Thursday, February 24, 2011

Oil, the economy, the dollar, and you

Let me start off with a few facts in order to set the tone for what I am about to communicate to you about my opinion of the current state of our US economy.

To begin, please think about how you/people in general form their opinions about things. Generally, people look to credible resources in order to value an opinion. In short, if you respect something like a periodical or a person, you will tend to agree with their opinion. All to often, people look to the news media, directly or indirectly, for information that helps them form their opinion. How often do you ask yourself, is this my opinion or am I rehashing someone else's opinion?

In general, when people are doing well in life, as in they have confidence which usually accompanies success, they tend to have more of an opinion about things..

Okay, so what is about to follow is my opinion.

Please note the following; I am not an economist. I have not studied economics. I do not work in the oil industry. I am not a fear monger. I lived and worked in lower Manhattan in September of 2001.

Having stated, or written, the facts. The following is my opinion, based off this subjects in the title.

When the strikes on U.S. soil occurred on 9/11, I was with a Princeton grad (see above) who told me within seconds of the second plane striking the World Trade Center that this was terrorism and most likely the work of Osama Bin Ladin. Ya see, my friend was informed but not because of the news media, because he had recently studied the history of Al Quaeda and was aware of this terrorist group's goal. More on that later.

So in the days that followed 9/11, when I was out of work, "hunkering down" with my family, I stayed away from the main stream news and began to look into what my friend had told me. At this point the entire world knew who was behind the attacks, but I wanted to know why and I refused to let the local news or even the national talking heads tell me why.

What I learned shocked me at the time. The Al Queda and their leader didn't just want to kill Americans, they wanted to destroy The American way of life. This is not simply a shot at freedom. They wanted to hurt us so badly that we had no choice but to change our ways. They wanted us to stop bullying our opinions into the matters of other countries in the pursuit of freedom and democracy for the World. They wanted to end our politics. Wow, those are some pretty bold ambitions for such a small group I thought.

Then I learned that they were not at all that small.

And I learned that their plan was simple. They took our powerful nation, with all its wealth, technology, and power, and they shrunk it down to one variable: oil.

Ya see, the price of oil effects EVERYTHING in the United States. It is not just the price of heating oil in your house or gas in your car. Have you ever played the Kevin Bacon game? With oil you get the link usually on the first move and very rarely get past the second move without a direct link.

I recall a quote from Bin Laden from shortly after 9/11 when the price of oil was trading up significantly from its recent range but still below $50 a barrel. He said something to the extent of, $100 oil will cripple the US economy". And that was the goal. To crush he US economy and his group had shrunk us down to one variable.

Of course much has happened in the U.S. and around the world since 9/11. Do you recall the recession after 9/11 that helped fuel lower interest rates and then a housing boom, incredible stock market rally, then a housing bust? Followed by another recession, a nasty stock market sell-off complete with fear last seen shortly after 9/11, still lower interest rates, and job losses.

Ask yourself, during the last roughly 10 years, have Americans changed all that much? Has our politics changed? Our egos? Or did the post 9/11 nepotism and Nationalism last only for a little while, even while our brave men and women were sent abroad to fight for what our politicians deemed appropriate. Pause and think about that for a second.

Now think about what was the constant during the peaks in troughs in the stock market, real estate market, and jobs market in the last 10 or so years?

It isn't the price of oil.

It is the "sustained" price of expensive oil.

And that is where it all begins and ends. With the price of oil sustaining its advances, costs go up. When costs go up those higher expenses to companies must be passed on to the consumer in order to protect all important margins. Over time, companies will find ways to cut expenses (jobs) in order to maintain their margins. But costs are going up everywhere. Commodities (the things you absolutely need) have gone up considerably as a result. And it is not simply inflation which by many accounts is a good thing if it is "controlled."

This is the point we are at now. EVERYTHING infected, not effected, but rather infected by oil has cost more for so long now that those prices have risen, including commodities, and that effects the economy. Other things like home sales data, car sales data, retail sales data, jobless claims, all have their historical data points and can help form thesis opinions, but NOTHING can escape the oil factor which was the plan of those who attacked us to begin with nearly 10 years ago.

As I have mentioned, I am not a fear monger. And I definitely do not have a solution, sorry. In fact, I fundamentally believe that Americans will innovate ourselves out of our current status and that a new class of leadership is and will emerge in our country to lead us into a new direction that will positively impact the world. I believe our country is going through similar growing pains that those countries and democracies (think Europe) older than us went through and that today's emerging countries, like China and India, will go through similar growing pains and cycles down the road as they grow and advance.

However, right now I am worried. I am scared for us because of the potential for "the snowball effect." The snowball effect is what can happen when things spiral out of control. Picture a snowball, a nice fluffy yet wet coating of snow, and a hill. As that snowball rolls down the hill, it gets bigger and bigger while picking up greater inertia and speed, thus in time, it can topple over things it previously could not. Perhaps it could even get out-of-control...

In America, this would be in the form of civil unrest in the form of something we have never seen before. It is impossible to plan and prepare for something never before experienced. However, like that snowball, once the unrest begins, it can grow and expand rather rapidly and those "in charge" of restoring order, may abandon their posts in order to protect their families.
Think of the recent tragedy of Hurricane Katrina and what she dispelled on Louisianna and Mississippi. Didn't much of the police force scramble to be with their families protecting their own, before doing their job? Can ya blame them?

With so many economists and opinionated folks out there looking to the past for reference to make sense of the current situation at hand, I am not sure our country has a past where the snowball effect took place.

Why am I all of the sudden worried about the potential of a snowball effect?

Simply because of what is currently going on in Libya and brewing in other Middle Eastern countries and how it is being received throughout the world. Ya see, whenever their is a problem in the Middle East, because we are so reliant on oil mined from that region, the price of oil goes up. That's understandable. But usually too, at the same time, so does the American dollar increase in value. In the last week in the wake of Libya, the US dollar has gotten weaker. Usually, in fear of the worst, like a war breaking out, the US dollar will rise because a "flight to quality" exists as investors look to place their money in a secure location. For a long period of time this occurred as the US and our dollar was so highly regarded we were in fact, "the world's reserve currency."

At this point, I am seeing real signs that the U.S. is no longer in this powerful position. The world is not turning to the US in times of uncertainty. They simply have lost faith in the power of our country. And, they could be wrong. I certainly hope so. But, to date, in my lifetime, in the 20th century, the US dollar has been the world's reserve currency and for now, that appears to have changed. And that is why, I made reference of the snowball effect.

If we truly have lost our status as the world's reserve currency, The United States can experience fear and panic in the streets as things spiral out of control rather quickly. Civil unrest can be extremely powerful and when it gets momentum, it is very difficult to stop. Many of the very same folks who were being programed to have certain opinions will quickly shift to complete mistrust and as fears heighten so too will irrational thinking and acting.

Getting away from dependence on oil is just one of the keys to our country's future success and in many ways, that process has already begun. I'm not sure what else we need to do or even what to do right now, but I know two things for certain; we need the price of oil to come down dramatically and our dollar to strengthen in order to have stability and growth in our future.

In the last decade, the United States has struggled and we are in worse shape now than ten years ago. I do not know any other time period in our country's history when this has occurred.
Like a career 300 hitter who has gone 0-20 in his last at bats, I believe the longer we struggle, the closer we are to getting out of the funk, just like the longer that batter struggles, the closer he is to getting a hit.

When you see a run of reds at the roulette table, do you bet on black or on red?

"Oil, the economy, the dollar, and you" by: Paul Gozzo


  1. I just read that Merrill Lynch just previously stated that $120 oil is the "breaking point" for the US economy.

  2. It looks like I am not the only one that noticed the dollar's sad weakness last week as Libya's unrest heated up...many respectable periodicles reported on this fact over the weekend such as The Wall Street Journal.

    This link is to an article that debunks that worry claimin that if the US dollar really lost its safety status, then we would not have seen a rally in Treasuries which in turn pushes down yields and hurts the dollar.

  3. Interesting post, and an interesting approach, from: your horrifying experience with 9/11 - current unrest and the socio-economic impact of oil dependency. I agree that innovation will overcome, but Detroit has not innovated and that is why it has been devastated by the economy. To make matters worse, GM is now known as 'Government Motors', due to their bailout. In my perspective these companies need to fail, and they deserve it for fueling the problem (pun intended), and not innovating.