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Lifestyles and P.O.O.

by Frank A Lechner

April 18th, 2005

We have been watching a demand led expansion in the POO, or Price of Oil, for some time now. Much of this is attributable to the lifestyles here in the US and in other areas across the globe. There are countries seeking to expand or enrich their lifestyles through modernization, and commoditization. They are choosing to do this with an expanded manufacturing base, coupled with an exporting program. Much of the export program is directed to the US. This activity puts an ever increasing burden on the world oil markets.

Simultaneously, we here in the US have grown to appreciate a new lifestyle from a period not so long ago. The average house size now is somewhere around 1800 sq ft of living space, when in the past it was about 1000 sq ft. Add to this the perceived need for larger garages, a two or three car, instead of the elderly one car of the past. This results in more concrete, more concrete blocks, more windows, more studs and plates, more trusses, more sheathing, more shingles, larger furnaces, more plumbing, always more, more, more. More houses now have central air conditioning then ever before, resulting in further demand during periods when demand of utilities used to be slack. (people used to open the windows). Not only is this demand in products on the market, both finished and commodity, it also adds to the long term carrying capacity of this home, or the demand for utilities.

It takes more energy to turn on those lights, to heat or cool the home, to keep the ever larger refrigerators running, or to leave the chest freezer plugged in. Instead of the time when one television was in the living room (now they have formal living and 'family' rooms), there are now televisions in the kitchen, in each bedroom, the living and the family rooms, and maybe even in the garage. There are microwaves, central vac systems, toasters, larger ovens, under cabinet lighting, washers, dryers, lawn trimmers, lawn mowers, weed wackers……….awwh hell, you get the picture. These items all require some form of energy to run or keep them operable, be it electricity or fuel of some type.

Heard the other day, from a less than sensible person, that the way to fix the energy cost issue, was to put a luxury tax on anyone driving a vehicle such as an SUV. In my line of reasoning, he was silly at best. This sounds just great from an argumentative position, but in reality, it would do nothing to alleviate increasing fuel prices. Typical socialist thought, 'if you don't do it the way I do, then you are wrong and you must pay'. The stupidity in that little statement is obvious, and speaks to a non-learned level of thought. Who is to say what size vehicle a premium should be paid on? You could pick an arbitrary government statistic of per miles per gallon efficiency I suppose. But, where does it end? This argument could be taken to the next order of progression to the size of the home you live in. For instance, if you have a 1000 sq ft home, there is no tax, but for every 100 sq ft over the maximum, you will be taxed x number of dollars.

Or you could say, anyone who owns a boat, a snowmobile, a riding lawnmower, a weed wacker, or a so-called personal watercraft, must pay x tax for a non-essential item. Maybe you could tax anyone with a camper or a second home on a lake, with an energy use tax, through the virtues of an item owned and not necessary. The list is endless. Why choose just the persons that drive something larger than a Saturn?

Getting back to that original statement, in reality it is almost impossible to achieve for the average family, due to regulations imposed by persons as forward thinking such as the one talked of. The government now mandates that everyone is to wear seatbelts, and each child under x years is to be harnessed in a 'child protection' seat. Any of you that have children, know how much room in a vehicle seat such as those use up. Point being, is many of the smaller more efficient cars will not satisfy the government regulations to drive on the roads. You cannot go to Grandma's house in one small car; you will need two. You cannot fit your whole family in one car. Doesn't that defeat the purpose of the original tax on consumption? Using his line of reasoning, if you had a husband, wife, and a couple of kids, you are aok, but should you decide to have more than that, you should be taxed. Better yet, why not just put a moratorium on families larger than 4?

All of these items contribute to a demand led expansion in oil prices. The lifestyles enjoyed in the US, absolutely taken for granted by most, increases demand for fossil fuels. The world demand expands as other countries also try to expand their standard of living, to resemble those of the US. A TV would be ok, maybe a car instead of a bike for personal travel, or a house of their own. Others will have their own dreams and aspirations, while in the end, it all contributes to demand expansion.

To many across the world, the US consumes far more energy resources than is deserved or warranted. That is all fine, except that it is paid for using modern economic methods shall we say. Other countries have the same capability to go on the world market, purchase oil and oil products, provide it to the populace, and they are doing it in droves. That is why this is a worldwide demand expansion, with the resultant increases in pricing. Until there is a worldwide recession, I don't see a huge break in oil prices.

This increasing pricing for oil is further exaggerated through the policies of the US Government. The US is on a path of currency weakness, which creates problems for the oil producers, should the POO (priced in US $ on world market) remain the same. Bear with me here:

An exporter of oil sells 1,000,000 barrels of oil at $30 US per barrel. This is converted to Euros at 1 US$ = 1.25 Euros. (each dollar buys more Euros with a strong currency). The exporter receives $30M, and then converts to 37.5M Euros. These Euros are then used to purchase wheat at 4 Euros per bushel. They have purchased 9,375,000 bushels of wheat with the proceeds to feed their populace.

Let's say the US embarks on this weakening currency policy, and there is no corresponding increase in oil prices. The US$ is now worth 0.85 Euros. The exporter receives the same $30M, but when converted, only receives 25.5M Euros. These Euros purchase the same wheat at 4 Euros per bushel. They have purchased 6,375,000 bushels of wheat. Effectively, if oil prices do not increase in dollar terms, the exporter has lost 3M bushels of wheat purchasing power.

If you were an exporter, talking to the US, wouldn't you be a little upset upon hearing of this weaker dollar policy? Would you not threaten to change your policy to price your oil in Euros instead of US $, unless there was a corresponding increase in the dollar price received for that oil? It works this way:

The exporter sells the 1,000,000 barrels of oil, only now at $45 per barrel. He receives $45M for his oil. With the weaker dollar policy, the dollar is only worth 0.85 Euros. He receives 38.25M Euros in the conversion. These Euros are used to purchase the wheat, and they have just bought 9,562,500 bushels of wheat. This is very close to the original scenario of 9,375,000 bushels of wheat. They have covered their lost purchasing power in wheat terms, through the increasing dollar price received for their oil.

What does all of this mean for gold and silver? First of all, the US is on this track of a weaker currency, which is good for gold and silver. The demand for oil is increasing across the world, and the US $ prices received for that oil is increasing. The dollar, being the supposed 'reserve currency', is perceived to be in a vulnerable position. The exporter is worried, maybe the price of oil in dollars will drop, and the lost purchasing power will become a reality. In a risk assessment, it is decided that fiat currencies are inherently worthless, so the decision is made to store some of the exporting receipts in gold and silver. Taking this a step further, the same can be said for any country exporting to the US and receiving devaluing dollars in return for their items sold.

That the US is devaluing the dollar is a given. Your net income received, after taxes are taken out, is able to purchase less and less of the items needed on a day by day basis. Your savings are depreciating, as each dollar held in your possession is decreasing in value the longer you hold onto it. Inflation in prices paid for items of need, is nothing less than yet another tax on your income. $1000 in savings now, is losing value continuously. The bank statement may say $1000, or even $1020 for the meager interest earned, but your purchasing power is decreasing steadily. You need to protect your hard earned resources to the best of your ability. Gold and Silver can and will do well in times of instability, or in times of inflationary pressures.

Buying gold and silver is not just for speculation of higher prices. It is the wise move!

Everyday is the right day to accumulate gold and silver !!

Frank A Lechner

whynotgold@msn.com

Frank A Lechner is a private investor, and makes no allowances for stupidity or insanity as each chooses his own investment battles. Past performance is no indication of future direction, nor do I even care about govt mandated disclosures. You make your choices and you live with them. He does in fact believe that we are indeed in a time of turmoil, a time of increasing prices, much as wrote about before, and that this period will resemble the 70's. Those that fail to learn from history are destined to repeat, or so I hear. Good investing to you.