Greenspan Says Oil Prices Will "Cool Down"; Oil Prices Obey

On Wednesday, Chairman of the Federal Reserve Alan Greenspan said oil prices would "cool down" from their record highs of recent days. Thursday, as if on cue, oil prices dropped from higher than $57 per barrel down to the $54 per barrel range. Light sweet crude on the New York Merc found $53.90 a decent place to rest by the end of the day.

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Every additional dollar spent on one product reduces by that same dollar the level of expenditures on other products. In the case of imported oil, the dollars spent on rising energy costs are lost to the U.S. economy, thereby reducing domestically generated revenues of businesses by the amount of that increase.

  Gasoline prices, which had topped $2.35 in some parts of the country, quickly retreated to good times levels of around $2.25 per gallon, still far higher than they were just a month ago, when economists and other market watchers were still predicting that the U.S. economy would grow at a robust pace throughout 2005. Despite the temporary reprieve, the Energy Department on Wednesday predicted the possibility of $100 per barrel oil through next year, claiming that this prospect was the result of suppliers unable to keep pace with growing worldwide demand. The implication was that China, quickly becoming a powerhouse industrialized nation with well over a billion consumers, would devour oil resources and keep the pressure on suppliers to move fuel toward its economy, pushing global prices ever higher.

Despite the day's easing of oil prices, the International Monetary Fund on Wednesday afternoon also predicted that oil may hit $100 per barrel and remain volatile for the next two-and-a-half decades.

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When the price of one product rises, consumers will try to substitute away from that product to the extent that they can. This puts additional demand pressure on the substitutes, pushing their prices up.

  The higher prices for petroleum-based energy will damage economic growth world-wide, but the rising prices will also likely spawn new technologies that provide energy from alternate sources. The bad news is that these alternative sources are not likely to provide energy at any considerable savings. Also, with the price of oil on the rise, it becomes profitable for companies to extract oil from fields where the costs of exploitation had previously been prohibitive.

Likely as not, Fed Chairman Greenspan predicted the easing of oil prices based on the fact that U.S. interest rates have been rising for months as the Fed does battle with looming inflationary pressures. The higher U.S. interest rates should strengthen the dollar against other currencies, thereby reducing the costs of imports like oil.

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A stronger dollar will make imports cheaper, but it will make goods that American companies sell overseas more expensive, thereby costing jobs in export-related industries in the United States.

  The recent record weakness in the greenback had been part, but not all, of the reason oil and gasoline prices had risen so dramatically. With the U.S. dollar once again finding its footing, the old pattern of cheap imports to the U.S. will begin to re-emerge. This does not mean, however, that gasoline prices are likely to soon return to pre-Bush Administration levels. Most analysts would agree that those days are long gone, and none of the powers that be are terribly interested in seeing a return to relatively cheap energy. The profits currently being earned by energy-related companies are far and away too handsome for anyone in Washington to seriously try to stop such money from flowing to interests that have such power in the world's halls of government.

On Wall Street Wednesday, stocks continued their rally that had begun in earnest at the beginning of the week. The narrow index of 30 blue chips was up better than half-a-percent, and the NASDAQ composite index was up almost a full percent, once again breaking the 2000-point mark to the upside. For several weeks now, the broad-based NASDAQ has been bobbing over and under the 2000 point value, using it almost as a new baseline for meandering in a trading range, one that is lower than the previous one, which was centered a bit below 2100. The NASDAQ composite index had floated there from before the beginning of the current year until just a few weeks ago, when it first made an aborted run upward before collapsing down into the territory it now calls home. Bond prices slumped, with the inversely related yields pushing upward, maintaining the steady rise that will, as noted above, strengthen the American dollar somewhat, but at the same time add further to the financial hardships already being sustained by households struggling to reallocate money toward higher energy costs and away from other goods like food and housing. Little can be done by these consumers in the short run, and the effect is almost inevitably a recession as households use a greater percentage of their income to pay for the privilege of being able to drive to work each day.