THE NEXT BIG ECONOMIC STORY...OIL IS STILL EXPENSIVE!

one of the major benefits that was touted as a result of overthrowing & taking over iraq was that OIL would drop back to $20/brl. getting control of iraqs vast oil reserves would allow the US to better control the flow of oil from the middle east and that would be an economic positive for the US economy.

we are now some 3 months into the re-building of iraq and oil is $32/brl. some may credit this to stronger demand for oil due to a strengthening economy or the fact that OPEC left output quotas unch at their last meeting. regardless of the reason, $32 oil is not a positive for the economy. it acts as a tax on businesses and consumers.

businesses in every industry have discussed high energy costs as contributing to the challenging business enviroment and the cause for higher operating costs, lower margins & lower eps. consumers will no doubt be adversely effected by higher gas prices, especially with the proliferation of low gas mileage vehicles, i.e. SUV's, hummers, etc.

one good note on the energy front is the fact that natural gas has dropped back to $4.50/btu, which is much lower than the $7+ it peaked at a few months ago. still considerably higher than the $2.50-3.00/btu it has averaged for the last few years. greenspan discussed natural gas at a few of his recent hearings and the FED also discussed its implications for the economy, so if natural gas starts to rise again due to spikes in demand or otherwise that would be an incremental energy negative.

back to oil. if oil prices remain at current levels or goes higher, the economy will be effected in a negative way. the implications are widespread, but suffice to say that business energy costs will remain high and consumers will have less money to spend on "stuff", which will hurt business revenues. double negative for earnings. any company that has benefitted from lower energy prices, or the prospect of lower energy prices, will have to be re-evaluated based on more expensive energy. regardless of what our government says about iraqi oil.

have a grateful day!

larry