All The Noise About Oil

While I’m a big believer that the price of consumer goods will decline in the short term (deflation), I also recognize that some commodities are rising in price. In particular, I’ve been very bullish on both gold and sliver, and they have both risen nicely in value over the past two to three years.

Today’s commentary is on another commodity and its rising price: Oil. Crude oil prices are trading near a 13-year high, and most analysts are predicting oil will breakout above US$40.00 per barrel this summer, if not earlier.

While I don’t pretend to be an expert in the political arena, a layperson like me would assume that the easing of tensions in Iraq and Afghanistan would keep oil prices stable, or at least keep them from rising. Apparently not.

As I understand it, oil is rising in price for these reasons:

First, OPEC (which supplies 1/3 of the world’s oil supply) plans to cut production by 4% to 23.5 million barrels a day by April 1, 2004.

Second, Demand for oil is rising in countries where capitalization and economic expansion are taking off, namely China and India. Venezuela, a major supplier of oil to the U.S., is experiencing political unrest.

Finally, inventories of both oil and gas in the U.S. are lower today than they were a year ago. Yes, this is a classic economic case of the lower the supply, the higher the price.

It’s truly amazing to see that we can travel to the moon, develop electronics that were once only imaginable, and even create drugs that a few decades ago would be considered miracles. But yet, we cannot find a cost effective alternative to gasoline. For this lack of technology focus, American consumers and businesses will pay dearly.

In fact, can you think of any other commodity the U.S. is so desperately in need of that’s in the hands of other countries? There are some, but none are as big as oil. And if our currency continues to fall in value against other world currencies, these foreign “oil rich” currencies might start asking for something else than U.S. dollars… like euros.

I’m joining the crowd on this one and agreeing with other analysts in that we’re looking at higher oil prices ahead. Maybe it’s time to sell that Hummer.