My Wife Told Me Gas Is $2 a gallon

This past weekend, during one of our quite moments, when the children were asleep, my wife curled up next to me and said, "honey, do you know gas is $2.00 a gallon for regular?" I almost fell out of bed. I have been married for 17 years and my wife has never said anything to me about gas, except to ask me to fill her car up with it. The high cost of oil is catching the attention of everybody, including my wife, which is a sign that either the top is in, or our economy is about to stress under the weight of permanently high oil prices.

Over the past few months OIL has been expensive and recently, it has reached prices not seen since, EVER! Recent prices have never been seen, and many things are signaling that these prices are not going to recede in the near term, and maybe not for the intermediate, or long term either.

OPEC says that they are close to maxing out there production capacity, and many of the OPEC Ministers say that its not the supply of oil that is the problem. The Qatari minister also said even maximum OPEC oil production output wouldn't solve the problem of record-high oil prices. Political and psychological factors weighing on global oil markets were behind high crude futures prices. "OPEC can't solve these issues," he said, repeating that there is no shortage of supply in today's oil markets.

In fact, OPEC stated today that "inadequate refining capacity in the U.S. and multiple specifications for gasoline in its different states are some of the reasons behind the current high global oil prices." The causes for high OIL prices are many...geopolitical tension, high demand (caused by many things, not just a strong global economy), low refining capacity, and maybe most concerning the hubbert index that says that oil production is peaking and will begin to decline over the next decade.

Over the past decade, OIL use and supply complacency has risen and currently, we are mired in a dangerous and debilitating OIL dependency, much like a drug addict. Regardless of cost or consequences, our nation continues to consume oil at the the highest rate in our history and we have failed to invest in any significant "treatment" program to alleviate this problem.

OIL is not just used to power our vehicles. As important as gasoline is to our cars, it is only a small part of our nations OIL consumption. OIL and its many by products are used in almost every industry and is a key raw material in many products, most which we do not consider as an "oil related" product. Some examples of this is carpeting, paint & coatings, plastics, adhesives, rubber, and many synthetic materials used to make fabrics & clothing.

Our homes are heated and cooled with either oil or electricity generated by oil. Our boats, planes, trucks and factories use oil to operate. Chemical companies, hotels, manufacturing, construction, food service, transportation, etc. all require oil to operate and run their businesses. And last but clearly not least, we need huge amounts of oil to keep our military and national defense functioning.

With OIL being a key ingredient to the fundamental operation of our economy, it is remarkable that the consistently high price has not had a more detrimental effect on the economic recovery. How long that can last is yet to be seen, but as the price of oil remains high or if it presses higher, for what ever reason, it cannot remain benign and will not be able to be ignored. Most recently, John Snow, Secretary of the Treasury, said in a way only he can, "the high price of oil is not helpful, but should not halt our country's economic recovery."

The truth of the matter is that high oil prices are much more than "not helpful" to the US and global economy. The implications are way to far reaching to get into in this blog, but the repercussions of expensive oil will show up in every industry and affect every person, everyday.

In previous periods of high OIL/energy prices, economic slowdowns or RECESSIONS always occur...normally about 6 months later. Being that high prices have been upon us for sometime now, going back almost one year, if prices do not recede in short order, economic strain caused by high OIL prices should show up in the coming months. And the only reason it hasn't yet is that borrowing has been so inexpensive, that the high cost of oil has only been background noise, especially since we are continuosly told by the BUsh administration that oil prices will come down as we secure Iraq...NOT!

If my wife can't ignore the high price of gas any longer, then neither can the economy.

And as a footnote, having nothing to do with oil...

If the FED decides to move from its overly accomodative monetary policy in the coming months, that will add a new dynamic to the high energy prices. "Money" is a large component to the workings of the economy, so if the FED makes it more expensive to borrow it, at the same time as consumers and businesses are facing consistently high OIL prices, the combination will be powerful and unique to this business cycle. The combination of expensive OIL and more expensive borrowing costs could be a combination of forces that hit corporations and consumers in a way not seen before. The economic drugs we are addicted to are cheap money and oil...wait till the hangover from these two kick in.