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Trickle Down
Oilnomics
A handful
of years ago the George Bush presidential campaign coined
the phrase "Trickle Down Economics". The concept
that if you give tax relief to the top of the economic pyramid
the benefits will trickle down to the rest of the economy.
If you restructure your view of the economic pyramid and place
oil at the top, whatever happens to oil prices will also trickle
down to the rest of the economy. You can raise the price of
corn and have little effect on the economy. You can raise
the price of beef and have little effect. But raise the price
of oil and you touch virtually every corner of the economy.
Crude oil is used to produce gasoline, heating oil, jet fuel,
and industrial raw materials such as fertilizers, rubber,
and plastics. Fuel provides the transportation of people and
materials. Higher airfares cause less travel and have a negative
impact on airlines, hotels, restaurants, and airport and hotel
workers. Higher transportation costs for products causes higher
prices for almost every product that gets transported to its
place of purchase accept maybe at a roadside farm stand, and
the season for roadside farm stands is pretty much over. Oil
after being chemically processed is a major component of plastics
and rubber. Look around. In most any environment there
are hundreds of items in clear view made of plastics. Look
at the average car, its full of plastic and rubber. Walk through
a grocery store and look at the containers products come in:
many containers are oil-based plastic. What isn't in a plastic
container is in a glass or steel container that was produced
with massive amounts of petroleum based heat sources.
The raw materials for all these products are twice the price
they were a year ago. Companies that process, or ship products
have the choice of either passing their higher costs on to
their customers in the form of higher consumer prices or absorbing
the higher cost and reducing corporate earnings.
The effect of higher oil costs is
showing up in strange places. A major trucking company typically
sells their tractor-trailer fleet every three years. Usually
they sell them at a premium to the highly discounted price
they negotiated when they purchased their trucks. Not this
year. No one wants to be a long haul trucker right now and
this trucking firm has to take a hit on the bottom line to
unload their fleet.
The winners due to higher oil prices
are some of the people you would expect and some you wouldn't.
Oil exploration companies will see higher earnings. Insulated
windows and building insulation manufacturers will win. Higher
mileage auto manufacturers like Honda, and Toyota will come
out ahead. Sales of down comforters and space heaters will
go up. The odd beneficiary of higher oil prices is the State
and Federal government. Since highway and sales taxes collected
on fuel sales are a percentage of the purchase price, government
tax receipts are up almost the same percentage as fuel prices.
Further increases in crude oil prices will send another
shockwave down through the economy. Lower oil prices,
which can result from a quieter Middle East situation or warmer
weather, should be good for the economy, corporate earnings,
and the stock market.
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