Prior to this summer I spent three years warning my clients as to the danger that rising oil prices presented to our economy. This warning was based primarily upon the reality that our economy was not equipped to handle oil prices above $100 per barrel. Now three months after oil prices topped $140 per barrel and gasoline prices topped $4.00 per gallon, our congress should act now to counteract future volatility in oil markets.
Contributing to the recessionary pressures our economy is facing today was the high energy prices experienced over the summer. High oil prices affect every aspect of our economy including the nearly 40% of our consumption that is not transportation related. High oil prices not only affect the direct prices at the pump, but also lead to a rise in consumer prices for every item from food to the plastic toys you will purchase for your children this Christmas. As the global economy has contracted so have oil prices based upon an expectation that global demand will fall. The result of this expectation in falling demand has pushed non-reliant speculators out of the market place and pushed down prices.
Although we see the net result of these price drops at the gas pump, most manufacturers will not pass on their current savings in the price of consumer goods and food. The reality is that prices pushed up by high energy prices will not fall because these producers understand that their energy prices are likely to re-rise as economies improve worldwide. As a result of a need in stability and the reality that many speculators have abandoned the oil markets, our congress has a golden opportunity to address our oil-related energy needs.
As oil prices approached $150 per barrel, energy jumped to the forefront of national campaigns; unfortunately, as oil prices have collapsed by 60%, congress now seems poised to push their party line social agendas rather than enact legislation that is necessary to a healthy economy.
The current Congress has enjoyed the lowest approval ratings of any congressional body in US history, yet the American people blindly chose to elect more of ruling party in some distorted belief that positioning more of these buffoons in congress will somehow lead to an improvement. As a result, this current congress will most likely continue to enjoy record-low approval ratings and I am betting will fail to address our energy needs in a common sense, non-special interest manner.
Over the next two days, I will address several common sense policies that we should demand our congressional leadership address.
First, it is time that the American people demand leadership congressional leadership that acknowledges the realities of our economy and understands that leadership is the ability to position our nation's interests first, rather than the platform of their particular party.
Everyone must admit that our economy is based 100% on oil and even if we were to develop sustainable transportation fuel alternatives, our oil consumption would only drop by 60%. Secondly, we must demand that our leadership recognizes the reality that today there is no viable alternative to oil and that even if an alternative were produced today, our economy would easily need 50 years or longer to retrofit our manufacturing, transportation and energy infrastructure. The reality is that our nation has spent trillions of dollars over the past 100 years building an infrastructure uniquely designed for oil. The idea that a viable alternative could end our dependence on oil within a decade, or two, or three is naive and fiscally impossible. The sooner that we begin to support congressional leadership that understands the need to balance both today and tomorrow's energy needs and realities, the sooner we can make progress.
What we need is a comprehensive energy plan that understands the realities of our economy, addresses speculatory influences in the oil markets, addresses the need for expanded domestic oil production for both economic and national security reasons, and addresses the non-competitive government-sponsored oil monster that politicians have created and exploited.
Speculation In Oil Markets
As I previously mentioned, the only benefit of a collapsing global economy is the resulting 60% reduction in oil prices that we have experienced. The resulting collapse of the "oil bubble" has driven non-reliant speculators out of the oil markets. As a result, congress now has the opportunity to enact legislation that will help stabilize prices by limiting the influx of non-reliant speculation back into the oil markets. If congress does not act to limit speculatory forces in the markets, then we will once again see oil prices exponentially rise as the economy improves. Any such rise will only hinder consumer spending and slow the economic recovery process.
Prior to the so-called "Enron Loophole" trading in oil markets was limited to investors and industries that were reliant upon the commodity. For instance, the airline industry was a chief player in the oil markets because of their direct reliance and vested interest in the commodity. As a result of this reliance based trading activity, prices, although rising, were much more stable and less susceptible to massive volatility. The "Enron Loophole" essentially opened up the oil commodities market to non-vested or non-reliant investors. The resulting influx of billions of dollars in institutional assets such as pension funds has caused an exponential increase in oil market volatility. Re-establishing market rules that limit oil market trading will help provide stability to the markets as our economy attempts to pull out of the current recession. Without such limits, institutional investors will flock back to the oil markets as the economy improves. The resulting non-supply and demand driven price run-up will artificially inflate prices, slow any increase consumer spending and limit the pull-out from our current recession.
I believe in free markets, but oil is not a free market commodity. true free markets are based upon supply and demand based production and pricing. Oil production is not based on supply and demand, the production is arbitrarily set by the OPEC nations. The resulting profits based production easily manipulates a 'free market' trading of this commodity; limiting the speculative forces in the oil markets, will help bring stability to prices and limit market driven reactionary production cuts by OPEC.
Our economy is 100% oil based and clearly the "Enron loophole" has created a level of volatility in the oil markets that has never before been seen. It is time, especially considering the temporary exodus of non-reliant speculators to re-establish speculatory rules for the oil markets.
Addressing the influx of non-vested speculatory forces into the markets is an important step, but alone will only help with short term stability in the oil markets and consumer prices. In addition to a re-examination of market rules, we must take action to re-capture domestic energy wealth and production through expanding our domestic energy capabilities. That means the institution of multiple energy initiatives including expanded oil and natural gas production. As we outsource our energy needs, we are turning over trillions of dollars of our wealth to foreign nations, most of which have lax and unenforced environmental regulation, are investing billions in developing new energy generation technologies to assure they retain their energy monopolies, and for the most part want to counteract western influence.
To be continued...
November 13th, 2008
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