Posts Tagged ‘price’

The Price of Anything

Thursday, March 10th, 2011

Dear Friends,

It seems to me, that everyone who has grown up in a market based economy, should have a basic understanding of the way supply interacts with demand, to reach a price equilibrium, and that if demand is reduced, cost goes down and if supply is reduced, cost goes up. But I run into more and more people, who profess no knowledge of this economic law whatsoever, and maintain that it is totally the oil companies that set the price of gasoline.

The supply, real and perceived, of any thing, not only commodities, is a factor in it’s economic value. The value of gold is high because the supply is very limited and the demand, for all uses, is great. The value of a thing is not determined by it’s utility, water for example is usually cheap, because it is plentiful, but put a person in a desert for a day, where it is not plentiful, and he or she will pay a fortune for it. This is another example of the relationship between supply and demand.

The Obama administration, has at every turn, made decisions that will lower the supply of crude and coal. From changing drilling regulations and outright bans on drilling to curtailing coal production the administration has proven it’s willingness to raise the price of energy to protect the environment. This is one of the planks of their platform. Energy prices will necessarily rise… To make renewables competitive with dirty energy.

Due to a hoax. The hoax of anthropomorphic global climate change. They changed the name from warming to change, because they aren’t sure if the planet is still warming or cooling, so the name, change. The global warming we have experienced from 1959 to 2008, (or sooner) has been mirrored on Mars with a congruous shrinking of the Martian polar ice caps. The predicted warming has not materialized here however. It seems to have leveled off. But what it all boils down to is this, they don’t know if the planet is warming or cooling, they don’t know the mechanism of it’s warming or cooling, but the one thing they are sure about, is that it is our fault.

With a hoax in hand they have sought to shrink the ability of the market to meet short term supply interruptions. Take bobby pins, say there are 4 factories running at 50% capacity, meeting the demand for bobby pins. Now take one factory down, perhaps from a fire, what will happen to the price of bobby pins? Probably nothing… the remaining factories can ramp up production to meet the increased demand.

Take the same example but the 4 factories producing bobby pins are now running at 100% of capacity. Take 1 out, from a fire, and now what happens to the price of bobby pins? The price necessarily skyrockets. It is necessary because, the factories remaining cannot ramp up production, they were already at 100% of capacity. So the price will rise to a new equilibrium. Higher then you would think due to the perception that the supply of bobby pins is now at risk…

The result, of the administrations decisions, is that the US is producing far less oil and coal than it could. If the US was producing even 10% more, than it is now, there would be a dampening effect on global prices. But with a hold on US oil sands, coal to oil, intractable permitting for coal, nuclear and most of the US’s coastline off limits, the US government, under this administration, is intentionally lowering the ability of the US to produce energy. This puts not only the citizens of the US at risk but the citizens of the world.

Economic production is tied to energy prices. The single biggest factor in the rise in the economic production of the worker, since the industrial revolution, is the leveraging of his or her productivity, with mechanical power. This leveraging has led to the rise in the standard of living in countries that participate in a market economy. The application of mechanical power makes the price of energy a major portion of any economic player’s cost structure.

Now that the ineptitude of this administration, has set the Middle East and North Africa on fire, like a child with a matchbook, the supply of oil in the world is being interrupted. Overtly undermining Momar has led to him setting oil wells on fire, even a hint of unrest in Saudi Arabia will drive the price of crude to $200.00 a barrel, (from Bloomberg Radio) and the continued unrest in Egypt and Tunisia is leading to a possible flood of refugees. How will that effect the world economy?

But people keep insisting it is all the oil companies…

Bubble Bubble, Toil and Trouble

Sunday, December 6th, 2009

Dear Friends,

It seems to me people are incapable of learning from the past. Doesn’t anyone think, maybe, gold prices might be bubbling a little bit? I mean come on… unprecedented run up in price, all time highs being set daily now, and most importantly people are buying gold because it is going up so fast. Isn’t that the very definition of a bubble forming?

Hard to see where a price bubble could be a bad thing… but lets look at the subject.

Real Estate bubbles are historic in that they have been happening since the middle ages and probably before. Stock bubbles are a more recent phenomenon and commodity prices are classic bubbles. Think about the price drops of some commodities that have experienced their price bubbles bursting. Think rhodium between 2004’s price buildup to 2007’s climax of $10,000.00 an ounce. to $1000.00 an ounce in 2008, (a 90% price drop). Gold is a commodity just like rhodium and is subject to the same market forces.

Another thing driving up the price of gold is that production is outpaced by demand. Demand that is largely driven by an expectation that the price will go up indefinitely. But I ask you what happens when the price of a commodity goes up drastically? Production of that commodity goes up as soon as it can be ramped up. When gold was relatively cheap many gold mines became unprofitable. They are being brought back on line as we speak. They are a source of a potential prick.

The profoundly unwise monetary policy of the US is also another factor in the gold bubble. The US government has been printing and borrowing money way too fast. This is damaging the perceived value of US caveat currency. When this happens people seek a better store for their wealth. Gold is a historic store of wealth. But if the price of gold were to drop in half, (which is not unlikely in a bubble burst), then what good that store? Once the price bubble bursts the price will be suppressed for some time.

If America’s caveat currency looses it’s value do to it’s foolish spending, do you think the US government might entertain the thought of nationalizing the gold supply, seizing personal gold held by it‘s citizens? Like has done in the past by progressives. Making a potential barb from the us government.

China is buying gold at a fast pace. As both a store of wealth and as a tool to balance it’s currency. But if the perceived value of gold were to drop for whatever reason, China could bankrupt herself, but the price would still plummet. Opinion is like that… it can turn on a dime and is as powerful as a tsunami. That is what makes bubbles so dangerous.

Coming on the heels of the financial industry’s near death experience a gold bubble bursting could send the world into depression. The caveat being the bubble could go up for several more years, (rhodium rose for three years before the fall), making it more dangerous or it could burst tomorrow, if the conditions present themselves.

By their nature bubble’s are unpredictable. The only thing that generally defines a bubble is after it has burst people claim it was obvious. The truth is few people see a bubble forming… but everyone sees it burst.

I am not saying money cannot be made in a bubble. The trick is to get out just before it bursts. Those that do make out exceptionally well. Those that don’t… Well, some try to fly.