Love of Liberty : oil

The Commodity Correction

ChrisR — Sun, 24 Aug 2008 00:57:00 GMT

I've been reading a lot of great pieces on whether or not the commodity bull market has come to an end.

Here are links to some of my favorite writers:

If I had to throw my hat in the ring, I'd side with Peter Schiff and Jim Rogers. I believe this is a correction, albeit a sharp one. But commodities (and commodity stocks) have to break further for me to believe it's more than a correction. However, I always take everything Gary North says very seriously, so his great analysis is always in the back of my mind.

Lower Oil is Not a "Tax Cut"

ChrisR — Tue, 12 Aug 2008 13:47:00 GMT

The fact that the price of oil has dropped considerably does not constitute any kind of "tax cut."

When the price of oil increases once again, are we supposed to call it a tax increase? How did the price of oil get singled out for such a distinction? If the prices of wheat, lumber, or cotton decrease, should we be calling them "tax cuts" as well?

Since when did market prices become bundled with taxation?

The language seems very sloppy to me, especially since every gallon of gas that we buy contains a real tax attached to it. I recently read that the gas tax in California is 62 cents out of every gallon. Isn't it ridiculous to call the lower price of oil a "tax cut," while actual taxes remain untouched?

Let's say the 62 cent tax is reduced by 10, 50, or even 100%.....Then you would have a real tax cut.

Has the "Oil Bubble" popped?

ChrisR — Thu, 07 Aug 2008 20:16:00 GMT

Since the price of oil has finally broken to the downside, I've seen a lot of talk of how the "oil bubble" has finally popped.

What's interesting to me is the exact opposite occured when the stock market initially broke back in 2000, and when housing prices initially broke more recently. In both of those cases, the talk was that there was nothing to worry about...After all, prices fall occaisionally...If anything, they were buying opportunities.

I remember speaking to several real estate agents and telling them that the party was coming to an end. They definitely did not believe me...and with all of the commissions coming in, I understood why. The Austrian Business Cycle Theory was spot on though, and the party was indeed over.

Now whether or not we've seen the top in oil, I don't know....but I seriously doubt it.

To begin with, I don't even think there has been an "oil bubble." The price rise seems pretty orderly to me...and I've yet to hear my Aunt or next door neighbor tell me that they're buying oil futures.

Also, and this is probably the most important factor, the Fed's monetary policy signals more monetary inflation ahead. U.S. foreign policy also indicates that oil consumption by the U.S. military will continue. New supplies of oil don't seem to be on the horizon. And finally, I highly doubt that when an actual top occurs, there will be so many proclaimations of how the bubble has popped...It doesn't seem to work that way. The sentiment will most likely be the opposite...that the price of oil will never stop going up...ever!

So has the "bubble" burst? I guess we'll find out.

Record Profits for Oil Companies...What Does it Mean?

ChrisR — Mon, 04 Aug 2008 15:30:00 GMT

With oil companies earning record profits, there have been calls for a "windfall profits" tax to be placed on them by the government. From an economic point of view, this totally ignores the meaning of profits and losses.

Oil company profits are a signal...If the marketplace could speak, it would say:

"Increase the supply of oil!"
"Remove your resources from losing ventures and invest them here!"
"This is where the demand is!"

If oil companies were experiencing losses, the marketplace would say something different:

"Decrease your output of oil."
"Your customers are well supplied."
"Apply your resources elsewhere, where the demand is higher."

It's actually a beautiful setup...and it's all natural...central planners need not apply.

So record profits are a signal. However, instead of increasing supplies of oil, I've read (over and over) how investment has to take place in alternative fuels.

But does it?

Possibly...if alternative fuels are something people desire, then entrepreneurs would be wise to test the waters. However, like everything else, such an investment is risky. And without a doubt, private entrepreneurs, and not politicians, need to make the decision as to whether or not the risk is worth it.

Do alternative fuels have a future? Only the market can tell us...and it will do so with profits and losses.

But what about oil? After all, oil companies are the ones earning record profits. We know this is where the demand exists.

So isn't it silly to talk of an arbitrary "windfall profits" tax? Does it make sense to hinder those who are hearing cries from their customers (via record profits) that supplies need to be increased? Instead, the government needs to get out of the way and let the marketplace operate. Profits and Losses are signals...It's much wiser to listen to them, then to try to fight them.