OPEC Decision Spells Disaster for US Economy

OPEC throws the United States a Curve Ball!


"The Cost of Doing Business" has just gone up. The largest increases in US oil prices in history is starting to hit home in the United States economy. And its turning the economy "sluggish". While the United States is crying "foul ball", the rest of the world is turning a deaf ear to the US's demands.

For over 50 years the United States has benefitted from cheap oil that literally "fueled" its economy. It was a bit like playing with a corked-bat. A corked bat in baseball is hollowed out and has a liquid inside it to make the bat hit harder when the bat connects with the ball, its considered cheating.

Complaining to the World Trade Organization (the umpire of international finance) is a bit useless. The prices of gasoline and oil in countries other than the US are significantly higher (sometimes 4 to 8 times more expensive). Even Canada and Mexico's oil prices are higher, despite being "just across the border".

Why? Because for over 50 years, ever since the end of WWII, the United States has hogged the world's oil markets, causing shortages in parts of the world, and surpluses in the United States. The prices in Canada and Mexico benefit from those surpluses, but not as much as the United States does.

The world wide "Supply and Demand" however have started to shake the foundations of the US economy. China and other countries are now demanding more oil, and OPEC countries are selling their oil to China and other countries instead.

The recent OPEC decision to increase production of oil was only half of what the current demand-increase is.

The world wide demand for oil (especially in China where cars are now becoming more popular and common) has gone up about 6 million barrels per day, and oil analysts suggest that demand might rise another 2 million barrels due to increased use of SUVs.

The July increase of 2 million barrels per day is only half of what the world really needs. Saudi Arabia suggested 2.5 million/day, and the United States asked for 4 million/day, OPEC decided for a toned-down version of Saudi Arabia's plan.

And since China and other countries are now demanding the lion's share of that oil, the US oil prices are continuing to go up.

OPEC is considering whether to increase production again in August.

But July is the heaviest season in the United States for people driving. Summer vacations, baseball and soccer games for the kids, shopping and movies for teenagers... all that travelling adds up in the summer to much higher gasoline prices.

But it also effects regular transportation as well. Bus companies, taxis, big rig trucks... the entire transportation industry is effected by higher oil and gasoline prices.

If the price of gasoline goes up, everything else gets inflation.

Inflation means people cut back on how much they spend, sending the economy into a tailspin of more inflation, low consumer confidence and depression level interest rates.

AKA., economic disaster. Depression. People with products to sell, but they can't afford to ship them.

The courier industry is a prime example. Already stocks in UPS and other courier companies have taken a 10% dive on the NYSX.

And stocks in everything that deals with transportation have also been hurt. Everything from automobiles to airplanes.

The oil industry companies aren't complaining however. Higher prices means more profits.

Its a bit like the baseball stadiums charging more for seats and there is less people in the actual stadium. They're making more of a profit selling less seats to less people at a much higher price. The oil is still getting sold, but there is less to go around so the oil industry just raises the prices so they make huge profits.

And George W. Bush doesn't care if the U.S. economy goes sour due to raised oil prices... he's IN the oil industry. He's making record profits now. If the oil industry had umpires, they'd be crying "foul ball" or "strike three" right now.

TSX sinks after OPEC decision


A decision by OPEC oil ministers to increase its crude oil production quota less than had been expected and worries about inflation in the United States sent stock markets lower today.

The oil cartel said it will increase its production ceiling by two million barrels a day next month in a bid to bring down high prices. OPEC also agreed to raise the target by an additional 500,000 barrels a day in August if necessary.

Saudi Arabia had been seeking an immediate increase of 2.5 million barrels a day to reach a ceiling of 26 million barrels.

"We believe there is not any shortage in the market and we should be very careful about the coming months," Iranian Oil Minister Bijan Namdar Zangeneh said after a meeting in Beirut.

In New York, contracts of light crude for July delivery were trading 21 cents higher at $40.17 (U.S.) a barrel.

On the markets, the S&P/TSX composite index dropped 21.26 points to 8,353.57 while the TSX Venture Exchange was down 4.61 points to 1,588.76.

The Canadian dollar was up 0.16 of a cent to 73.57 cents (U.S.).

On Wall Street, the Dow industrial average dropped 28.17 points to 10,234.80. The Nasdaq dipped 15.39 points to 1,973.59, while the S&P 500 was down 3.82 points at 1,121.17.

In economic news, unit labour costs in the United States rose at a 0.8 per cent pace in the first quarter, up from the previous estimate of a 0.5 per cent pace and following a 1.7 per cent rate of increase in the fourth quarter.

Mark Chandler, senior financial markets economist at Scotiabank, said the higher labour costs increased fears of inflation, which could prompt the U.S. Federal Reserve to raise interest rates sooner and faster than expected.

Initial claims for unemployment benefits also fell last week by a seasonally adjusted 6,000 to 339,000, the U.S. Department of Labor said in a second report that provided further evidence of an improving jobs market. Claims hit a high last year of 444,000 in the middle of April and have slowly drifted downward.

Among the most active stocks on the TSX were Patheon down $1.57 to $11.75 and Bombardier up 13 cents to $4.60. Hip Interactive shares fell 17 cents to $1.48.

Weakness on the Toronto market came from the technology sector as Nortel Networks fell 15 cents to $5.08 and Research In Motion dropped $2.94 to $77.85. Zarlink Semiconductor fell nine cents to $5.28.

Canadian energy stocks headed higher included Talisman Energy, up 35 cents to $27.60. Nexen gained 60 cents to $49.35.

Dow components trading lower included Intel, down 51 cents to $27.50, and Alcoa, down 44 cents to $30.80.

In corporate news, Manitoba Telecom received an Ontario court's go-ahead yesterday to complete its controversial $1.7 billion acquisition of Allstream Inc. A judge refused to grant an injunction requested by Bell Canada, which said the deal will violate several agreements between it and MTS. MTS shares were up 40 cents to $47.

Canadian conglomerate Brascan Corp. has increased its stake in London's Canary Wharf office development, despite losing a months-long bidding war with a group led by Morgan Stanley. Brascan bought an additional 6.3 million shares of Canary Wharf, bringing its total interest in the office complex to 19.6 per cent. Brascan shares were down 21 cents to $34.93.

In overseas markets, Frankfurt's DAX 30 was up 0.37 per cent and the Paris CAC gained 0.06 per cent. London's FTSE 100 fell 0.1 points to 4,422.7.

Japan's Nikkei Stock Average of 225 issues fell 215.29 points, or 1.9 per cent, to finish at 11,027.05. Tokyo's market opened higher, following a gain by the Dow industrial average in New York on Wednesday and amid hopes that oil prices might come down. But oil futures crept higher Thursday and traders started selling stocks.

Shares in Hong Kong plunged in a widespread sell off of banks, real estate issues and Chinese companies that could be hurt by any slowdown in the mainland economy. The Hang Seng Index plunged 271.82 points, or 2.23 per cent, to 11,929.93.