Oil Nearly Reaches All-Time High, Consumption Tax Gets Greenspan Nod

Stock prices moved back and forth today on mixed signals from members of the Organization of Petroleum Exporting Countries. Light crude on the New York Mercantile Exchange reached an intra-day peak of $55.20, less than a dollar off its all-time intra-day high, reached in October of last year. The sharp rise came on a statement made by OPEC's acting secretary-general that $80 per barrel oil was conceivable within the next two years. Oil prices had pulled back somewhat by the end of the day on a statement by OPEC member Nigeria that oil production increases might be on the agenda for consideration at the next OPEC meeting, which will be held in Iran in middle of this month.

The initial OPEC signal today about the prospect of $80 per barrel oil gave international traders a sense of confidence that the commodity would be a strong, longer-term haven for global interests trying to find a safe haven for value as they transfer assets out of weakening dollars and into something more secure and attractive as an investment.

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The term "weaker" dollar means that the United States currency has become worth less in exchange against other world currencies. As the dollar becomes worth less, more of them are required to purchase commodities like oil.

  The result of these moves is that the supply of dollars increases in global currency exchange markets as central banks and private parties buy oil with their dollar foreign reserve holdings. As the supply of dollars increases without any matching increase in demand for them, the greenback drops in value. At the same time, because demand for oil contracts increases, the price of oil rises. This effect is magnified in the U.S. because the weaker dollar means it takes more of them to buy a given amount of oil. Adding fuel to the rise in oil prices is the increasing global demand for energy, particularly by China, where the manufacturing sector alone is gathering momentum to satisfy both its own rising domestic needs and its still strongly growing exports sector. With all of these forces acting in the same direction, most analysts do not see much chance for oil prices to ease considerably for the foreseeable future.

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A company that is not a monopoly cannot merely "pass along" to consumers all of a cost increase that it incurs for two reasons: competitors might not do the same; and customers might buy so much less that revenues actually fall after the price increase.

  This bodes ill for the U.S. economy, which is still highly dependent on foreign sources of oil. Rising energy prices may hit hardest during the peak travel season later this Spring, showing up at the pump in higher—possibly record-high—gasoline prices, as well as rising air fares. The airline industry, already struggling in a brutally competitive market, could see one or more companies having no choice but to seek protection under the Chapter 11 of the Federal Bankruptcy code if squeezed much more between the need to raise ticket prices to cover higher fuel costs and the need to hold the line on those fares because of competitive pressures.

In other news today, Federal Reserve Chairman Alan Greenspan managed to keep himself in the headlines by indicating his support for a "simplified" tax code, a term that has become code among neo-conservatives for a shift away from reliance on federal income taxes and toward some form of value added tax.

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The Federal Reserve was established by an Act of Congress early in the 20th Century to separate monetary policy from the fiscal policy that is the result of the political process.

  Earlier this year, the Bush Administration touted a commission it had established under the auspices of the Treasury Department to make recommendations about an overhaul of the United States tax structure. After concerns were expressed about the mission and potential recommendations of that commission, the White House backed away from previous statements about the urgency of the commission's work. With Greenspan once again stepping into the unusual role of recommending fiscal policy changes, the idea of a national sales tax is once again front and center. It is entirely unclear why the Chairman of the Federal Reserve Board is attempting to inject his views into the political process, which is supposed to be separate from the objective of monetary policy, which is supposed to be exclusively to maintain stability of the aggregate price level through controlling the growth of the money supply.

Should the United States turn away from its long-standing tradition of taxing income, the repercussions on the economy could be momentous. A consumption tax would increase the net price consumers pay for many goods and services.

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Households can generate income two ways: through wages and salaries or through the proceeds from investments. Generally speaking, the wealthier the household is, the greater the percentage of its total income it derives from investments.

  A large percentage of lower- and middle-class households spend almost the entirety of their earnings on consumption, whereas wealthier households allocate a greater percentage of their disposable income to investments, which would generate untaxed income under a national sales tax. The result would be an effective shift of the tax burden away from income earned by capital and toward income earned through labor. Moreover, consumption accounts for nearly two-thirds of the annual gross domestic product of the U.S., so a consumption tax, which would suppress consumption, would cause a possibly substantial and negative effect on GDP.