Big Oil Blues 2008

I have had a running argument with a friend regarding the oil industry.  It first needs to be stated that we are both conservatives that believe that economies operate well, for the most part, in a free market system.  I, however, also believing in the ‘depravity of man,’ know that anything involving humans without any regulation will eventually be abused by man often to his own detriment.

In the last year, as the price of oil was rising out of control, I chose to place the blame on several groups that I felt were not playing fairly.  Each had its own interests in mind at the time.  First, there were the speculators.  These included retirement account investors who had decided to drive up the price of oil in order to increase the return on these accounts.  The problem with this type of move is that in the end, it amounts to a tax on the entire country, and as a percentage of income it results in a much larger burden for the poor.  Rampant speculation is always bad for the economy.  There is always a ceiling, and when it is reached, a big fall will always occur.  You can look back through history as it has happened again and again.  And, you do not have to look far.  The stock market is still suffering the effects of recent speculation.  In the housing industry, over the past few years, America was treated to stories ad nauseum about housing prices that were skyrocketing out of control on the east and west coasts.  It was referred to as a ‘bubble,’ and the ramifications of the burst are still being experienced throughout the industry (however, in Dallas, Denver and Houston, cities that for the most part did not did take part in the rampant speculation, housing prices have continued to rise at a reasonable rate).   Before that, we had the S&L scandal in the 1980s.  In all of these instances the economy was negatively impacted by rampant speculation in a particular industry.

The second group that obvious benefitted from the aberrant rise in the price of oil last year was the oil companies themselves.  They cried crocodile tears about how awful it was that ‘demand’ had driven oil to such high prices.  At the same time, because their profit on a barrel of oil was based on a percentage of the price, their actual profits went through the roof.  During this time, my friend and I had argument after argument.  I could not get over the percentage of profit built into the oil companies’ prices.  To me this showed that the oil companies were not attempting to exist in a competitive market.  As the price of a barrel of oil was driven up, and the oil companies’ profit went along for the ride, they simply got filthy rich.  I used the Wal-Mart as an example.  If the cost of a particular item went up for Wal-Mart, they would do their best to keep their costs low, and the affect on the consumer end would only be seen up to the amount of the increase in the cost to Wal-Mart.  Wal-Mart does not have a percentage of profit built in to its system.  It works on the concept of economies of scale.  No industry could employ the idea of economies of scale better than the oil industry, but there is simply no incentive to do so.  They exist in a perpetual state of mute collusion in which everyone benefits when the price goes up because people are still going to buy gas, and the entire oil industry can reap the profits.

They claim the price was demand driven, but that is a lie that has been proven at this point.  The price was driven by speculation, and as an industry, big oil had no incentive to keep this from happening, quite the opposite.

Until recently they were still blaming demand for the rise in oil prices.  I called B.S. on this.  The price of oil was about a quarter of what it had been six months ago.  So, if the price of oil were actually driven by demand, this would mean that America (and the world) would be using about 25% of the oil that it was 6 months ago.  This idea is just ridiculous.  This was all underscored even more today as news that OPEC’s largest cuts in production in its history were met with…, the price of oil going down again.  This proves that the price was not being driven by demand, but rather by speculation.  Demand and price have a positive correlation (when demand goes up, prices goes up), and supply and price have an inverse correlation (when supply goes down, prices go up).  Today’s announcement simply underscores how much out-of-whack the oil industry was this summer, because now, prices are continuing to fall regardless of the restriction of the supply.

Finally, the suppliers in the Middle East benefitted from the unrestrained speculation in the oil market.  Again, as with the oil companies, they had only to gain.  The negative impact to the economy here was huge.  It is never good to send large amounts of your wealth to another country, but as the price of oil went up, that is exactly what we did, and the dollar took a pounding as a result.  Today, the dollar is actually stronger than it was six months ago.  Interesting.

Check out this story.  I found the graph especially interesting.

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Black Friday Success

As a man who feels himself in charge of his own destiny, I have developed a set of rules that help me to more effectively enjoy life.  For the most part, if I do not want to do something, and it does not hurt my family, then I do not do it.  For instance, I do not do garage sales.  I find them to be an extreme whipping, and I would rather just give my old useless stuff to a deserving charity.  So, I do.  Another activity that I have chosen not to take part in is the greatest shopping day of the year, also known as Black Friday. 

This year, I have been completing the game room in my home.  This includes a beautiful bar with a pub theme, a couch, bookshelves and seating.  The only thing that was missing was a television.  The plan had been to wait until I received this year’s tax refund, and buy an LCD HDTV, which would be my first.  However, after reviewing our finances, my wife and I had decided to buy one for Christmas, and finish out the room.

We traveled to my in-laws’ house on Wednesday, and prepared for a long Thanksgiving weekend with our little girl receiving loads of attention.  However, when we told my father-in-law of the plan to purchase a television, he went into internet action. 

I had looked at some prices in the past week, and had decided that I would probably be buying an off-brand 40 inch, 1080P for around $800-$900.  My father-in-law, being a veteran after Thanksgiving shopper knew that I had an opportunity to save a significant amount of money.

He looked at several sales, including online sales, and found some good buys.  Then, he ran across the sales ad for Sears.  It had several great buys on televisions.  I was interested in the 46 inch Sharp 1080P LCD HDTV for $899.00.  This was a $500.00 savings, and suddenly I found myself more motivated.

Unfortunately, my in-laws live about 80 miles from the nearest Sears, so my wife and I got up at 3:00 a.m. and set out for Lawton, OK.  First, I needed gas, and that meant finding a station that would sell it to me in Altus.  After three attempts, I obtained gas, and, more importantly, coffee, and we were on our way.

I began to get worried when I passed a Wal-Mart on the outskirts of Lawton at about 4:00 a.m., a full hour before their sale was to begin.  The parking lot way already half full.  Then about 4:20 we got to the mall, and saw that J.C. Penny which opened at 4:00 a.m. was already a madhouse.

We drove around the corner to the Sears, and I felt a little better when I saw the line waiting outside was not too long.  We placed ourselves in the line in the 40 degree weather behind about 60 people, and I was sure that they were all there to buy my television.  As time drew on, the line grew to the end of the building, curved down another wall, and then out of sight around another corner of the building.

The store opened promptly at 5:00 a.m. and the crowd briskly dispersed throughout the store.  We went directly to the televisions.  When we got there, there were already about 50 people roaming around, and grabbing the tags that referenced the various televisions.  We made a great decision when we decided to seek out a salesperson first.  We went to the register where the sales people were quickly devising a plan for dealing with the mayhem.  Their plan was to simply to form a line at each register and deal with the customers two at a time (one at each register).  Luckily the line just materialized behind us, and we ended up being third in line.

I paid close attention, and quickly realized that we had a problem.  The first question that the man at the register asked was what the SKU# was.  We had simply printed the front page of the ad off the internet, and the small print was illegible.  Therefore, I sent my wife in search of the correct SKU# and prayed that she would find it quickly.  She found the only Sharp 46 inch 1080P LCD HDTV on display, and quickly returned with the number.  The man looked it up and said that there were four in stock.  We were relieved and completed the transaction.  He informed us where we needed to go to find the Customer Pick-up department.

We drove around, and easily found the loading area with one empty space still available.  I did not plan this as a commercial for Sears, but let me say, their pick-up department has its ducks in a row.  There was a nice man there who showed me where the machine was that I needed to scan my receipt through.  There was a beep, and I looked up to see my name on a screen just like at an airport.  It showed how many people were in front of me (four), and how long I had waited.

We were waiting patiently when tragedy stuck.  My wife looked at the receipt and realized that we had been charged $1296.00 for the television that was supposed to cost $899.00.  I felt a little sick.  I suddenly had visions of the lines that we had left- the ones that had about fifty people in them apiece when we left several minutes earlier.

I showed the receipt and the ad to the nice man who had helped us a few minutes earlier, and he offered to get the dock manager for me.  The dock manager, Robert, quickly determined that I had bought the wrong Sharp 46 inch 1080P LCD HDTV.  There were two different ones.  I felt sick again because I knew it was my own fault.  I quickly developed an exit strategy.  I would just get my money back, admit defeat, and buy another television that we saw on Amazon.com that was a 42 inch Sony for the same price.  However, before I could even say a thing, Robert said, “Come this way, I can fix this.”  He quickly reversed the charges on the first television and sold us the new one.  After thanking both men profusely, we were loaded and on the road in only about five more minutes.  We drove back to my in-laws’ house and climbed back into bed at about 7:00 a.m.

Success.