Oil surpassed $70 per barrel last week, up from $37 back in December. The unwinding of speculative positions forced the price down from $147. In the intermediate term of six to twelve months, I expect the stock market to show signs of life which will help support higher oil prices. The real issue is supply destruction in the oil industry and this reality is known as depletion. All you hear about in the news is “demand destruction” but supply destruction is outpacing demand destruction thus forcing the price upward.
As in many markets, energy prices spiked to new highs and then subsided causing the average consumer to think the price spike was an aberration in the market. We have maintained that peak oil occurred in 2005. The peak is where new production does not exceed actual depletion of existing fields. There have been some who believe that massive undeveloped oil deposits in various locations have been withheld for suspicious reasons. I disagree. It is true there are massive deposits but they are expensive to extract or they are in formations that do not easily give up the hydrocarbon. The low hanging fruit has been developed. The greed of man does not believe in patience when resources can easily be extracted and converted to cash.
Why do you think that the Obama Administration is making such a big deal about alternative energy? They see the writing on the wall. $200 oil is in the cards for the near future and will arrive sooner not later if the economies around the world heat up thus requiring more liquid fuel. China is at the point of exceeding the U.S. as the #1 consumer of new autos and the demand appears to be strong.
The U.S. Dollar must decline in order for the U.S. to survive this economic crisis. The Fed cannot raise interest rates without extending this “recession” or depression depending if you have a job or not. By depreciating the U.S. Dollar, the current debt will become worth less, hopefully not worthless.
I now believe that one should increase their position of gold and/or silver bullion if possible. 5-10% is not enough insurance to weather the potential decline of the U.S. Dollar. 20% of your investment portfolio is not an unreasonable percentage. The commodity bull market is alive and well around the globe. If the U.S. Dollar declines by 5%, oil will increase by 5% without any change to the other fundamentals. The opposite is true as well. However, I do not believe that a strong dollar is sustainable given the quantitative easing by the Fed and the unfunded liabilities of the U.S. Inflation is a currency event, not an economic cycle event.
Natural gas is cheap right now. Its price is being set at the trading desks of hedge funds and investment banks rather than the economic supply/demand criteria of end users and suppliers. Of course this is true for all commodities. Perceptions of the moneychangers provide a perverted pricing function thus are ultimately stealing from the rest of us who consume commodities. The world continues to consume more energy each year independent of the economic downturns and as the global population grows, this will be the reality. All sources of energy must be tapped to keep up with the demand. Right now, natural gas is cheap relative to the alternatives. You can expect the price to be pulled up by the market in the coming months.
Mexico is in deep trouble. Mexico’s Cantarell Oil field, The second Largest oil field in the World Is Dying. In July 2008, daily production rate fell sharply by 36% to 973,668 barrels per day from 1.526 million barrels per day a year earlier. Mexico may soon be an importer of oil rather than an exporter to the U.S.
Canadian Oil Sands extraction is unprofitable below $75-$80 per barrel. This provides a floor for supply from this resource. Venezuela’s exports are being committed to China. In Colorado, new permitting requirements make it extremely difficult to drill for oil & gas.
I suggest that you prepare yourself for this coming storm. Anything you can do to become more energy efficient now will reap rewards in the near future. If you have a gas guzzler, you may want to trade for a more efficient vehicle. There are little things you can do around the house to improve its energy footprint. There are now energy tax credits for approved upgrades in the U.S. You can grow a vegetable garden and start with the simple- tomatoes, onions, lettuce, radishes… Yes, right now it seems like more trouble than it is worth but as energy prices go up, there will be less fresh produce to buy at reasonable prices.
If you own two or more vehicles, I would recommend that one of them be energy efficient with a notable range (gallons x mpg). If we have an gasoline shortages, the impact will be less on those with energy efficient vehicles.
When will the storm arrive? You can be sure that leadership will not forewarn us since they do not want the masses rising up in fear. If everyone topped off their gas tanks at once, we would have a gasoline shortage immediately. That is how tight supplies really are. What would happen if people began to hoard gasoline because of being told of a coming energy storm?
Proverbs 6:6-8
Go to the ant, thou sluggard; consider her ways, and be wise:
Which having no guide, overseer, or ruler,
Provideth her meat in the summer, [and] gathereth her food in the harvest.