Sunday, May 25, 2008

Congressional Smoke and Mirrors

A couple of weeks ago Congress had an investigation on big Oil. One of the Senators asked the oil man why they didn’t pass the profits down to the consumer (I guess it’s not right to make a profit in the United States). The CEO said that he didn’t think it was practical. Then yesterday the local channel had a bit on retail legalized marijuana stores here in California. They asked the vendor what the sale price was per ounce and she replied “We keep it at the same price as the illegal stuff, if we didn’t, we would be supplying street users who would still sell at their regular price.” It kind of seems like the dope dealers of this country understand basic economics better than our elected representatives.

Gas prices are going through the roof. At these prices there is going to be a lot of oil entering the market, probably more than the consumer can use. At some point prices have to drop. It’s a little like the housing bubble. As prices rose, more houses were built. Now we have a large supply and no one now really wants one. The odd thing here is that Congress wants to maintain the high housing prices in order to keep the real estate market stable. If gas prices collapse, would we have a gas bailout also?

Congress can run investigations on why things are more expensive. In reality, the items we purchase don’t cost more, the currency is worth less. Counterfeiting is against the law, but spending more government funds than you collect in taxes is not. Let’s face it, the 160 billion dollar tax stimulus was not real money, it was not earned by anyone.

From a simplistic economical view, a worker makes 100 dollars worth of widgets and at the same time, the government prints $100. There is now 200 dollars chasing the produced widgets. This item didn’t double in price. But, by God, Congress is going to grill and roast that widget maker. How dare anyone gouge John Q Public? You can't see the smoke and the mirrors but they are there.

The average person has no idea that Congress is the problem. Isn’t it amazing how politics can solve our economic problems with just a printing press? It’s kind of like trimming your toenails with a guillotine. The solution is a problem.


Tyrone said...

I had a conversation with a co-worker about the price of gas and higher prices for food. His belief: we're being gouged by oil companies, and the higher fuel costs are driving up everything else.

I said: No, it's inflation driving the prices up. It takes more worthless dollars to purchase that same amount of oil. The world doesn't want our falling currency.

His response: I don't understand that.

That is your average american. Don't understand it, then believe something you can understand, rather than educate yourself.

Jim in San Marcos said...

Hi Tyrone

I agree inflation is the name of the game. It's not an easy concept to understand. It's effect is so slow as to almost be unnoticeable. Gas prices have speeded up the process to where it is more apparent.

I am beginning to think that we now have a full blown oil bubble in the commodities pit. Oil is starting to mimic the Bunker Hunt silver corner of the 1980's.

Most people will not understand inflation until they reach retirement. I remember my first pack of smokes only cost 22 cents. I hear that they are about $3.50 a pack now.

Thank you for your comments.

Anonymous said...

Hi Tyrone

The oil companies have to buy oil (in futures terms) on the open market. The current market price for one barrel of oil is $133 a barrel. GWB made a plea to the Arabs to pump more oil to overdrive supply. The Arabs response was "No, supply is meeting current demand."

So the price is not increasing because of demand. It is pure speculation that supply will decrease in the near future, causing the price to soar. Sound familiar to a housing bubble a couple of years ago?

As learned from the recent Congressional Roasting of Big Oil, profit for them is currently at 5% and taxed by the government at 15%. All though the oil companies make a good profit as the price of gas increases, Uncle Sam gets a big chunk of the change!

If you want answers, just follow the money. If supply is meeting demand, who has the motive to drive the price of oil through the roof? Super bleached white sheets for clothes and red/white checkered picnic table cloths for hats that are wrapped in a tight snake-like black band come to mind.

Of course this is pure speculation on my part. What do I know?


Jim in San Marcos said...

Hi Tom

Oil is getting to be a big issue. While you were posting, I was posting on oil.

I think that we have to separate oil companies from refinery's. Refinery's don't care what the price of oil is, they just make products like gasoline. They get paid for processing oil.

As you suggest something is seriously wrong. I suspect that we have a corner on the oil market in progress.

Since the commodities market is a zero sum game, someone is going to get their cookies toasted real bad.

Thank you for your comments and read my current post, it has more info.