Crude Awakening: $100 per barrel near
11-06-07: As the price of oil approaches the $100 mark, we are remarkably surprise at the lack of consumer complaints and outrage. Perhaps it is because the price at the pump has not yet resonated throughout the country. Here in the West, gas price is almost $4/gallon and driving to work is becoming a luxury. Sadly, there is little relief in sight as winter approaches.
World Demand
The crisis in the Middle-East will continue drive prices higher. Today it is Pakistan and Turkey. Tomorrow it is Iran and Iraq. The list goes on. There is always something in that part of the world that will cause the market to get nervous. Unfortunately, what happens there directly affects our pocket book. We are sad to report; there is no relief in sight in respect to geo-political stability.
As we have posted before, the U.S economy is very much dependent on oil. The days of cheap oil from the Mid-East are over. Those hoping gas price will return to $1.99/gallon have chosen to buried their heads in the sand instead of facing the reality of the world today.
In many ways, this is the price of globalization. As developing economies such as China and India grows, they have been trading their bicycles for cars. It is quite simple when we look at the big picture; there is only so much oil left (as we’re told). Everyone wants a piece of it. It’s like saying to a drug addict; this is the last one! People will pay whatever it takes to secure their supply, thus bidding the price higher. If it makes you feel better, the Europeans have been paying over $5 per gallon for over a decade now. We are headed in the same direction.
When we talk about oil, it is not just about gasoline. While 50% of crude oil is used for gasoline, the other half is used for other things such as plastics and more. Expect these petroleum products to cost more.
OUTLOOK
Although the Feds have been trying to help push this economy along by lowering short term interest rates, inflation will eventually creep its way into the picture. Inflation is what the Feds fear most. In fact, they have basically said additional rate cuts are unlikely.
This brings us to the question most are asking these days. Where should we stash our hard earn money? In our view, the market is heading for a big fall. The risk of economy slow down is very evident. High rate of inflation is over the horizon. Sluggish housing market is putting a squeeze on consuming spending. Job growth is flat. The economic picture does not look good going into 2008. For these reasons, cash is king. People will probably make more money in CD than in the stock market in the 6 months. On the other hand, if you are up on positions, this might be a good time to start cashing out and start building a sizable cash reserve.
