Oil Destabilizes, So Watch Out

by Mitchell Clark, B. Comm.

Oil and gold — the two single most important commodities to keep an eye on going forward. The price of a barrel of oil is the barometer on the future of the economy, while the price of gold represents investors’ confidence in the process.

Oil is going up right now and it’s going to have a destabilizing effect on any economic recovery. The reason is simple. Most of our economic activity relies on oil for goods or a service to be delivered or completed. As the value of the raw material goes up, so does pricing pressure in the marketplace. This is why the cost of food is starting to go up, and will keep going up over the next several years.

Every good or service we consume relies on oil to some degree for the transaction to take place. Oil at nearly $70.00 a barrel just after a major financial collapse and global recession is telling us something. The marketplace is saying that, in spite of all these shocks to the system, the easy-access oil is starting to run out.

Even the domestic numbers are staring to change. Despite U.S. crude inventories being at a 19-year high, the Energy Department says that domestic oil supplies recently dropped by an unexpected 5.4 million barrels. It was the third week running in which oil supplies unexpectedly fell.

So, we’ve got: expectations for economic recovery; OPEC saying that oil production will remain unchanged; and domestic supply stocks that are falling just before summer. It’s the perfect environment for $100.00 oil once again.

And, we’re also looking at the perfect storm for economic malaise going forward. The price of oil is going up in expectation of a stronger economy. Yet, rising oil prices have the effect of changing consumer behavior. And, as we all know, higher gasoline prices kill big-ticket sales of cars and airplanes. So, it could be that the only person who wins with rising oil prices is the person who is invested in oil. Regardless, I think all these events will bring nothing more than economic stagnation over the next few years. Slow growth with higher prices is a realistic forecast. The only way to beat it is to be invested in the right stuff.