Sunday, May 18, 2008

Three Big Bubbles Will Burst: Part II

Now we deal with the energy bubble(s). There are really two of them working congruently but not identically. That is the price per barrel of oil and the price per gallon of gasoline.

Here are the basic factors:

  1. Supply of each.
  2. Demand for each.
  3. The value of the dollar (since I am referring to prices in USD).
  4. Speculation.

Many of the factors from the discussion of the value of the dollar apply here, but usually in the context of the dollar; therefore, I will not repeat those.

First the supply of oil: there’s a lot of it. The result of estimates of the known readily available fields is: there is enough to meet demand of 100-150 years. Common sense would indicate that we obviously don’t know all of the areas, especially under the oceans. The amounts that are known to be trapped in shale and micro-fissures raise those estimates 5 to 8 times. Either way, there is more than enough to use until we can find efficient and workable alternative sources.

The supply of gasoline is another matter. In the U.S we have not allowed additional refineries to be built for over 30 years, mostly because of misguided environmental concerns. I say this because using the old refineries is not only costly, but inefficient and not at all environmentally sound. This is irony of the first order. We actually import gasoline already refined because we can’t do it all ourselves. Combined, these are the most fragile elements of this puzzle. If any of our major refineries go off line, there will be hell to pay at the pumps.

Demand for the past year in the U.S. has leveled and is now decreasing. People are driving less, keeping their houses warmer in the summer and cooler in the winter, and airlines have cut routes, just to name a few areas.

Worldwide demand will stay at the present levels and increase as economies in countries such as China and India flourish. There will always be fluctuations.

The price of oil is directly influenced by the value of the U.S. dollar. World-wide pricing was switched to the euro a while back and as goes the euro so goes the price of oil.

The big biting bugs in bed with us are again the speculators. Normally they keep the markets alive and serve a vital purpose in the world of finance. Occasionally, they get a little crazy: reference again the and housing bubbles. This is especially true when they draw in the general public.

They are directly influencing the oil and gasoline futures market just as they are the dollar and compounding the net results, increasing the sizes of the bubbles.

The price of oil started recently at the $60 level and was pushed by demand to the $80. The speculators (in oil, gasoline and the euro) took over and have driven it to the $125-$130 level. It will probably continue to $150 +/-; again, until the last fool is sold the highest priced barrel as possible. A pull back to $80-85 would be predictable, but again, the panic that would bring that price would probably overshoot that mark to $60 +/-.

If you add in the probable drop in the price of the euro, even to $1.10, it would decrease the price of oil in USD to $110. Believe me if the speculators run from the dollar, they will run from oil too, and gasoline. Get out of the way of that stampeding herd.

I don’t know what would be the cause of the panic. We seldom know until after it is over and we sit back and study it, but it will happen. Speculators do just that, speculate. It is how they make a living, on both sides of a price. Ask George Soros. He made his considerable future betting against the old line currencies.

Again, the best advice is: never buy or sell on panic. If everyone wants something, sell it to them: if they don’t, buy it from them. The general public is almost always wrong; hence the reason for my article on SUV’s.

Notice I did not mention politics or political correctness. They have little to do with an open market. Trying to control the market is the politicians’ personal area of self-destruction.

For those of you who want to blame Presidents Clinton or Bush (or Dick Cheney), don’t bother. The president has very little say in all of this, except for the occasional exceptional bully-pulpit speech. Their only real power is appointing judges and issuing executive orders: a topic for another time.

Don’t worry about the 3 Liberals running currently. The same will apply to them. We’ve survived some real losers: ahem… Jimmy Carter, and we will survive anything they try to throw at us, as they try to empty our wallets.

Be prepared,

The Hammer

Copyright Crickard Publishing 2008. All rights Reserved


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