Rising Energy Costs and the U.S. Economy


Byron W. King
Energy and Oil
July 16, 2008

June 2008 was the second worst June in the history of the Dow Jones. The only June that was worse was in 1930, at the beginning of the Great Depression. That’s not exactly encouraging.

Why was June so bad? The dollar fell. We have the U.S. Federal Reserve to thank for not defending the value of the national currency. The Fed governors talk the game of defending the dollar. But then they meet and don’t take any action, such as raising interest rates.

I understand that the Fed does not want to raise interest rates. That would just plain hit the economy in the gut with the left fist. The politicians would scream. But when the Fed wimps out, the dollar declines in value. And the cost for foreign imports, such as oil, rises. That hits the economy in the gut with the right fist. One way or the other — a left or a right to the gut — our U.S. economy is getting beat up. I’d prefer it if we just took our own national medicine and stabilized the dollar.

If the dollar stabilizes, oil should level off. And we could see the market begin to recover. So watch the dollar for your signal.

Meanwhile, the gold and precious metals stocks benefited from the declining dollar. Toward the end of June, most gold stocks all had good run-ups as the dollar fell.

You can’t really time these kinds of moves over the short term. But over the long term, the U.S. dollar has been declining in value. And precious metals have been climbing. My colleague Ed Bugos, a true gold bug, foresees gold at $1,200 per ounce by early 2009. Another precious metals trader of my acquaintance is forecasting silver at $26 per ounce. If that happens, the mining stocks will soar.

But let me discuss this in terms of energy and oil and in terms of Rising U.S. Energy Costs…

In June, as you know, the price of oil just rocketed up (as the dollar fell). I follow oil like a hawk, and even I was astonished at the pricing trajectory. I really thought that profit taking and the general negative impact on the world economy would have to slow down oil’s rise. But no, oil kept moving up.

I kept wondering… Who the heck is buying this oil? Are you broke yet?

But somebody is buying the expensive oil, and we are in the midst of the greatest transfer of wealth in history. Entire nations are being impoverished. Other nations are being enriched beyond their wildest dreams.

Rising energy prices, and the related transfers of wealth, are among the great strategic movements of our time. Since the dawn of the oil age, we in the U.S. have had some semblance of control over energy prices. Heck, at one point, prices were so low that the state of Texas empowered the Railroad Commission of Texas to stabilize prices.

It’s a long story, but the West has, more or less, always had a handle on energy prices, even in the face of OPEC, over the last 40 years or so. At the end of the day, the West could have faced down the major oil exporters and kept some sort of lid on the upside of energy pricing. Not any more.

The people who sell oil are, of course, more than happy to take our money. They are ecstatic, truth be told. In a matter of a few years, Western energy demand is moving the wealth of many generations into new hands. Some nations are getting rich, while others are getting poor — fast.

A few years ago, Russia was a post-Soviet basket case. Now the Russians are buying up much of Western Europe.

A few years ago, the United Arab Emirates was a dusty backwater. Now the UAE is becoming a world destination, and its sovereign wealth fund is buying the Chrysler Building in New York.

Meanwhile, expensive oil is breaking the backs of the middle classes in the U.S. and many other countries. Wait until next winter, when millions of households in the U.S. and Europe cannot afford to heat their homes. Ugh!

And world economic growth is stalling as oil prices rise. So it really seems as if the rising prices have to moderate. This is what happened in the first couple of days of this week, with oil trading down, from $145 to $136 per barrel. Finally, a breather. Whew!

Best wishes for good investing.

Until we meet again…

Byron W. King

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