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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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