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Gold/Mining/Energy : Oil & Gas Price Economics -- Ignore unavailable to you. Want to Upgrade?

To: kingfisher who wrote (211)	6/19/2000 4:06:00 PM
From: kingfisher	Read Replies (1) \| Respond to of 350

19 15:26 Let's Slam the Evil Oil Price Gougers!: David DeRosa (Correct) By David DeRosa New Canaan, Connecticut, June 19 (Bloomberg) -- Saddle up your horses, folks. The president needs every able-bodied man, woman, and child to ride with his posse. We have to hunt down those low-down varmints, the oil price gougers. Yes it's back. That old ugly word, gouging. If oil prices go up, then an oil company must be gouging some hapless consumer. Just the weekend we were treated to shocking scenes of Chicago- area motorists paying $2.30 a gallon for a fill up. Who would have thought that a sports-utility vehicle would need so much gas? Come to think about it, maybe Detroit is in on this. President Bill Clinton, with his decades in political life, didn't miss a beat. The man in search of his legacy may be headed toward the legacy of former president and oil scrooge Jimmy Carter. What's next, a speech from Clinton wearing a cardigan sweater extolling the virtue of energy conservation? Here is what Clinton said this morning on the Today show: ``What we don't know is whether there was any price-gouging. So we've got the Federal Trade Commission looking into that, and we've also had the Department of Energy and the Environmental Protection Agency looking into it.'' That's good news for the gougers because after watching the Los Alamos security fiasco, we know that the Department of Energy couldn't find its own derriere with two hands. The sad thing is that there used to be a reasonable chance that the Department of Energy would be abolished. But now that oil is over $30 a barrel, kiss that goodbye. For all its Los Alamos tribulations, DOE is, well, re-energized. Supply Obstructions Note that if oil prices fall, nobody talks about consumers gouging oil companies. Gouging is a one-way street. But let's talk sense. If you want a greater supply of gasoline, then you better stop talking about gouging. Ever since the days of the oil shocks, 1973 and 1980, the U.S. government has been engaged in efforts to restrict the supply response. What is next, another windfall profits tax? Normally, when the price of a commodity rises, especially if it rises by a lot, more supply comes to market. And this effect is amplified over time. Over time, the supply effect is more elastic, to use the case of oil, because economic decisions to invest in more wells, pipelines, and refineries, begin to kick in. That's why the process has to be left to work because there is no other way to get the price of oil down other than by rationing consumption. The oil market is starting to be topical in other places. There used to be only two top-drawer questions in the market buzz. Are stock prices sustainable and how high will the Federal Reserve push up short-term interest rates? Now you can add a third. How high do oil prices have to go before they become a factor in the Federal Reserve's monetary policy? Fed In A Box? This is a fairly complex question with some distinctly unpleasant possibilities. In popular thinking, a rise in the price of oil should ripple through the entire economy, giving rise to pickup in the rate of increase in consumer prices. Higher oil prices imply inflation and that could lead the Federal Reserve to raise interest rates. Follow the dots and you get lower stock prices. So there it is, right out in the open. OPEC has the stock market in its hands. If the oil sheikhs don't increase production, your 401K and stock options will get trashed. That of course is balderdash. Ever since the 1973 OPEC oil boycott, any rise in the price of oil has been attributed to some international conspiracy and the role of energy in the U.S. economy has been greatly exaggerated. Oil Prices and Inflation There is also a basic misunderstanding in the supposed connection between oil prices and inflation. A rise in the price of oil is the rise in one price, not all prices. Inflation is the latter, a rise in the general price level. Now it is true that oil is a factor in the production of a great many other things so you do see ripple effects. Yet not all goods and services use the same amount of oil. But we are left with the following question for Mr. Greenspan and the rest of the Federal Open Market Committee. If oil goes to $40 a barrel and gasoline to $3.00 a gallon, what are you going to do? Choice number one is to raise interest rates to combat what is seen as inflation in the pipeline. Ouch! I have a better idea. Rather than chasing inflation phantoms, let's worry more about the fundamental state of the economy, income and jobs, and the effects on industrial production. How about lowering interest rates to cushion the blow of the higher fuel costs. -------------------------------------------------------------------------------- ¸ Copyright 2000, Bloomberg L.P. All Rights Reserved.