OIL AND ECONOMICS - MAY 2001  





The headline reads, "Bush Says 'Economy Slipping', Urges Quick Passage of Republican Tax Plan'. Another headline warns of rolling electrical blackouts in California, soaring energy prices, and OPEC rate hikes.

As we look at our current economic situation, we see Democrats and Republicans doing their usual dance of blaming each other for the slowdown. Most of us have come to accept that politicians are far more concerned about scoring points for their team than actually doing the job they were elected to do. This is unfortunate because at this moment it is more important than ever that the government leaders try to cut through the cloud of conflicting details that surrounds the economic situation and deal head-on with the problems underlying our economy.

It is my belief that a large part of America's economic problems are caused by one very simple thing: energy and oil costs. Last summer when the U.S. economy was booming the OPEC oil conglomerate decided they wanted a bigger piece of the pie. As is always the case, western oil companies were willing to play right along.

When oil and gas prices started skyrocketing, I remember warning a friend that corporate greed would kill the economy. A year later, this warning came true.

This is certainly not a new principle to global economics. In 1973 when the OPEC oil embargo sent gas prices from 29 cents per gallon to over $1.50 per gallon, the U.S. economy crashed into almost a decade of recession. It is important to note that during those years of recession the American oil companies were posting all time high profits. In the mid-eighties when the economy began to boom, the oil companies began facing harder times. In Texas, oil company workers were being laid off and corporate profit margins shrank.

Over the last 25 years, we have been on a financial seesaw where either the overall U.S. economy is good and the oil companies bottom out, or the domestic situation sinks and the oil companies take in exorbitant profits.

When we look closer at what is taking place in the California energy crisis, we find another interesting example of this. The problem began when a law was passed forcing utilities to sale off their power generation plants. After this occurred, the utilities became middlemen suppliers who bought energy from those that they sold their power generating plants to, and then distributed it to the customers. To further complicate matters, regulations were passed which limited the price suppliers could charge customers, yet the power plants could charge the suppliers whatever rate they chose. This left the suppliers stuck in the middle.

Soon the power plants raised their rates, but the suppliers could not pass on the increase to their customers. When the suppliers began to lose money, the power plants would no longer give the suppliers energy to deliver to the customers and so the power outages began to occur. The problem is not that the energy supplies do not exist. It is that the suppliers cannot afford to buy it from the generators to distribute it to the customers.

Now an important point in this story is that Texas oil companies have purchased many of the power plants. So, when prices go up someone has to be making money off the increase. In this case, it is the oil companies. They are the ones who purchased the power plants, and are now making the money from the price increases that triggered the crisis.

In New York we have a similar situation except that prices have been passed on to the consumer by way of a 50% increase in electricity bills last year.

In California the rolling blackouts are not only a cause for inconvenience, but also bring industry to a halt. A single minute of power failure causes millions in economic losses. Plus, the money consumers are putting out to pay high electricity bills, as well as gas and heating oil prices, funnels money out of the rest of the economy fueling the overall economic downturn.

In order to truly understand the situation we should keep the fact fixed in our minds that when energy prices go up someone has to be making profits from the price rise. The money doesn't just disappear into thin air.

We should also be clear that when we hear the words 'energy crisis' we understand that it is a mistake to believe that we are dealing with a lack of supply. Oil companies would like you to believe that they just can't find enough reserves to meet energy needs. That is not and has never been the case. The crisis is a fraud that the oil companies hide behind as an excuse for price hikes.

During every 'energy crisis', the oil has been there, but supplies have been withheld to drive prices up. Those who watch the issue closely know that the first step to driving up prices is for the OPEC member countries to agree to cut back production. Once the prices rise, the American oil companies take advantage of the situation to get their share of the profits.

When we look at our relationship with the Middle East oil producing nations over the past 25 years we see major problems. Their oil embargoes have devastated our economy multiple times. We have fought a war with Iraq over oil. We are constantly bogged down in Middle Eastern conflicts because oil makes every one of these countries a 'vital interest' to U.S. foreign policy. And because of our interest in Middle Eastern oil and politics, we become the target of terrorist attacks from political radicals. Radicals who are usually funded by oil money.

Although this may all seem bewilderingly complex, I believe there is a simple approach to solving the problem in the long term. It seems obvious to me that we must find a way to end our dependence on Middle Eastern oil once and for all. If we were to achieve this goal it would not only end OPEC's ability to bring our economy to its knees, it will also free us from living in constant fear of the political chaos of Middle Eastern conflicts. Usually I am one who believes we should not look to the government to solve our problems. In this case, however, only the government can do what needs to be done to solve this problem.

What I propose is needed is large-scale funding for research to develop and support alternative energy sources. The technology to do so is within scientific capabilities if we have the funding and incentive to make it happen. It does not appear anything will happen if left to the private sector because the costs of research are too great. Furthermore, we must consider a goal proposed by Vice President Al Gore: a goal to find a replacement for the internal combustion engine.

When Gore made this proposal Republicans laughed at him. But people who laugh at bold approaches are not those that create new inventions, dream new ideas, or move the world forward. Breakthroughs cannot be made until someone defines the need for a new invention.

Given the amazing scientific and technological progress humankind has made since the invention of the internal combustion engine, I believe our best minds could do better. But first, we must dare to exhort them to think outside the box. They must be inspired to consider the possibilities which lesser minds think impossible. To those of you that agree with my ideas on this issue you may think we should immediately look to the current administration to do what seems obvious. Unfortunately, we must remember that Mr. Bush is now our president. Mr. Bush is formerly of the oil elite, his friends and family oil aristocracy, and his political campaign was financed by oil money, so I would not expect this president to do anything that the oil companies would not approve of.

Already President Bush has used the economic downturn as an excuse to move ahead with policies that will benefit the oil companies. Besides using the downturn to push through corporate tax cuts, he is also attempting to undo environmental laws to allow oil drilling in Alaskan nature preserves and has also went back on pledges to cut carbon dioxide emissions. When the political weight of the oil corporations is factored in, the reticence of political leaders to take action that will lead to long-term benefits at the price of short-term sacrifice becomes obvious.

It seems that the only way action will be taken on this is if it becomes an issue that takes center stage in the media, and pressure is created forcing the politicians to take action. These are the times when, as a nation and as the human species, we must ask whether we are capable of taking control of our long term destinies, or are we merely looking out for our immediate interests at whatever cost to the future.






























OIL AND ECONOMICS GAS PRICES an article by author Caeser Pink on the relationship between oil prices and the economy.





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