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Saturday, July 20, 2013

Rising Oil Prices

Global government demonstration premium priced into Oil, devalued units of Dollars chasing less goods.

Oil is the very substance which allows the many gears of the global economy to continue to function.  Add a premium to this important element and watch the grinding commence.

As oil reaches higher prices per barrel, it is apparent that there cannot be an economic recovery.  This type of price rise is 'bullish' some talking heads on television will say; nay, it isn't.  Crude oil being an input cost is crucial for any business operation, manufacturing operation, mining, etc.  As its price rises, all labor becomes more expensive and a higher share of capital has to be diverted to this most important factor of production.  Investment in other areas will be temporarily put off until the price of oil lowers once again, which it may or it may not.  At this juncture any form of prediction is akin to saying the next roll of the dice will land on a specific number combination.  Which in all honesty may be easier to do considering the number of variables involved vis-a-vis the current manipulated market, but I digress...

These input costs will eventually work their way down to the consumer level, i.e., lower order goods.  However, as oil is a precious commodity for business, so it is for the consumer.  After all, transportation is a necessity for most activities in the United States and as it is the case with most, it requires this all too important commodity to make it happen.  As more income which would have otherwise been used elsewhere is spent on gasoline (a derivative of oil), less is available for other expenses such as products and goods from the very businesses suffering from increased input costs.  

Moreover, just in time inventories which depend upon nation wide logistics of simultaneous truck movements is also powered by this aforementioned derivative of the commodity discussed; oil.

In an almost self fulfilling prophecy that comes full circle, the business sells less goods and therefore fails to meet its revenue targets.  Ultimately in a real scenario, which in this [temporarily] centrally planned economy need-not-apply, this would cause a downward pressure in companies' stock prices which would be reflective of the very price rise in oil deemed 'bullish' by some.

There is nothing at all bullish about added pressure on the lives of those in a fragile economy consisting of ever increasing volatility, uncertainty, and a schizophrenic Fed yelling "Polo!" before markets can even say "Marco!"   

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