|Oil Tanks the Economy
Copyright March 1, 2008
hooting over $103 a barrel Feb. 29, the price of oil hit the U.S. economy like a sledgehammer, sending the Dow Jones Industrial Average skidding 315 points. Federal Reserve Chairman Ben S. Bernanke is running out of room slashing short-term interest rates. Already taking the Federal Funds Rate down to 3%, Bernanke hinted at further rate cuts when the Fed's Open Market Committee meets again March 18. Bernanke is caught between a rock and a hard place trying to avoid recession. Every rate cut weakens the U.S. dollar, fueling more inflation, and driving the spectacular run-up in crude oil prices. Oil companies have shown no mercy, gouging consumers and driving pump prices through the roof. Announcing record quarterly and yearly profits Feb. 1, Exxon-Mobil continues the shameless exploitation of current market conditions damaging the U.S. economy.
No U.S. corporation should profit at the expense of virtually every other business. Inflated energy prices rob businesses of healthy profit margins or force them to raise prices, fueling inflation. With traders at the New York Mercantile Exchange bidding oil contracts into the stratosphere, Exxon-Mobil has the perfect excuse to gouge consumers. There's no restraints placed on oil companies to stop shameful price-gouging, causing the current stagflation harming the economy. Oil companies have a green light at the White House to continue exploiting businesses and consumers. It's not acceptable for oil companies to justify price-gouging based on “cyclical” trends or supply the feeble excuse of helping conservation. With the White House defaulting and showing no leadership with the oil industry, it's up to Fed Chairman Bernanke and members of congress to enlighten the public about price-gouging.
When an air traffic controller strike Aug. 5, 1981 threatened to wreck the economy, President Ronald Reagan fired 11,345 striking air traffic controllers, enforcing the 1947 Taft-Hartley, permitting the president under “peril to national safety” to take draconic action. No such act currently exists to stop oil companies from damaging the U.S. economy. Exxon-Mobil's fourth-quarter profits rose 14% to $11.6 billion, for an annual profit of $40.61 billion, eclipsing the 2006 record of $39.5 billion. No one wants to begrudge any company for breaking new records but not at the direct expense of the U.S. economy. “Exxon can put out some amazing numbers and this is one of those cases,” said Jason Bammel, senior analyst at Macquarie Securities in New York, reacting as if they won the Power Ball lottery or Las Vegas jackpot. Cheering one industry at the doom of all other makes no sense.
Unlike soybeans or pork bellies, runaway oil prices affect all businesses consuming energy. When the Organization of Petroleum Exporting Countriesspecifically Arab countriesimposed an oil embargo Oct. 16, 1973, prompting a 400% increase in the price per barrel, Nixon ordered price controls. Price controls were designed to prevent oil companies from gouging on “old” oil, purchased before OPEC's embargo and encourage new production, where companies could share current market rates. After Nixon resigned Aug. 9, 1994, his self-appointed successor President Gerald R. Ford eliminated most, but not all, controls when he left office Jan. 20, 1977. Carter eventually eliminated price controls, hoping to encourage more domestic production and synthetic fuels. By the time, Carter handed President Ronald Reagan the baton, crude oil prices jumped another 400% to $40 per barrel.
Most U.S. oil companies buy crude oil from major petroleum exporting countries and either refine gasoline or buy gasoline from foreign sources. There's little correlation between the price of crude oil today and the cost of refined products, including, gasoline, diesel fuel, jet fuel, home heating oil, etc. Oil companies can charge whatever the market bears. When crude oil hit $103 per barrel, it gave the oil industry the perfect excuse to continue hiking refined products, especially gasoline. Every time there's a drop in the dollar, energy also prices rise, building into the price the cost of depreciation. Bernanke now finds himself in a Catch-22, using a lax monetary policy to stave off recession but knowing slashing interest rates devalues the dollar and fuels inflation, especially in energy prices. When the Fed meets March 18, Bernanke will have to weigh carefully more rate cuts.
Contributing mightily to today's stagflation, the White House, Congress and the Fed must do more to rein-in oil companies from price-gouging. Price-gouging has yielded obscene profits at he expense of virtually all businesses except the oil industry. White House officials have done next to nothing reining in oil companies from taking massive profits at the expense of businesses and U.S. consumers. “We really had a plethora of negative news,” said Art Hoagan, chief market strategist for Jefferies & Co. in Boston, not least of which was crude oil hitting $103 a barrel. With the U.S. spending 12 billion a month on Iraq and Afghanistan, the U.S. government can't afford a major economic downturn. Even Bush acknowledged at an Aug. 28 press conference that the economy is slowing down. Nothing would stimulate the economy more than ending the extravagance in Iraq.
About the Author
Home || Articles || Books || The Teflon Report || Reactions || About Discobolos
©1999-2005 Discobolos Consulting Services, Inc.