When life gives you lemon, you make lemonade.

“When life gives you lemon, you make lemonade,” becomes a common saying in these troublesome times. The future is uncertain yet grim. Drivers suffers from the never ending gas price increase, consumer noticeably changed their spending habits, employees anxious about another layoffs, even the cheerful ones who used to light up our days becomes a nearly extinct species. As of I have sent over dozens of summer job/internship applications, but no cigar; nonetheless, it is not the end of the world.

Maybe youth has misled me to become short sighted or pride has overclouded my views towards my flaws, then again optimism and skepticism is the only two things left in my possessions. After all there is nothing to do or anything to lose. Hopefully, some will join this new journey and “make lemonade” during the process.

Now enough with this nonsense, let’s attempt to discuss something related to Economics.

As of last Friday oil has gone crazy, as if it hasn’t already, and shot up $10.75 to $138.54. Instead of bring our torches and pitchforks to Big Oil, we should set our emotions behind and think rationally. Currently, there are two separate explanations for the crazy oil price: weak dollar or Peak Oil.

The first explanation basically boils down to a weak economy, then Fed cut rates; weaken the dollar and oil speculators buy tons of oil to hedge against the dollar, hence the crazy high oil price. This explanation became a norm since Ron Paul presidency run. The second explanation explains the oil industry underestimated oil demand and overestimated oil supply, plus “peak oil” drives oil speculators to stock up on oil before it ran out.

If the first explanation is true, oil is overvalued in a sense that when the dollar/economy strengths, the bubble will pop and oil will be cheaper. Conversely, if the second explanation is true, oil is undervalued and it will increase at an increasing speed.

In the name of good Economics, I will read and research both explanation, and hopefully, finding the true answer in this summer.

The $110 barrel of oil

This week a barrel of crude oil (hereafter I’ll use oil instead of crude oil) has reached $110 where it was only $60 a year ago. Many claimed (and hoped) $100+ barrel is temporary and soon enough it will fall back to the good old days. Being a buzz-kill I have to disagree. Even though we have self-claimed oil producers, but most of them are oil extractors. We can only produce oil with high pressure or bacteria, but currently these methods will use more energy than it produces. Hence the phrase oil is a non-renewable energy.

By using simple human logic, if something gets rare it will become more valuable (or expensive). So why should oil price remain constant? It shouldn’t. The other question will be what drives the price to almost double in 07, instead of a steady rate of increase which never actually happen to America?

Texas Senator Ron Paul, an Austrian Economist, explains it is all because of the weak dollar. The Dollar has devalued 30% based on gold, causes goods and services 30% more expensive.

Then what caused the other 70%? The rest is more of a Keynesian demand-pull inflation. Our fellow average Joe and Jane have used more oil to fill their tanks and heat their houses. Wars have been using lots of oil. Also, China and India has consumed more oil to produce more products and fill their gas tank. Hence, about 2 years ago Time Magazine made a satire cartoon where you saved $2 on a pair of sneakers made in China and spent it back on the gas pump.

Next: A few suggestions to slow down the oil price increase