No replies to this topic

[TTHQ Staff]

BEING STREET SMART
____________________

Sy Harding


HISTORY WARNS ABOUT HIGH OIL PRICES. May 20, 2005.

For a long while it seemed like the world, and particularly the U.S., had learned a great deal from the 1973 oil embargo, and particularly after OPEC increased prices dramatically again in the late 1970s. Determined to no longer be dependent on imported oil for 34% of its oil usage, the U.S. began an impressive push to decrease overall energy consumption, while simultaneously encouraging use of alternate fuels.

Congress enacted 55 mph speed limits (didn’t we hate that?), and mandated increasingly strict fuel efficiency standards on auto manufacturers, which ended the era of fuel-guzzling behemoths for quite awhile. The Energy Department was created to develop a national energy policy. Housing codes were introduced that required substantially increased energy efficiency in new homes. An effective educational program had us all re-insulating older homes, using wood-stoves, and comparing energy-efficiency ratings when buying appliances and electrical equipment. For competitive reasons, that in turn had manufacturers determined to produce the most energy-efficient products possible. Incentives were offered for development of alternative energy sources. Many electric utilities and large companies switched to domestic coal-fired equipment. For awhile it even looked like nuclear energy would make a big difference - until the Three Mile Island accident in 1979.

It worked surprisingly well. The average fuel economy of automobiles nearly doubled. The other initiatives contributed proportionately, with the result that over time the amount of oil being imported into the U.S. declined by a significant 31%. With demand down, the price of oil also declined.

However, oil prices have continued to cycle up and down over the years. And unfortunately, once they begin to rise significantly they have a history of almost always damaging the economy significantly.

The OPEC countries ended the 1973-74 oil embargo in 1974, and oil prices began to decline. But the U.S. had already been thrown into a serious economic recession by the inflated energy prices, coupled with the cost of the Vietnam War, and the stock market was already in the 1973-74 bear market, in which the Dow lost 45% of its value.

Sharply rising oil prices again from 1979 to 1980, and rising interest rates to control inflation, resulted in back-to-back U.S. recessions, in 1980 and 1982. The stock-market, anticipating the problems again, was hit by a bear market from 1978-1980, and another from 1981-1982.

In more recent times, another spike-up in oil prices took place in 1990, accompanied by Iraq’s invasion of Kuwait, and the U.S. counter attack with Desert Storm. Oil prices quickly rose 60%, from $15 a barrel to $24. The war ended very quickly, but still there was a recession in 1990, from which it took several years for the economy to fully recover.

By early 1999, crude oil was back down to only $13 a barrel. Then it spiked up again, and by late summer of 2000 it had risen to $37 a barrel. U.S. dependency on imported oil, was not only back to the previous dangerous levels of 1973, when 34% of U.S. oil consumption was imported, but exceeded those levels, with 48% of U.S. oil consumption being imported by 2000. Thanks to the popularity of SUVs, the average fuel economy of cars and trucks had worsened by 6% over the previous 9 years. But no one seemed to care much that it cost $8 more to fill the gas tank in 2000 than it did the previous year. The economy was booming. Everyone had jobs and profits in the stock market. Sure, we griped about it some. But as long as the fuel was available and the economy was booming, and stock prices were holding up fairly well, who cared?

However, the economy cared. It wasn’t all the fault of rising oil prices. The Fed was again raising interest rates in 1999 and 2000, in an effort to ward off inflation. But sure enough, high oil prices in 2000 were followed by a recession in 2001, and the serious 2000-2002 bear market in the stock market.

So, this might be a good time to reflect on the current spike-up in oil prices.

Crude oil was back down to just $18.60 a barrel at the end of 2001. But the price has spiraled back up over the last three years to record high prices above $50 a barrel, almost triple the price of just three years ago. Once again that rise in oil prices is accompanied by the Fed raising interest rates to ward off inflation, and even as in 1973-74 (Vietnam War) and 1990 (Gulf War), the U.S. is also engaged in heavy government spending related to the Iraqi War.

It may be wishful thinking that the results will somehow be different this time.



Sy Harding is president of Asset Management Research Corp., DeLand, FL, publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.