Well, not really the end of the world, but maybe serious crunch time, economically speaking. Remember folks, you read it here first.

What really sent the world economy into the toilet back in ’08? Hmm? Do you know? Think about it. What was the proverbial straw that broke the back of the United States’ and the rest of the world’s economies? I’ll remind you… in the summer of ’08, gasoline prices at the pump reached and then exceeded a record-breaking $4.00/gallon in the U.S. Not even during the ’73 oil crisis did gas prices at the pump reach that amount (adjusted amount: $1 in 2008 = .20 in 1973).

One thing that everyone must understand about economics at this time in history is that everything… EVERYTHING is dependent upon the price of oil. Oil makes the world go ’round. Don’t ever forget that. Everything that you buy, sell, move, eat, drive around in, build with, watch, play with, etc. is brought to you one way or the other by oil. If diesel fuel goes up to $4.00/gallon again, trucking companies will raise their rates to transport goods across the country. Rail and air freight will raise their rates accordingly, also.

That rate increase gets passed along to the consumer… YOU! Eventually, the rate increases on goods and services get to be so exorbitant because companies are struggling to maintain their bottom line that Mr. and Mrs. Consumer can no longer afford them. That’s when the feces really starts slamming against the circulating blades. Everything is connected in today’s economy. When the products/services become more expensive, the consumers cut back on consumption, the businesses make less profit (eventually losing money); the whole framework of the economy begins to crumble. Loans and mortgages stop being paid so homeowners can buy groceries for their families. Workers are handed pink slips because the company can no longer afford to pay them. It’s a vicious cycle.

This is exactly what happened in ’08. Our economy had been humming along for a decade on the building and services boom, but when the real commodity that fuels the economy (cheap oil) increased in price, the whole house of cards fell in on us. Since the world economy is primarily based on the U.S. dollar, when they saw us struggling, they were fearful for their own economies. And right they were to be fearful. Their economies tanked right along with ours. It hurt everyone, even behemoth China suffered as less and less of their products were being bought.

My parents were Depression Era children. My father used to say that a quart of milk was only a dime back then, but no one had the dime. It’s not quite the same in today’s modern economy here in the U.S. Today, the quart of milk will go up to $5 because of the cost to produce and transport it to the store, and still no one will have the $5 to buy it when it does get there; nor would they have any way to get to the store, unless they walk, because they wouldn’t be able to afford gas for their vehicles.

I paid $3.07 for a gallon of gas for one of my trucks the other day. I’ve read about predictions of $3.75-$4.25 for a gallon of gas by this summer. What drives these prices? Well, some of it is supply and demand. However, since oil and gas are traded on the commodities markets worldwide, prices can also be influenced by speculators if they have the power (read as cash) to drive the markets in the directions they want.

So, what are we gonna’ do? Well, I can tell you this… if those gasoline prices do reach the predicted levels, it will strangle our economy and stomp this illusive “recovery” into the dirt. We will see ridiculously high prices for consumer goods and catastrophic unemployment. There will be across-the-board loan/debt/mortgage defaults. Banks will fail. Uncle Sam would be overwhelmed. A bailout would not be possible this time, I don’t think. It would be UGLY.

The good news? Well, there isn’t any… except for the fact that I’m no economist or commodities trading expert (that was the disclaimer here, folks). However, a little common sense goes a long way.  Read, study, learn how things work. Don’t always listen to the general media. A lot isn’t in the news because it would panic people. Your government knows what can and might possibly happen. They’re just not broadcasting their opinions like I am.

Luck with it.

Later…

~Eric

Image credits: panicked man courtesy of Clker.com clipart

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About V. T. Eric Layton

vtel57, Nocturnal Slacker

6 responses »

  1. Life really sucks when gas prices go up. Those that make these decisions, live in some strange reality where it doesn’t matter about the price of gas.

    Well, that’s not the case for the majority of us.

    And for those of us who’s very jobs mean needing to drive to client’s homes, it totally unacceptable to have gas prices go up that much. Not only will we not be able to buy gas to do our jobs, but we won’t be able to buy enough groceries, fuel our heaters, etc.

    Every time gas prices go up, the price of just about everything goes up as well.

    What a bunch of horse hockey.

  2. PsiCop says:

    People in the media talk about how spikes in gas/oil prices are demand-driven, but in this case, that isn’t true. Demand does surge and fall, and worldwide it is higher than it was, say, 10 years ago. And it’s also true that demand is on a continuous increase. But that continuous increase is far too small to account for the recent price spike. Demand has nothing to do with what’s happening right now.

    No, the problem is speculation. Again. As happened in 2008, we have a lot of people and companies (who then were taking their investment cash out of real estate and mortgage securities) who are dumping it on the commodities markets, of which oil is a very large part. This is especially the case with corporations, which nationwide are sitting on a vast pool of cash. Speculation has ratcheted up nearly all commodity prices over the last few months.

    About the only good part about the 2008 oil bubble is that it broke a lot of folks, and the lesson was learned … if only in a few places. The construction boom in Dubai funded by oil barons who had securitized their holdings several years before, for example, was wrecked when the bubble burst and the notes came due. The Saudi oil ministry recently went on record as saying they oppose any crude-oil price above $80, and the reason is they don’t want another burst bubble of the same magnitude. At the moment crude is trading higher than that, but if the Saudis are able to bring the price down — as the primary oil producer, they just might be able to do it — then the present “bubble” won’t last too long.

    It all boils down to this: Too many people are digging in their heels and refusing to acknowledge the basic truth of the Nash equilibrium. It is better to watch out for the good of the entire system, as well as one’s own good. In the long run, everyone who’s currently profiting by cranking up oil prices, would do better to forgo just a little bit of that, in favor of promoting a healthy worldwide oil market at more sustainable prices. But they don’t want to know that, and don’t care to know it. Even if John Forbes Nash earned a Nobel prize for having pointed it out to them.

  3. Patrick says:

    Budget deficits and national debt are the big players. Forget about oil prices.
    China has much of your national debt. The Yen is linked to Jack Shit.
    National debt has increased almost exponentially over the past three decades.
    The basics are always the same….. 5 minus 2 = 3.
    Sorry Eric, I think a totally unregulated “Free” market is responsible.
    It is able to feed of basic human greed.
    I believe the price of a barrell is irrelevant.

    • Well, one think about China holding our debt, they’ll never do anything to piss us off or hurt our economy because not only would they lose on the debt we owe them, but they’d also lose their biggest trading partner.

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