Energy and Recovery

Dear Friends,

It seems to me that any economic rebound that gets underway will be dragged down by world energy policies. Policies that drive up the cost of energy. Both intentionally and unintentionally. In the name of a hoax. (Climate Change) Economic rebounds are largely driven by low costs. Costs that were driven down by the recession. If government actions drive up basic costs of doing business, like energy, air is taken from the economic ball, blunting the rebound.

Energy is a leading economic indicator. Because energy is used as soon as a product or service is made or delivered. Other indicators lag energy. Partly because energy is a global commodity. The price is closely tied to use. Also other inputs that may or may not be traded on the commodity markets, lag in need.

Unless “Just in Time Inventory” is used business has a stock of inventory to use before it needs to purchase more. This puts a lag on other inputs to an economic upturn. But energy, in whatever form, is used and paid for within a month. Turn around is exceptionally fast and energy stocks compared to energy production (use) compared to historic averages is a snapshot of economic out put.

Here is the kicker. Energy production has been cut, and cut, to keep the price high. The US has seen the permanent closing of refineries. All the offshore drilling and production leases that George Bush signed have been shelved by Obama and Salazar. But economic demand for energy has dropped faster. Every time economists have looked for a tightening of energy supplies and inventories, they have grown. Despite cuts in all aspects of production. This bodes ill. The greatly reduced demand suggests greatly reduced economic output. GDP numbers notwithstanding.

This is strongly suggestive that actual economic output is very low. Cars Trucks, machines, and computers have not become exponentially more efficient over night. But the actual demand for energy has dropped much more than the GDP numbers would suggest. But there must be less of them running. If there are less trucks, cars, machines and computers running less work is being done by them. Less work being done by machines means less economic output.

The curtailment of future production by shelving offshore leases by the Obama administration should have leveraged crude prices higher. Remember when oil prices were at their highest, Obama said, they were not too high, that they just rose, too fast. If he believed it then he probably believes it today. Today he is president and has acted on those beliefs.

The high price of energy was a contributing factor to the economic contraction. It wasn’t a coincidence that the economic contraction followed a round of unsustainable energy price rises. As a basic input to the economy energy has a profound effect on profit.

Think about your own situation. When your cost of driving to work. (An unavoidable cost) goes from twenty dollars a week to fourty dollars a week. Something has to give. You must cut back on other expenditures to get to and from work. That drained money from other things. Those businesses then had less money to spend. Plus were strangled by the cost of energy too. The cycle was vicious. And we are setting it up again. I suppose… to ensure that we will have no rebound.

No matter how strong an economic rebound is, curtailed energy production, will inevitably curtail economic growth. Government policies have choked off future supply. You can see it in the volatility of crude oil prices. This suggests that as soon as demand goes up the price will skyrocket. Production is limited by governmental interference in the market. Demand is driven by economic output. The math is simple.

So if the price of fuel goes up fast and high we will know a recovery is under way. Barring a fast and hard price increase in energy prices we will see the economy stay in the doldrums. Any recovery will be presaged by $4.00 a gallon gas. (In the US). So as hard as it is to swallow… as soon as the economy recovers we will see very high energy prices again… With government that likes and wants them high…