OPEC doing Greenspan's work

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OPEC doing Greenspan's work High energy costs now prevent a global crisis later

Donald Coxe Big-name Wall Street economists and strategists hate high energy prices for excellent reasons:

1. They are contrary to unanimous Biggie forecasts that oil prices would fall back to the low 20s -- or even less -- and that natural gas prices would go nowhere.

2. They challenge the Biggies' view that there are no inflationary pressures in the economy.

3. They deliver higher returns to investors in oil and gas stocks (which few, if any, Biggies recommended) than to investors in technology stocks (which all Biggies recommended).

4. They could put the global economy at risk: The recessions of 1973 and 1990 came after oil price shocks.

As if those affronts weren't enough, they make filling up the tanks of Biggies' SUVs and BMWs annoyingly expensive.

When oil prices roared past US$30 a barrel and natural gas levitated past US$5 per million cubic feet and the energy group moved to the top performance bracket in the U.S. stock market, Wall Street's biggest and best were appalled.

When President Bill Clinton, against the advice of Treasury Secretary Lawrence Summers and Fed chairman Alan Greenspan, released oil from the Strategic Petroleum Reserve (to meet the threat of national disaster from a Gore defeat), the Biggies were relieved. Oil fell back from US$37 a barrel to US$29. No Biggies denounced the president for the perilous act of politicizing oil. (That linkage of oil to politics will probably be used by Mideast extremists to justify the demands of such charming people as Saddam Hussein and the Persian Ayatollahs that oil power should be enlisted in the jihad against Israel.)

Understanding the geopolitical implications of using oil for domestic politics, European governments declined to join Clinton. Result: Oil prices moved back above US$30 and natural gas prices resumed their rally.

If higher oil prices guaranteed a Gore defeat, US$60 oil would be a bearable cost. But the connection between oil prices and Al Gore is too tenuous to justify expensive oil. There are sounder reasons that investors should look on the bright side, and why they should buy oil stocks.

First and foremost, high oil prices help prevent a U.S. dollar collapse, a cataclysm that would trigger a global bear market. (As noted in this column on many occasions, true bear markets have, since 1968, always been accompanied by dollar crises.)

Oil is denominated in dollars, not euros or yen. That means oil consumers have to keep scrambling to get dollars to finance inventories. When revenues of the Organization of Petroleum Exporting Countries and other oil exporters soar, they pay down their heavy foreign debts -- which are overwhelmingly dollar-denominated -- and build up their foreign exchange reserves with purchases of U.S. dollar assets. The U.S. current account deficit is US$1.7-billion a day. OPEC's daily revenues are now in the US$900-million range, up from US$350-million two years ago. That's a lot of dollar buying power.

Secondly, high energy costs are not in themselves inflationary. They are mildly deflationary. Inflation is, as Milton Friedman documented, a monetary phenomenon. As long as central banks don't try to offset inflation by printing money, then all that happens is that shares in the global income pie are redistributed to oil producers from other sectors. Consumers who can't get wage increases to cover their rising energy costs cut back on other spending. Companies that can't pass along energy costs cut back on production, or go broke, or both. (That's why long-term interest rates have fallen this year despite the leap in energy costs.)

Thirdly, as more money is drained from overenthusiastic consumers in industrial economies to pay energy bills, the global economy slows from its near record rate of growth without central banks having to raise interest rates to punitive levels. As money flows outward from the United States and Europe to Third World oil producers, stock markets stutter, companies pull in their horns, and consumers hunker down. OPEC is doing Greenspan's work.

Finally, high energy costs now prevent a full-blown global energy crisis later. Two decades of volatile and disappointing oil industry returns have once again made the industrial world dependent on unreliable Third World suppliers. Barring a return to disastrous Ottawa policies, the outlook for the Canadian industry has never been brighter. Well-managed companies should be viewed as long-term investments, not just short-term cyclical plays.

The Biggies are still wrong.


-- GasPasser (Gas@for.less), October 08, 2000

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