Tuesday, March 11, 2008

Climbing the Slippery Slope of Oil

In a year, crude oil prices have nearly doubled. Today's price is 5 times higher than the $20 a barrel at the beginning of 2002. With this morning's record price of $109+ a barrel, you would have expected to see disrupted supplies and resulting long lines of people and their cars waiting to buy gasoline. But there are no shortages.

Oil is in a speculative spiral. It is the classic case of money chasing money. Every time there any tensions in the Middle East, or a hurricane approaching our Gulf Coast, or a refinery fire or other problem, the price of oil jumps. But, when that last reason for the oil jump is abated, the price stays up and merely waits for another reason to go up. And, like piling dominoes in a single stack, the price just keeps going up. But, like that stack of dominoes, the stack, at some point, will come crashing down. It happened to the dot-com boom in the 1990's and to the housing boom in the last year; and, it will, at some point, happen to oil.

By all rights, oil should be collapsing under the fear of a recession in the United States. If our country has an economic slow down, then India and China, our biggest trading partners, should also see slow downs. And, the energy used to make all the "stuff" that Americans love to buy should see a slow down. But, it hasn't as of yet. Now, you hear the argument (the excuse) that oil is rising because the U.S. dollar is falling. If that was really true, oil should not have risen over 3 percent in the last two days on a meager fall of two-tenths of a percent in the value of the dollar. That makes no sense on a correlated basis. A 3+ percent rise in oil is well out of balance with a 0.2 percent drop in the U.S. dollar. It is, and I repeat, pure speculation. And, the only way that it will stop is when oil inventories start rising as a result of less usage or because of increased supply.

Right now, there is no place other than oil and other commodities to put money to work and make a quick profit. Our stock market and the other world stock markets are falling precipitously because of the potential threat of a U.S. recession. Real Estate is a bust. So, there is no profit potential in either residential or commercial real estate. Commodities, like oil an gold, are they only game where short-term profit potentials still exists. And, until there is a tipping-point where oil supplies have peaked because usage has fallen or supplies have increased, oil will continue to rise; maybe to even $200 a barrel. And, if so, expect to pay $6 for a gallon of gasoline at the pumps!

I once heard Hillary Clinton claim that oil would fall the day she took office because the oil companies would see a new direction in energy policies in this country. That may sound good on the campaign trail but it is pure bunk. Somebody should tell Hillary that oil is a "world" product and is only minimally being influenced by what happens in this country. Even if we could reduce the oil usage by 10% in the country, oil would only be influenced by 2-1/2 percent on a worldwide basis. And, 2-1/2 percent is less than one year's growth in demand. The major influence on oil prices is being brought about because of the economic explosion that is taking place in China, India, Indonesia, and South America.

If what we "did" in this country had a major influence on oil, the price of crude should have fallen rather than risen another 25% since last November when the Nancy Pelosi/Harry Reid Congress passed their so-called "Energy and Security Act of 2007". That law was laughable and the oil industry knows it. It, in no way, mandate any new exploration. Instead, it fulfilled the foolish belief by Democrats that we can conserve our way out of our oil problems. To say we would increase fuel economy by 50 percent by 2020 is just a bunch of political mumbo jumbo. At the very best, it will "merely" keeps pace with our future oil needs. More than likely, however, it will fall well-short of our future fuel demands. That is because it will take another 18 years past 2020 "before" the mandated average 35 per-mile-per-gallon fuel economy standard will have its full effect. That is because the average car on the road is 9 years old and it will take twice that average in years before all the cars on the road are replaced with the 35 mpg fuel standard. Also, it should also be pointed out that, as cars age, they significantly lose their fuel economy So, practically speaking, it will probably take more than 18 years to achieve and average of 35 miles-per-gallon in America.

The best thing that can happen to high oil prices is high oil prices. High and higher oil prices is the only way to force conservation. People will drive less if, and when, it hurts them in the pocket book. They will be forced to car pool. And, they will buy more economical vehicles. High oil price will drive more exploration which will spawn increase supplies. However, America will be left behind in exploration because our Congress has exclude new exploration and drilling in places like ANWR (Alaska Natural Wildlife Refuge) and off our coastlines. As a result, we will increasingly become more and more dependent on foreign sources of oil and natural gas.

Finally, high oil prices, and not Congress, will actually drive alternatives to oil. Expensive technologies like hydrogen will become a possibility, if not a reality, because economics will make it so. But, alway remember, there are nearly 250 million vehicles on the road in America. It will take many years to replace them all with any new technology as a viable alternative to oil.

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