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Oil: Painful for some, but hardly a crisis

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Because we can expect future generations to be richer than we are, no matter what we do about resources, asking us to refrain from using resources now so that future generations can have them later is like asking the poor to make gifts to the rich.
Julian Simon

Oil: Painful for some, but hardly a crisis

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So says a lead report in the Economist. “Americans might whine about it, but they aren’t in pain because the oil price is $35,” argues Roger Diwan of PFC Energy, a consultancy. As evidence, he points to the robust growth in demand for oil in America in recent months—one of the main reasons why prices are now so high.

WOW, tell that to the soccer mom filling up her SUV! The Miami Herald reports: “The national average of $1.729 a gallon reflected data from two separate surveys with all grades averaging $1.779. That represents a 26-cent increase since Jan. 1, according to the Lundberg Survey, (Lundberg Letter of January 21, 2004, analysis of crude oil and wholesale gasoline price, reformulation costs, margins, demand trends and other factors in play is provided along with seven illuminating graphs), which tracks prices at 8,000 stations. Two weeks ago, the Energy Information Administration (EFI) had warned that escalating oil prices could result in refiners cutting back on crude purchases, thus reducing gasoline production.” With the supply of gasoline declining by 800,000 barrels, the drop sent the supply total to nearly 10 million barrels below the five-year average.

The short-term energy outlook, as analyzed by the Energy Information Administration, offers this forecast: “Even if unexpected significant refinery or pipeline disruptions are avoided, national monthly average regular  are projected to reach a peak of about $1.83 per gallon this spring. Summer (April to September) gasoline prices are now expected to average about $1.74 per gallon this year. This would be a record in nominal dollar terms and the highest inflation-adjusted summer average since 1985. For 2004 as a whole, national regular gasoline pump prices are now expected to average $1.67 per gallon, 10 cents higher than our previous projection.

So why would the venerable Brits not feel our pain with the huge rise in retail costs to the American consumer? The U.S. Dollar has tanked and since OPEC has an oil settlement in dollars, the price soars. The reason that OPEC is considering a move to euro for pricing crude oil, should be obvious. Their profits are tied to a falling currency.  The Globe and Mail warned that OPEC is considering a move away from using the U.S. dollar — and to the euro — to set its price targets for crude oil, the highest-profile manifestation of the debilitating effect of depreciation on the greenback's standing as the currency of international commerce.

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Now review the OPEC revenues fact sheet and focus on the next chart - OPEC Basket Prices 1/1/2002 - 3/8/2004. The tell of the tape, since 911, has a chart that makes speculators drool. Add the current spike to $38.18 a barrel and it is hard to dispute the latest comments from the current OPEC President, Purnomo Yusgiantoro: “The current oil price will not be a benefit to the world”. However, he goes on to suggest that OPEC would not back track on its February decision to cut official production to 23.5 million barrels per day from 24.5 million bpd from April 1.

Is this just a short term problem that Americans are feeling or is this a trend that won’t reverse? The Economist cites the assessment in a book “Oil Factor”, “FOR the last 30 years, the price of oil has been the single most important determinant of the economy and the stockmarket.” The oil price will soar above $100 a barrel “by the end of the decade, and possibly sooner”. Compound these costs with any other country that has their currency pegged to the dollar, and ask how long they would be willing to absorb the impact of diminished purchasing value?

Finally, Daniel Jack Chasan in an essay - Americans have yet to learn the hard political lessons of the Arab oil embargo - offers a sober reminder: “One can argue that our efforts to cut petroleum use were doomed to fail. Or one can argue that once the memory of gas lines receded, the nation took its eye off the ball. Either way, we import a larger percentage of our oil today than we did in 1973”. To that must be added, at a much higher price in dollars, cost of military intervention and permanent nation building expense. The crisis may not be felt by the Brits, since they are resigned to pay enormous taxes on their fuel and enjoy a North Sea production and a stronger currency. However, the adverse impact upon foreign oil dependency, is self evident. Any reasonable American needs to rethink their support for policies that are ruining our economy.

Since 911, the price of oil has risen, our dollar has fallen, our jobs exported and our safety less secure. Left to be endured, is an upsurge in interest rates and a genuine reporting of the true inflation that we all are paying. America’s oil policy has failed. The facts prove that foreign oil wars don’t produce a reliable and inexpensive petroleum supply.

SARTRE - March 21, 2004

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.
Henry Hazlitt

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