Monday, July 31, 2006

Oil & Interest Rates

ExxonMobile Corp. reported second-quarter profits of $10.36 billion – up 36 percent from the previous year. Revenue was also up 12 percent to finish at $99 billion. Conoco Phillips, Royal Dutch Shell PLC, BP Oil, and Chevron all experienced similar increases of 65 percent, 40 percent, 30 percent, and 18 percent respectively.

Rep. Edward Markey, D–Mass. is quoted as saying that American consumers have been "tipped upside down and have [had] their savings shaken out of their pockets at the gas pump." Gas prices have become a key comodity in determining changes in economic growth.

Traditionally the responsibility of the Federal Reserve System (FED) is that of conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates. By influencing interest rates the FED has historically had the capability of causing growth or decline in the national economy.

With the lowered interest rates over the past 6 years the value of the US Dollar has continued to fall as inflation has been on the rise. In contrast, the Organization of the Petroleum Exporting Countries (OPEC) has nearly tripled their basket prices since 2001.

While the economy has grown with the lowered interest rates the FED is now faced with a more difficult situation as the economic growth slows under pressure from gas prices. 17 consecutive increases in interest rates have not been able to put a stop to inflation while still allowing for sufficient growth and development.

According to Janet Yellen, president of the San Francisco Federal Reserve Bank, it is not likely that interest rates will raise for an 18th time in a row.

While international investors take advantage of foreign currencies raising in value in comparison to the US Dollar, we hope that the economy will continue to grow despite high gas prices. Even more, though, we hope that gas prices will fall again before the next phase of interest rate changes — the value of the US Dollar can't be allowed to fall forever.


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