At Arm's Length - Financial Commentary about Money, Investing, and How It Affects the Average Investor

At Arm's Length: 04.12.05

Oil Slack

Over the last six trading sessions, the price of oil has dropped. It has not, however fazed anyone. The markets seem nonplussed by the falling price largely because it is still well above the fifty dollar a barrel mark. The reasons for the new regular price for a barrel are many and were recently addressed by the Fed chairman Alan Greenspan, his comments broadcast by satellite to the titans of the industry here in the states. OPEC in all likelihood did not care.

Greenspan, a firm believer in free market corrections suggested that the current strain on oil should not prompt oil producers to tweak the price that is set by global demand.

That demand is not about to abate anytime soon as China is just warming up to production at any cost. Their incredible pool of cheap labor will keep the overall cost of their goods well below those of other industrial nations. Oil and raw materials at any price is easily absorbed. As the markets they serve continue to increase their appetite for their goods, they in turn change the dynamics of the world's indebtedness in the process.

China has pegged its currency the renminbi or yuan to the dollar, much to consternation of their trading partners. The United states has been pushing Beijing to change the valuation and allow their currency to appreciate on its own. Now Europe, whose euro has continued to gain strength against the dollar, is, for the first time, running a trade deficit with China.

The global reaction to this has started mutterings of protectionism. But from whom? Many of the companies whose investments are based in China also trade on American exchanges. Steep tariffs would simply offset themselves, pushing shareholders to question the wisdom of imposing archaic trading rules on a newly minted global marketplace.

Governments who believe they can exercise their right to protect their manufacturing do so at the risk of a consumer rebellion. The low cost goods being dumped on American and European shores are left there by request. One of the world's largest retailers and the fifth largest customer of Chinese goods, Wal-Mart would not stand for any government interference probably by pointing out that it is the consumer that should determine the price, not those elected to protect the soil from invaders much more fierce than cheap goods.

As those trade deficits widen, already at record levels here in the United States, the hope that oil will create the need for pricing changes in Chinese manufacturing will not occur. Inflation might work that way stateside and Greenspan warned that it would ultimately affect consumers, the Chinese have a good deal of price maneuverability.

In fact, the only deficits China need worry about are those among oil producing nations. But China has a plan there as well. By increasing its presence on the African continent, China has become the new benevolent trade partner with much of the third world now so lovingly referred to as developing nations.

So if the Chinese are not worried about the price of oil, should we? Yes. China is not only a big exporter of goods and growing consumer of resources but the banker of choice for the United States. Pushing this relationship by demanding that this economic super power bend to the will of the a debtor nation seems, at best, silly.

Unfortunately, our choices have become limited. Without citing the growing educational gap in this country compared to China - last year, they graduated a million college students, we are ill prepared to create alternatives to the growing cost of oil and the lack of new resources.

In many industries, enormous pools of money such as the one Exxon/Mobil currently sits on would be crippling for a company. Flush with cash, these companies have not increased exploration nor have they sought to increase production of refined oil, Technological development and the need to build newer refineries have these companies adopting an old school approach to this nation's energy problems. As long as our infrastructure remains limited to current production capabilities, profits will remain high.

Beating the demand for oil in the United States and create a viable alternative to running deficits in commodities as well as finished goods would require two things. America needs to develop another source of viable energy. To do that, we need to focus on education.

The previous week's articles.

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