Wednesday, July 16, 2008

Why Crude Oil is Dropping

Interesting day in the market. Wells Fargo surprised with a decent quarter (relatively speaking, of course). Oil prices continue to slide. Its because of a few basic factors here:

1) The dollar is strengthening (very slightly), and crude oil is priced in dollars.
2) President Bush lifted the ban on offshore drilling (potentially raising future supply, even though it will probably get blocked in congress).
3) Further weakening in the economy and with consumers point toward demand destruction.

Are any of these factors sustainable? The best answer I have is probably not.

1) We've done nothing but institute policies which will further weaken our currency. Continued bailouts are weakening our country's balance sheet and will make us print more money. (And now the Fed wants more power?!?)
2) Bush continues to make these symbolic gestures now that he doesn't have to pander to voters. First it was vetoing the farm bill, now its lifting the drilling ban. He knows neither would probably happen, but this way he can say "Don't blame me! Its congresses fault!"
3) Demand destruction is happening, but it is being picked up by the Chinese. Their economy is still growing rapidly, and their government subsidizes gas for its people, giving them no real incentive to conserve aside from environmental concerns. And lets face it, China isn't exactly the leaders of the green movement.

The strong dollar rallies never seem to stick. Bank stocks reverse, home builders, REITS, and retailers all advance, but nothing seems to last. Can we believe this time is any different?

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