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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Perspective who wrote (87640)	10/17/2007 11:08:39 PM
From: GraceZ	Read Replies (2) \| Respond to of 110194

The price of oil is rising in dollar terms; oil is effectively its own currency. Let's assume you are right, oil is the currency, or more to the fact, energy is the currency. Energy is input in the form of labor and other costs to produce energy (barrels of oil)you can use to buy other things. As oil rises in price nominally, less efficient production is brought on line everywhere. Which means that collectively more energy goes into producing each barrel of oil on average regardless of the number of dollars you receive in return, the barrel is the currency and it costs you more barrels to produce the same amount. The inevitable result, declining margins, more energy is expended to increase production at the margin. Same is true for gold or any extraction industry unless the rise in price spurs on more efficient production, but this is almost never true because increases in efficiency are squeezed out as less efficient production is shuttered on the way down. The decline in margins doesn't hurt them as long as demand continually rises or remains strong but it sure hurts if demand falls off because a change in the price of energy (or money if we're talking gold) feeds through to all other prices. The equipment costs, labor costs and development costs will not fall back to where they were before with a fall in price and demand. hysteresis: 1. The failure of an economic variable to return to its initial equilibrium after a temporary shock. For example, an industry or trade flow might disappear due to an exchange rate change, then not reappear after the change is reversed. Now what can happen and does happen with amazing regularity is that a rise in the dollar cost of energy spurs on developments in energy efficiency throughout the rest of the economy, you can do more with less oil (energy). This helps the economy on the whole tremendously but doesn't much help oil producers because the resulting slackening of the trend in the growth of demand pushes price right over the cliff that it wants to fall off.