The Magic of $85.00 a Barrel of Oil and No Inflation

This morning, the price of oil hit $85.00 U.S. per barrel for the first time. (Avid followers of this column will remember how I was predicting $100.00 U.S. per barrel oil two years ago.)

Despite record prices for oil, the inflation rate posted by the government continues to be in the two-percent to three-percent range. Long ago, I gave up on the government consumer price index as a gauge of inflation.

Housing prices increased substantially in the U.S. in the five years prior to the property bust. It costs more to reach out, property taxes have gone up, quality merchandise costs more than ever (I’m not talking Chinese imitations), tuitions, medical bills — you name it and it goes up in price almost every year. The only item going down is the price of housing. But monthly payments, thanks to millions of resetting adjustable-rate housing loans, have actually gone up.

The real inflation rate is in the five-percent to seven-percent per year area. To have oil prices double in the past few years and the government tell us inflation is only two percent to three percent per annum must be a real magic act.

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Where do oil prices go from here?

I’m not in the camp that believes oil inventories are being manipulated to keep oil prices high. No. I believe the demand for oil coming from fast-developing countries like China coupled with a limited resource and tensions with countries developing the oil are factors that will cause oil prices to continue rising.

Any sound investment portfolio today should have exposure to the energy stocks like the big national oil companies.

NEWSFLASH: Centex (NYSE/CTX), the fourth largest U.S. new homebuilder, reported Friday that it was taking a $1.0-billion charge against property write downs. The company also said it would not be able to make its forecasts profits. Centex joins the ranks of U.S. homebuilders bleeding cash. Before the housing “crash” is over, I expect at least a couple of the large U.S. new homebuilders to declare bankruptcy.