PARIS (ResourceInvestor.com) -- We have long talked about the various impacts of higher oil and energy costs. The way that inflated energy prices knock-through into other commodities, for example by hiking transportation and extraction costs, is one of them. From commodities they then knock through into your pocket, maybe making you feel poorer, or if you bet on their rise, possibly richer.
Other impacts aside from your personal well-being or otherwise have included the run-up in food prices, also linked to transportation and manufacturing, but also to the way biofuels have been so badly mismanaged. All along we have pointed out that there is a correlation between general all round inflation due to rising energy costs, but with a significant time lag.
In other words we are feeling the impact of energy costs at – for argument’s sake – around the $70 per barrel range we had a year ago. Things like capital goods – big stuff such as plant and factory equipment – takes a good while to manufacture. So the estimated cost of say a smelter will rise as energy prices rise, even if the contract was signed when energy prices were lower.
Either the company that ordered the smelter will be hit as costs are passed on to it, or the manufacturer will be hit as it failed to ink any possible rise into its initial contract.
One of the things that has most worried us has been the possibility that the delays in energy costs knocking through were going to be discounted in the current economic malaise. Banks, energy companies and governments are not organisations that like to talk up a crisis, especially as they are the ones that tend to benefit from business as normal.
They all have a vested interest in pretending the next crisis is never going to happen. After all the banks were not exactly screaming out about the credit crunch. We cannot remember too many chief executives warning off poorer folks with bad credit histories from taking out mortgages on the back of the idea of never ending growth.
So what is perhaps slightly worrying at the moment is the prospect of a weakening U.S. economy, losing jobs faster than expected, with continuing banking and housing defaults, faced in no uncertain terms by oil prices wafting around the $106 per barrel price range.
Because, so far we have seen no inclination by any major economy to think their way out of trouble. Instead the only response to troubled times has been to cut interest rates which as those with memories even as poor as the average goldfish will recall, is exactly what got us in this mess in the first place.
We are always told how much more absorbent modern economies are to high energy costs as they have become more efficient, this is indeed true. But the least efficient and most bloated of all of them – with its industries that should have been bankrupt and foreign owned years ago – is the U.S.
Cutting dollar power so that the U.S. becomes some kind of bargain basement shopping mall for the rest of the world – I mean there is only so many pairs of trainers and flats in Manhattan a boy can have - is not going to be the answer. Many people around the world do want to see a smaller less powerful U.S., but a collapsing one is not something anyone is particularly after.
But what happens if that $106 oil takes 18 months to kick through into the U.S. economy? What will happen then? Who will warn us?
