By DAVID MOON, Moon Capital Management,
June 1, 2008
U.S. home prices fell 14.1 percent in the first
quarter, the fastest annual decline since records have been kept.
How could this happen? The federal government has been
working on all sorts of mortgage bailout plans ' not to mention the windfall tax
prebate checks from the IRS. I hate to break it to all those well-intentioned,
occasionally delusional folks in Washington, but the laws of supply and demand
are more powerful than the House
Ways and Means Committee.
The demand for houses has significantly declined; the
supply of houses hasn't. Prices go down. Second-graders trading marbles at
recess understand that concept.
The same laws that apply to marbles and houses also
apply to oil. Why doesn't everyone understand that?
During a recent House Judiciary Committee hearing in
Shell Oil president John Hofmeister argued that gas prices would continue to
rise unless demand declined or the supply increased. He said that $5 a gallon
for gas would look like a very low price unless they're allowed to find new
sources of oil.
That didn't sit well with Representative Maxine Waters
(D-CA), who declared her position if that were to happen: 'This liberal will be
all about socializing'uh, uh, would be about basically taking over, and the
government running all of your companies.'
She doesn't get it.
Even though the price of gasoline has doubled in two
years, the underlying economics that precipitated this condition took decades to
occur. They are only now being seen at the gas pump.
The world consumes about 86.61 million barrels of oil a
day. The 680 refineries in the world are able to produce about 86.60 million
barrels a day. Supply and demand trumps Rep. Waters.
Millions of people in China
didn't start driving cars and SUVs last week. This energy demand increase
happened over decades.
When we switched from paper to plastic grocery bags, it
was supposedly the ecologically friendly thing to do; no trees are murdered in
the production of plastic Kroger bags.
But the plastic bags are produced from petroleum, so
they are bad for the economy ' besides, it takes 2 million years for those
things to disintegrate in a landfill.
People routinely make decisions that leave them feeling
good but don't change the economic realities of large-scale supply and
I saw a Smart car for the first time this week. It gets
40 mpg, partly by being so small and lightweight. Maybe I'm a cynic, but I don't
foresee hundreds of thousands of Smart cars taking advantage of SmartFIX40. I'm
willing to bet that the average weight of an NFL offensive lineman reaches 1,800
pounds before the average automobile does.
Think globally, act locally. I like that. It sounds
nice. Each of us is responsible for the impact our decisions have on the whole.
But I'm not going to ease energy prices driving a golf cart to work.
Switching from paper to plastic, then back to paper is
Reengineering our societal approach to energy requires
some sort of massive change, and massive change is hard.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).