher asset values and allow for the refinancing of these assets. This will afford the financial community and the government some short-term breathing space against a bursting of the current asset bubble.
Of course, both the government and the corporate world are concerned about the immediate effects on individual households because it may spoil consumer spending during the important Christmas shopping season.
As I write this, hurricane Rita has entered the gulf. Let’s hope that damage is minimal.
If this is true, then the laws of supply and demand may justify the increase of oil products at the refinery level. Curiously though, if the world is sloshing around in crude oil, the prices for crude should still be quite moderate. Hmmm. Perhaps the fact that the same people that own the refineries also own many of the wells has something to do with it.
If the profits can be forced down to the crude oil level, the refineries become less profitable. By restricting the profit margin at the refinery level, a high capital investment in new refineries by anyone outside the industry would probably be discouraged. Manipulating a vertically integrated business has often been used in the past to keep the competition at bay and thereby acquire really great profit margins. Some very well connected and profitable domestic oil companies come to mind.
If this is not the case, perhaps these oil companies are just trying to help the government maintain the current asset bubble and avoid recession for a while longer. Ha. Don’t laugh. The people running our government and the oil people_ well… they are the same people.
Leaving other probabilities to imagination, someone will surely offer a better explanation.
Is fifty-dollar-plus oil here to stay? It would appear that it is. There may be some questions about how it got to this point, but our government is in no position to allow very much erosion below the fifty-dollar level for any extended period of time.
The domestic economy is extremely fragile. It’s not only caused by the ever-rising National Debt, but corporate and private debts are rising faster than their assets can grow, and have been doing so for a very long time. This bumped-up corporate offer of fifty-dollar-plus oil may be the last bailout our government will get.
In any case, the rise in oil and gas prices does not make the nation as a whole any poorer. It does make many people poorer, but at the same time it makes some others richer. In the long run, this middle and lower class money accumulates toward the investing class who are not in need of money for the maintenance of their lifestyle. Therefore the money will be invested somewhere and will create more jobs somewhere and more profits.
When the cycle is completed, it puts more people to work somewhere and the whole country is better off as can be seen by the rise in Gross Domestic Product (GDP). An ever-rising GDP rate is the current measure by which national economic success is gauged. Without yearly growth in the GDP, our government would have failed the corporate community. Average personal income will never catch up, but that doesn’t have much to do with anything measurably important to the economy.
Of course a large chunk of money goes to foreign countries because we purchase most of our oil from outside our borders. Fortunately, this is to our advantage as well. Most of the developed nations and the oil-rich nations are already awash in American dollars and cannot use them domestically. The money must eventually be used to either purchase American assets or American treasury bonds.
If the money is used to purchase American assets, it increases the value of those assets. By a wonderful coincidence, an increase in asset value is not considered to be inflation, rather is generally viewed by our economists as an increase in the national wealth. When the money is used to buy US Treasury bonds, it allows us to continue deficit spending and allow for decreased taxation for those in the upper brackets. This is obviously worthwhile because these are the people who invest somewhere and put people to work somewhere in the first place.
There will be some inflation of a particular sort. The increase in energy costs will be reflected in the cost of transportation, home heating, and electricity. It will also increase the price of pesticides and fertilizers for farm products and therefore food. A myriad of other products from cosmetics and household cleaners to plastics and rubber will be affected. On a global basis, and on a household basis, we can all recognize this as the pain of inflation. We can thank our lucky stars that it does not affect our economy this way.
Using the government’s accounting system, the higher commodity prices will actually increase the overall GDP, which mirrors the economic health of our economy. The increasing value of commodities will be reflected in still higher asset values and allow for the refinancing of these assets. This will afford the financial community and the government some short-term breathing space against a bursting of the current asset bubble.
Of course, both the government and the corporate world are concerned about the immediate effects on individual households because it may spoil consumer spending during the important Christmas shopping season.
As I write this, hurricane Rita has entered the gulf. Let’s hope that damage is minimal.
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