When Bad News Is Good News--Kind Of--Oil Prices

Being a contrarian has at least one beneficial side effect--you tend to try and find good news in bad news.  As a French philosopher (whose name escapes me) said, "To those that feel, life is a tragedy.  To those that think, life is a comedy."  Oh, those crazy French.  A bit harsh but there is some truth in it.

So on to oil prices and why high prices are good, or at least not a tragedy.

First, prices aren't all that high historically speaking.  Inflation adjusted, the high was in 1979 which was a pretty miserable year all the way around.  If you can guess who was president then you win a prize.

Secondly, due to conservation and other things our energy use as a percentage of GDP is now 2.5% versus 4.5% in 1979.  That is a huge drop.  The 'other thing' is primarily a shift from a manufacturing economy to a service economy.  Technology and financial services are not energy intensive like manufacturing.  So outsourcing and a shift away from manufacturing is actually a good thing.  A good thing if you consider energy but not necessarily a good thing if you are an autoworker.  See yesterday's post for that discussion.  But the fact is that our energy use is not a big a deal as it was 30 years ago.

So why are oil prices high?  Because of demand around the world.  Those manufacturing jobs we switched away from are now in China and India and they are using oil to make our products.  Also, there is a fear factor in prices due to terrorism and the fact that God, as one old oil man told me once, put oil in dangerous places.  Hugo Chavez comes to mind.  There is also a fear factor due to natural disasters which seems appropriate on this the anniversary of Hurricane Katrina.  But count your blessings.  If Hurricane Rita had hit Houston the situation would be much worse.

Oil prices are also high because there is not a lot of supply out there.  There will be but this takes time.  Exploration takes awhile but it is going on.  Just look at the horizon here in Texas and there are rigs all over the place.  When the price becomes attractive it attracts supply which will eventually have a downward impact on prices.  Also, we have a lot of oil offshore and in Alaska but that is a political football which for now I will punt.

So oil prices are good mainly because it means economic growth is strong which means you have a job.  It doesn't make you feel real good to fill up your car but imagine trying to fill it up if you have no money because you have no job.

Finally, the real reason that high prices are good.  It makes us think of alternatives.  I'm not talking about buying a Prius.  If you do that you are just showing off.  The savings from the gas will never make up the premium paid to buy this billboard from Toyota.  Buy a gas Honda or Toyota and enjoy the savings without paying the premium.  But back to alternatives.

As most readers know we are planning a new house and here is what I'm considering--solar hot water, solar electricity, energy efficient windows, foam insulation, geothermal heat pumps, wind power.  That last time we looked at stuff like that was 1979.  But this time I'm going to do it.   

Comments

[panasianbiz.com]

I think many consumers forget or ignore the simple fact that the oil industry is just that--an industry, a business, and all businesses set prices based on supply and demand. Good for you that you're planning a "greener" home!