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by Michael Rogan
Special to Tropical Breeze
Welcome to the summer of discontent. With
oil topping $140 a barrel, gasoline topping $4 a gallon, a subprime
crisis, banks failing and sharks attacking us again, these truly
must be the worst of times. Or so the news stories would have you
believe. In my continuing series of interrupting stories with facts
(also known as lending perspective), I will again attempt to shed
light on where we are and where we seem to be headed.
The subprime "crisis" is not
insignificant, but it cannot and will not be tremendously harmful
to the overall economy. Real estate comprises one-twentieth of our
economy, and mortgage defaults have risen to about one percent of
all mortgages. Exports, on the other hand, make up some 17% of the
economy, and are booming. Economically, this much more than offsets
the damage from real estate. Recent headlines predict the failure
of up to 150 more banks with a total cost to taxpayers of a billion
dollars. By contrast, the S&L "crisis" of the early 1990's
cost taxpayers less than $130 billion while seeing more than 800
financial institutions fail. Of course, the predictions back then
were also for billion dollar losses, but those predictions seem to
always be overblown.
It is very much in vogue these days to
find someone to blame for the current high oil and gas prices. Oil
companies, Saudi Arabia, speculators and developing countries are
amongst the most popular. And while there is little doubt that
speculators have played a role in the recent price spike, they are
neither an organized conspiracy or capable of permanently
suspending the laws of supply and demand. Perhaps a quick walk down
oil price memory lane might shed some light.
In the early 1970s the U.S. experienced
significant inflation due to Nixon removing the linkage of the
dollar to gold, causing the dollar to devalue relative to other
currencies. With oil around $3 a barrel, where it had been for
decades, OPEC nations began to balk at their declining income. This
led to the oil embargo, which led to oil prices quadrupling to $12,
which led to predictions that we would never drive gas guzzlers
again (see the Time cover dated 12/31/1973). By the end of that
decade of lousy economic policy, a second supply disruption drove
prices up to nearly $40 a barrel. Incredibly silly ideas like
prices controls and a "windfall profits" tax were enacted (stop me
if this is sounding familiar), leading to long lines at the pumps.
In the midst of predictions of $100 a barrel oil, and proclamations
of peak oil production having been reached, supply and demand took
over. Companies began building and people began driving fuel
efficient cars. Thermostats were lowered in the winter and raised
in the summer. People weather-proofed their homes. Demand crashed
in the midst of a drilling boom which caused production to
skyrocket. Within 6 years, prices declined 75% to $10 a barrel. And
except for a brief spike around the first Gulf War, they were as
low as $10 or $11 as recently 1998. So what did oil prices
remaining at the inflation-adjusted equivalent of 1973 prices for
nearly 2 decades cause all of us to do?
We built much bigger houses while the size
of our families shrunk. We bought minivans, SUVs and trucks, for
ourselves and our kids. We all "knew" oil would be cheap forever.
And just as demand began to pick up with the first modern worldwide
economic recovery, as always happens, articles were written
predicting even lower prices for oil since the world was awash in
the stuff (BusinessWeek 11/3/1997 Cover Story "The new economics of
oil").
So, despite being told "this time it's
different" by our financially ignorant friends in the media, it's
really just the early 1980s all over again (without the very high
inflation, 10% unemployment and 18% interest rates, of course). And
as you read this, demand is plummeting worldwide while production
is already on the rise. Alternative energy sources will once again
further decrease demand. And if history is any guide, sometime
around the next presidential election (or early in the next term at
the latest, energy prices will have plummeted, and mankind will be
ready for a new generation to relearn this lesson all over
again!
By no means do I intend this to sound
cynical. In all cycles like these, progress is made. Advances in
alternative energy sources occur during these times. We all learn
lessons in conservation. My main point, as always, is to remind us
not to overreact to the headlines. What's scary today will be
forgotten tomorrow, but have no fear, there will always be a
replacement story. So, once again, I recommend you turn off the TV
set, and get outside to enjoy the sunset – preferably with
your loved ones.
Michael Rogan is president of Rogan &
Associates Financial Planners, a locally-owned financial planning
brokerage firm based in Safety Harbor. He brings nearly two decades
of financial expertise to the local airwaves on the radio show,
Financial Planning for Life, heard at 11 a.m. weekdays on AM 1250
WHNZ. For more information, call 727-712-3400 or visit
www.RoganFinancial.com .
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