Oil prices: a conspiracy in our favor?

First off, if you haven’t already, I suggest you read this, with which I am in absolute agreement.  All kinds of emerging technology is becoming competitive due to oil’s continuing rise on the market in dollars, and the unremarked story is that the U.S. really is adjusting to increased oil costs much better than previously anticipated.  I remember absolute horror predictions made (by static analysis, of course) for what would happen when oil was a consistent 60-70/barrel.

Oil’s pushing towards $100/barrel, with no end in sight.  Yes, some of that increase, in fact, a lot of it, is driven by “sort things out with gunfire” politics in the middle east, and both major political parties are tied at the hilt to it.  But not all of it is so transient.  U.S. stocks are low, too, and likely to stay that way for a while.  Remember that a little further down…

But the other side of this… while this fuels our move away from automotive gasoline, what’s driving it?  Well, at least partially, that’d have to be the incredibly weak dollar.  That was against the Euro, and by the time folks are reading this, it may be over the 1.5/dollar mark.  That’s bad news for me personally (it means that visiting my in-laws is completely off the table financially), but as a whole, this is a global good thing.  Greenspan’s monetary inflation is destroying the petrodollar, at precisely the same time that the U.S. needs to:

  1. manufacture more at home
  2. get away from the “petro” anyway (or at least the incredibly wasteful gasoline part)

Huzzah!

What this means is that not only is oil greatly increasing in value, but the petro producers aren’t currently getting much additional value for it.  Does that simply mean they’ll swap out into trading oil on the euro internationally?  They could… but that wouldn’t affect U.S. prices much at all (they’d still go up), and, more importantly, it wouldn’t pay back the costs of doing so, since currently they can buy up huge stocks of oil on the cheap.

Eventually that’ll mean a glut, and oil prices will drop… relative to an increasingly weak dollar.  Meaning producing countries will get:

  1. Not much profit now:  prices are jumping, but to less real profit per dollar earned (since the dollar is worth less and less anywhere else in the world).
  2. The U.S. Congress having all the “air cover” in the world to back any other pony due to domestic oil-price headlines.
  3. An eventual oil glut’
  4. Right before the U.S. goes hybrid/supercapacitor/bio-diesel, etcetera… while cooperating closely with India on perfectly clean thorium reactors.
  5. And then sits more-or-less energy-independent with a currency encouraging domestic manufacturing.

If you wanted a single recipe to completely screw over the PetroTyrants (the House of Saud, Putin, Chavez, Iran, etc.), you couldn’t come up with a more effective recipe.  Not to mention that the next possible up-and-comer, China, has a little Straits of Malacca problem we won’t be suffering from.  (Sorry guys, but securing the Panama Canal didn’t do it: we have airplanes now.)

Makes you wonder: are there some adults in D.C. actually thinking this long-term?  Or is this “happy accident” territory, and we really are better off being lucky than good?

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9 Comments

  1. Alex

     /  November 1, 2007

    Definitely happy accident. There is no way at all that those in power could ever be competent enough to put something this elaborate together.
    That being said, a weakening US dollar is a good thing for manufacturing, assuming we can build back what we have lost. A lot of it is gone for good and the capital to rebuild it or even refurbish brownfield sites is not readily available. But – as long as much of the energy for shipping and manufacturing comes from oil which it does right now, the gain in manufacturing will be shortlived as the dollar plummets and the cost of oil continues to increase. It is good to see that the economy is absorbing this for now, but it is just a matter of time before it runs out of capacity to handle that cost and buckles under the weight.

    Reply
  2. “Those in power” are plenty competent — we’re simply blessed by the fact that each of them has rivals in power.

    And this’s only halfway good for us — monetary inflation is already through the roof. If we can inflate our way out of our debt while leaving other countries holding the bag, that’ll be good for our manufacturing sector, but importers are only going to absorb currency losses (trading profit for market-share) for so much longer before they have to raise prices; when that tipping-point gets reached, we could find prices suddenly keeping up with the money supply, which could get ugly given the average household indebtedness (12% interest rates are no good when you have no savings).

    Reply
  3. Alex

     /  November 1, 2007

    I guess we have different definitions of competence – as 90% of those in legislative and about 100% of those in executive branch leadership positions only seem competent enough to play “fsck you” politics against their rivals. They’re certainly not competent enough to do what is right even when it’s dropped in their lap.

    As for the monetary policy, I think you’re very right that the world will only absorb so much more of our debt before they decide that its not worth it anymore, and then they’ll dump it at a loss and invest in other currencies. I think though, and I could be wrong, that interest rates would go lower rather than higher to contain the drop in currency. I’m afraid that Wall Street and the Financial sector have gotten addicted to cheap money, and instead of belt-tightening of credit, they’ll clamor for more and more to keep up with inflationary costs rather than insisting on higher interest to bring inflation in check. Of course I’m not an economist but I swear the only time that the financial sector seems happy these days is when the Fed lowers rates, not when they raise them.

    Reply
  4. Happycrow

     /  November 1, 2007

    12% interest rates hitting folks with a debt-to-asset ratio in the ugly ain’t a good thing, indeed…

    Reply
  5. Quite the contrary, if they want to defend the currency, they have to raise rates — that’s why we’re on the edge of the razor: low rates cause inflation but high rates increase the risk of recession.

    Reply
  6. Alex

     /  November 2, 2007

    My concern is though that the conventional and correct financial wisdom you talk about is likely to be ignored by those who set policy. Originally it looked like the fed was going to keep interest rates high during the credit crunch so that those who speculated and lost in the real estate sector would suffer what they should in a capitalist free market. Instead they caved in. I’m afraid that those who set policy will instead listen to the clamoring financial minority who are asking for the wrong thing rather than doing the right thing, which may be hard in the short term but wise in the long term.
    Or – we are about to witness some major changes to economic reality where the old rules of macro and micro economics get thrown out the window.
    So yes, if they REALLY wanted to defend the currency they should raise interest rates – but I don’t think they will until it is too late, or, we’re in a very new and undefined economy with all new rules.

    Reply
  7. JimDesu: I’m afraid you’ve misunderstood me. I meant to say that it’s a bad thing for the individuals with the bad d/a ratio when the rates do increase…

    Reply
  8. No, I was referring to Alex — one would have to be a moron to disagree with your statement.

    Reply
  9. Alex — wisdom has nothing to do with those in office: it’s all about constituency, perks and power.

    Reply

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