On the web since 1997
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On the web since 1997 |
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Drill America , Part ILuke Hodgens / Powerhouse Profits -- Worried about the performance of your 401K? Upset at the obscene prices of gasoline? Disappointed at the rate of jobs growth? You're not alone. Although the US economy has rebounded nicely from the tech crash in 2000 and subsequent recession, growth, especially this year, has not been as robust as hoped. While tax cuts have spurred consumer spending and new job hiring, one particular factor has applied brakes to the economy, Oil.As of August 10th, oil prices have climbed over 45% since the beginning of the year. We've all seen the effects at the gas pump, the stock market and in the jobs reports of late. Higher oil prices are, in effect, a tax on everything from transportation to manufacturing - no one is immune. According to economists, every $10 rise in the price per barrel of oil strips about 0.5% off GDP and ads 0.5% to inflation. The stellar rise in stocks in 2003 was accompanied by relatively smooth oil prices. Prices, with the exception of a pre-war spike, traded between $26 and $32 per barrel. In 2003, The Dow Jones Industrial Average rose 25%...the only bump in the road occurred early in the year when oil prices were rising. At this point, the economy was cranking. Stocks were headed to the moon and jobs were being created hand over fist. Then: 2004, The Year of Oil "Rising oil prices stifle growth", "oil eating away at the economy", "Gasoline, $2.15 per gallon". These are headlines we've all become used to. Unfortunately for us, there's little we can do about it - sit back and absorb the punishment. The 45% rise in oil prices this year has translated into a dampened stock market, a handcuffed jobs market and a slowed rate of growth. In July, as oil prices began a sharp rise, there were a mere 32,000 new non-farm jobs created - the lowest monthly creation this year. When business must pay 25% more in energy costs, there's less capital for new hires. Inflation has thus far been a product of energy prices alone. Energy prices are undermining consumer and business confidence and it can be seen in the equities market. Rising prices of oil have caused the NASDAQ to drop a whopping 11% so far this year. The Dow dropped about 5% during the same period. More importantly, Gross Domestic Product (GDP) has fallen from 7.4% in the third quarter of 2003 to just 2.8% in the second quarter of 2004. The reason for the stumble? Oil prices. Supply Snafu With the industrial emergence of China and India, world oil demand is growing at supersonic speeds. The world demands roughly 82.2 million barrels of oil per day. Demand growth is at its highest level in 24 years. World demand will rise by another 1.8 million barrels next year to 84 million barrels a day. Since 1996, world oil demand has risen roughly 15%. Aside from a rising global energy demand, the remarkable run in oil prices is due to multiple supply side factors including the unrest in Venezuela and Nigeria, the pipeline disruptions in Iraq and the Yukos fiasco. Venezuelan President, Hugo Chaves, has endured multi-year controversies over the legitimacy of his presidency. Throughout his reign, Chaves, a Castro confidant, has opposed rival political parties, business groups, trade unions and civil society causing widespread protests and growing hatred for his leadership. Chaves has survived a coup and a recall on his presidency - due to a tricky amendment in his tailor made constitution that calls for a larger number of votes for a recall than the office holder received in the initial election. Throughout this time, Chaves has fired thousands of striking employees of his state run oil monopoly. The results - a huge decrease in production followed by an increase in prices. Although Chaves has won the August recall election, confirmed by Jimmy Carter, the strife in Venezuela will not end. Nigeria is caught up in a political situation of her own. A seven year civil war has been raging on between the Itsekiri and Ijawa groups in the oil rich Niger delta region. Although Nigeria is an oil rich country, corruption in the government and ongoing violence has kept most of the citizens of Nigeria struggling to survive. Nigeria has survived coups of her own, but the continued uncertainty over oil flow is wreaking havoc on world oil prices. Even as the United States fights to bring freedom and democracy to the struggling nation of Iraq, terrorist insurgents continue to undermine the ability of the country to profit from her greatest resource. From pipeline breaches to sabotage of oil installations, these insurgents have caused a huge speculative rise in prices. Although most of the sabotaged installations return to normal output within days, the "terrorism premium" added to oil has not diminished. A single breached pipeline in Iraq can send oil futures up over $1 per barrel in a single day. The reoccurring theme here is politics and government destroying the free market. Russia, although considered a democracy, is no different. On October 25th, of last year, Yukos chief Mikhail Khodorkovsky, was arrested, thrown in jail and charged with fraud and tax evasion. Five days later, ex-KGB operative turned Russian president, Vladimir Putin, ordered the seizure of Yukos shares and documents. Why? Khodorkovsky was an open critic of Putin and had raised money to support Putin's political opponents. Khodorkovsky himself has indicated he might someday pursue a political career - a big no-no in Putin's Russia. The government has levied a multi-billion dollar tax bill on Yukos which will cause a bankruptcy sale by the government, possibly to a state run oil company at a deep discount. Before Khodorkovsky was thrown in jail, Yukos was the world’s fourth largest oil producer. Now, the uncertainty of supply has added fuel to already skyrocketing oil prices. All of these perceived threats to supply have caused speculators to bid the price per barrel to record levels. These supply threats all have one thing in common - they all occurred outside of the United States! Being a net importer of oil, if a tree falls on a pipeline in Kuwait - we pay! The more oil we import, the more the world's politics affect us. Our lives are now dictated by socialist, totalitarian governments who can ruin our economy by simply restricting flow. Part II, next week Luke Hodgens is the editor of |
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