Don't Blame OPEC

Okay, it’s my turn to vent and rant about what going on in our economy. Earlier this month, I posted a new download for everyone to take a read to titled “The Worldwide Effects of the United States Oil Crisis”. Now yes, this essay contained a strong opinionated view on the direction of the crude oil inflation and out government, and I wanted to touch on this topic a bit more.

This month, we’ve seen oil reach as high as $126 per barrel as of May 12, 2008 (and continuously rising).  And honestly, I don’t see it stopping. Why is it continuously rising? Is it the fault of OPEC? Nope, not at all. Let’s take a look at some facts.

• The demand for oil is steadily increasing.
• Oil is becoming harder to find – I work for Schlumberger and while I do not want to put out too much of the business that goes on around here, there are heavy talks for the constant search for new oil.
• U.S. Dollar is steadily deflating – If you think all of these interest cuts is helping us, in actuality it’s not.
• Inflation is rising – Speaking of inflation, when it occurs, the general level of prices increases, this includes oil & natural gas.

So who is at at fault? Mr. David Gross of Newsweek quoted OPEC president Chakib Khelil in his article “Mismanagement 101”:

“…the crude’s remarkable run had nothing to do with the reluctance of Persian Gulf nations to pump oil, and everything to do with the ‘mismanagement of the U.S. Economy’.”

Here’s the thing. When it comes to being an investor, I love when the Federal Reserve cut interest rates. Stocks go up, investors are happy and buy, loans go down, and a lot of people make money. I, too, have benefited from some pretty nice gains due to rates being consistently deducted. But there’s so much more to the lowering of interest rates rather than for some quick gains and cheaper loans. After all, where ever there’s a good, somewhere there’s a bad.

What are the consequences of lowered interest rates? That leads me to my economist side of thinking. Lowering of interest rates is like putting a BandAid on a gunshot wound. Sure investors get some quick gains. Yes, loans are cheaper. But all of this also means more money to the money supply. Sounds good? It’s not. Take a look at “Money As Debt”, this documentary goes deep into the process of how more money is created out of thin air every single time we take out a loan. As more money floods the market, USD is decreased and price level rises. In other words, a deflating dollar and continuous inflation. With such occurrences, what else do we expect to happen when we visit the gas station and see $4 per gallon?

Yes, demand plays a significant part in the price level of crude oil and natural gas, but inflation is the main front runner of the success of oil stocks lately. You can even consider as to why oil is rising, but gold is falling.

Here’s something else that I feel strongly about. While we are experiencing tough times, a bear market, and all of these other struggles due to inflation (and deflation in some matters), I feel that this is going to last even more long-term than some would like to think. Let’s hypothetically imagine everyone bowing on their knees and praising Ben Bernanke & George Bush for their remarkable efforts on rebuilding the economy thanks to seriously deflation of interest rates. Well, do you think those rates are going to stay that way forever? One day, I don’t know when but I will guess and say when everything looks to be subsiding, interest rates will rise again. It will not stay at 2% forever. And as the Feds begin to rise from 2% to 2.25% to 2.5% and on and on, investors will not be happy. Businesses will not be happy. Banks will not be happy. And in turn, the people will not be happy. Investors will take out money from the market causing stocks and businesses will suffer from this withdrawal. Banks will not be able to profit as much causing higher loans which will affect the people looking to purchase homes, cars, and other investments. I feel once this bear market is over, we’ll have a nice short bull market, and then another bear market will follow. And I feel it may happen once Bernanke’s term ends and another unfortunate soul has to take his place and attempts to correct the wrong that is being done.

Back in the 1930’s, Theodore Roosevelt felt it was best to involve the government in the management of our economy and with a series of programs he successfully brought the American people out of the Great Depression.

Lately, it seems as if the government is slowly edging us back to the same position we were in back in the 1930s. Now I’m not a conspiracy theorist and saying the world is coming to an end, but here is one fact that I do know and everyone can relate to. Before the stimulus package was proposed and when the Federal Reserve was lowering interest rates in an attempt to help the American people and businesses. President Bush, in a press conference, apparently had absolutely no idea on the state of our economy in relation to the oil commodity. I don’t know about you, but I’m glad his term is about to end, because I do not want a President running a country who is completely clueless on the state of an economy he is supposedly involved in.

So that begs the question. Should the government limit its involvement in the management of our economy? Or should it expand their involvement? Honestly, I’m tied between the two. I feel they should expand and gain more control of the Federal Reserve. As I’ve said as an investor, I like the cutting of interest rates because of the gains, but as an economist I despise it because of the consequences that come with it. And I would rather deter the consequences over gaining an extra few bucks. I know the government can’t interfere with the business of the Federal Reserve, but something needs to be done because it is the American people that are suffering such affects. At the same time, I feel that the government should limit its involvement, because honestly, I don’t know what more can be done. When the government first got involved back in the 1930s, they opened up more governmental jobs, created welfare, and did all they could to help the people and in turn help the economy. That is what this stimulus package is supposed to do. What new programs can be made? What new routes can be taken?

Okay, I had a lot to get off of my chest on that. I re-read my essay, then I read David Gross’s article and it just brought up a LOT of questions and opinions in my head. Now please remember, these are my own opinions and insights. If it happens, then I want for everyone to treat me as every other economist out there that make obvious predications but are still somehow praised by the media. If it doesn’t happen, then the best I can say is at least I provided some facts to support my opinion. That’s more than I can say for some of these people making their assumptions.