Everyone seems over joyed with the lower crude oil prices, but there may be a dark side. That is the objective of this blog. After reading this, you may not be so happy.
First, a little story. Do you remember a few years ago when the biggest problem with the USA economy was the fact that many homes were "under water"? It was a crisis and out government spent billions to try to cure the problem. Personally, I don't know what the big problem was with homes being "under water". A family buys a home for $250,00 and the bank determines that they can make the payments. Rather than pay rent, the family pays about the same in loan payments. What is the problem? They lived in a better home. What was that worth? One day, they find that they owe more than the home is worth. If they keep paying on the home loan, it will be paid off on exactly the same date that the family originally agreed too with the bank. What is the problem? Did we need to turn our economy upside down to help this family? I don't think so.
I have a friend who borrowed money from the same bank above to drill an oil well on his property. The bank loaned him the money because it was clear that he could pay the money back from his oil sales. When the loan was made the price for crude oil was $100 and now it is down to $50. At $50 a barrel, my friend's oil well is "under water". What do you think our government should do for my friend? Is it really any different from the family above whose home was "under water"? I don't think so.
Next, let's look at the big picture. We have two countries, one is the USA and the other is Japan. This is just an example. These are not exact numbers, but they are good enough for this example. Let's say that the USA produces 1 trillion dollars worth of crude oil per year and that we have 20 years worth of reserves in the ground. That means we "had" 20 trillion dollars worth of crude oil here in the USA. Japan had zero crude oil under their island, but they used 500 billions dollars worth of crude oil per year. Now look how things changed. Rather than the USA having 20 trillion dollars crude oil, they now only have 10 trillion dollars worth. We lost 10 trillion dollars of wealth. The USA is 10 trillion dollars worse off now.
Now look at the people of Japan. Rather than having to buy 500 billion dollars of crude oil, they now can buy the same amount of crude oil for 250 billion dollars. Japan just got a free gift of 250 billion dollars. It is like every person in Japan getting a check for $2,500 each year. I think that you can follow that 4th grade math.
How did the USA do? Our crude oil reserves just went down by 10 trillion dollars. This means that the average person just lost $28,575 of wealth. Follow that? Most people do not understand that the USA is less wealthy now that crude oil prices have fallen. The people who owned oil wells are poorer and those who buy that oil are better off. The net affect is to move the wealth around with the bottom line that we are all "less" wealthy.
In the news, we hear how lower oil prices are affecting Russia, but we don't seem to understand that it is affecting us even more because we produce more oil than Russia. Why is it that most of us can not connect the dots or understand simple economics? We are in competition with the rest of the world and the more that crude oil is worth, the richer we will be. Don't we want to be richer than other countries? Lower oil prices is like a drought or the dust bowl of the 1930's. I know that most of you can not make the connection and that is the problem!!!
PS---Think about all the tax money that will not be collected from the big oil companies due to the lower crude oil prices? Think about all those job producing jobs that the investments by the big oil companies would have created? Now the savings will go to people who will use the savings to buy products imported from China at Walmart? Now you will have to worry that some simple minded politician will wanting to increase the federal tax on gas since we can now all afford to pay more. Most of the world does "not" have any oil or other energy so we have an advantage against them. With lower oil prices, now all those countries are more competitive against us!! That's the real problem.
