Monday, November 10, 2008

Lower Energy Costs: The True Stimulus Check

While Congress is talking about issuing another Stimulus Package to bail out the auto companies and extended unemployment benefits, in a perverse way, we have gotten a stimulus from the weak world economy. We have literally gone from above $4 a gallon for gasoline to below $2 in just a few months. My guess is that a near $1.50 a gallon is just around the corner.

The average American car is driven a little over 12,000 miles a year and gets about 17 miles per gallon. The average 2-car family drives a combined mileage of about 20,000 miles a year. That means that the every individual car owner is saving about $1,400 a year at $2 a gallon from the previous record high. For a 2-car family, that's a savings of over $2,350. That's just for the automobile travel. Other energy costs are falling just as quickly. That means the cost for home heating oil and natural gas is on the wane, also.

Because energy prices are so integral to almost every product of our economy, more savings could be evident; especially in food costs. More than anything, our the cost of food is driven by the cost of oil-based energy. That's because many of America's farms are so highly mechanized. From the cost to produce and deliver seed and fertilizers; to the cost of working the soil with massive farm equipment; to the cost of harvesting and delivering the product to the final food processor; to the cost of processing that food and finally delivering it to market; petroleum-based energy is a major expense. Depending on the final food product, energy costs could contribute anywhere from 20% to 50% of the price.

The upside of this weak, world economy is the lowering of costs in almost everything that we consume due to the lack of demand. The average family could be seeing as much as $5,000 a year in savings when all prices finally settle out. That's more than our government, with any stimulus check, could do to kick-start our economy. In many ways, it is the law of supply and demand that will help heal this economy. All these buyouts and bailouts are only short-term and stop-gap measures. It's when the consumer buys more products, because they have more excess cash and prices are low, that this country and the world will right itself from recession. The near trillion dollars that our government is currently planning to spend to bail out our economy, pales in comparison to the near $8 trillion in value that has been lost in our own stock market since October of 2007. I use the stock market value because, in a way, it is an expression of value of most major U.S. companies at any one point in time. Over-and-above that, you have several thousand small businesses that have been equally hurt. Homes across America have lost more than 30 percent of their value. Additionally, the average home price has fallen by at least $75,000 on the roughly 100 million American homes. As a result, our overall economy may have lost as much as $16 trillion in measurable value in the last year.

I really think that rising oil prices exacerbated the subprime loan situation in America. If energy prices had been kept low, many of those who were seeing higher annual costs for their Adjustable Rate Mortgages, previously at subprime levels, might have been able to cope and the rate of foreclosure could have been minimized. But the cost of rising gasoline, home energy and food prices, coupled with the higher cost of mortgages, was just too much for the many who lost their homes and defaulted on the credit they were give. I think our politicians should take that fact to heart when laying out any new plans for energy supplies in America. Placing restrictions on oil production, the use of coal and natural gas, and the blind intolerance of new nuclear plants is just delaying the possibility of more and more foreclosures and the substantial return of economic distress in the future.

I realize that, with oil prices down more than half, the immediacy of action by our government on energy supplies has been, once again, shelved. However, now is the time that we should be pushing for more domestic oil production before the reality of the world's oil shortages hits us once again. Just like Katrina and New Orleans, the consequences of not acting before the storm actually hits is just delaying immeasurable human and economic costs. The lower energy prices will help our society to recover from the recession. However, once our economy gets rolling again, consumption without increased supplies will only result in high gasoline, heating, and food prices. And just like this year, those who are only marginally living in their homes, will face the consequences of foreclosures. Just mark my words.

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