Stock Ideas 
Stock Ideas Investors Daily Edge An Inconvenient Truth:High Oil Prices Here to Stay
Stock Ideas Investors Daily Edge An Inconvenient Truth:High Oil Prices Here to Stay 
Market Watch
|
World Oil Production Growth The world is running out of cheap and easy oil. The latest OPEC production jump is a flash in the pan. Demand, however, is expected to increase by 2 million barrels a day by 2009. There is already a 200,000-barrel-a-day supply shortfall. |
|
| More... |
Most Popular
Login Form
| An Inconvenient Truth:High Oil Prices Here to Stay |
| Tuesday, 29 July 2008 | ||||||||
|
Even at my favorite neighborhood bar in Maryland, where you can order chicken wings “old bay” style, I couldn’t get away from chatter about Iran and high gas prices. Two guys were going at it right next to me. Then one of the guys suddenly stood up and walked out. He departed in such an agitated state that he left his credit card behind. The aggressor in the discussion looked at me and said, “Hi, I’m Joe and I’m a Republican.” “Hi,” I replied. “I’m Andy and I’m a Red Sox fan.” In the heart of Orioles territory, I knew those were fighting words – much worse than declaring fealty to Obama. But instead of backing away in disgust and disdain, he asked, “You local?” And that was it. My plans to chill that evening were shot. We talked for the next two hours and we didn’t agree on much. His biggest belly-laugh came when I talked about the auto companies. How they had to start making small gas-sipping cars right now ... how the huge number of Americans buying big cars and trucks was a thing of the past ... how “affordability” went from killing the housing sector to killing the retail sector to killing the auto sector. “’Less is more...’ something right out of the hippie sixties is making a comeback,” I said. And the guy just laughed. “You just wait,” he said. “Once gas prices go lower, we’ll be back buying our muscle cars and pickup trucks again.” He has history on his side. Small cars (all of them from Japan) grew popular in the 1970’s as expensive gas changed our point of view – just like what’s happening now. But as gas prices crept lower ... and lower ... and lower still, our love affair with spacious and powerful cars slowly but surely returned. Could it happen again? If prices head lower like last time, why not? But that’s a big “if.” First of all, it’s jumping the gun to assume we’re at the beginning of a “demand destruction” phase. We’re not.
Oil and gas may be more expensive than it was during the last spike in prices – which topped out in 1980. But as a percentage of wage income, we’re at about six percent. In 1980 it was 7-8%. And back then – coming at the end of a decade of stagflation – people were hurting more than they are now. We’re driving about three percent less than we were last summer. So there’s no doubt that high prices are driving gas consumption down. But we’re still driving much more than we did five years ago when gas prices were much cheaper. I think prices still have at least one more leg up before demand gets curtailed in a serious way. Then we’ll see prices fall again. As rational consumers, that should put us right back in the driver’s seat in droves. What’s going to stop us? “An Inconvenient Truth” isn’t that the environment is in trouble. It’s that we respond to prices. Could it be that GM and Chrysler will be rewarded for hanging on to their big gas-guzzling cars? If the oil and gas market were only domestic, I’d say yes. But the energy market is global. Do you think coal prices are so high because demand in the U.S. has spiked? No, the spike is mostly coming from China, not the U.S. Do you think jet-fuel costs so much because carriers in the U.S. have upped their usage? No, Just the opposite has happened. U.S. airlines have cut back on their number of flights. Let’s attack the issue of price from a different angle. Do you think the price of oil costs less now because demand in the U.S. has gone down by a few hundred thousand barrels a day? No. It’s part of the story and not even the most important part. Crude simply went up too fast and was due for a correction. Oil’s chart looked a lot like China’s stock chart before it suffered a 50 percent decline. And, yes, the speculators have something to do with the oil market’s frothiness. They led oil prices up and now – just as quickly – they’re leading prices down. It’s really not a slowdown in U.S. growth that’s led them to take another look that the fundamentals. It’s the global picture which has made them less bullish. * China growth taking hits. The Olympics is two-weeks away and it’ll cut into production. China’s leadership doesn’t want its country’s smokestacks to be bellowing black smoke for all the world to see. Plus China is determined to bring down inflation and as a result it’s tightening credit. * Global growth is shifting downward… but nobody knows by how much. But the idea that overseas growth has “decoupled” from U.S. growth doesn’t hold much sway anymore. * Inflation going global. Some countries will fight it aggressively. And some will see if it goes away on its own. But inflation cuts into spending – whether governments raise interest rates or not. And less spending should ratchet down growth. The old thinking: Robust global demand will more than offset any slowdown in U.S. oil and gas consumption and keep prices high. The new thinking: Sluggish global demand will finally slow down the meteoric rise of oil prices in the past year. Which is right? The Fed has already weighed in. They want the second scenario to click in so badly they can taste it. But, at the same time, they’re worried that the first scenario will take place. Why else would they try to jawbone other countries into making sluggish demand a reality? Here’s what Don Kohn – vice chairman of the Fed’s Board of Governors – said in a speech in Germany Last month: "In those countries where strong commodity demands are associated with rapid growth in aggregate demand that outstrips potential supply, actions to contain inflation by restraining aggregate demand would contribute to global price stability.” Don’t you love how these people talk? (I think when they do a biopic of Alan Greenspan, they should have Mike Myers playing the “great maestro.”) That’s Fed-speak begging governments in charge of growing economies with big commodity needs (China, India, Chile in other words) to reign in economic growth and commodity imports by cracking down on inflation. Sorry, Don and Ben. Ain’t gonna happen. You shouldn’t expect other countries to follow the U.S. For example, don’t take too much comfort in China trying to downshift its economic growth into single digits. It’s been trying to do this for over a year now. Just remember that: ... This is the same China which has forced iron ore prices up 95 percent. ... This is the same China which almost single-handedly has pushed up a dozen commodity prices to record levels. ... This is the same China that would like its economy to slow just a bit, but can’t afford it to slow down too much. China’s leadership has three nightmares that could spell the end of the Communist elite’s hold on power. One is rural migrants without jobs. The other is college graduates without jobs. The third is educated young people and older rural folk joining together in mass protests against a party which encouraged the emergence of a wealthy class. That’s good news for commodity and oil bulls and for commodity-exporting countries like Brazil, Canada, and Australia. Right now we’re getting a correction. The oil bull is not dead, it’s just taking a breather. In the long run prices are going higher – probably much higher. I don’t see big cars making a comeback anytime soon. They guy at the bar just won’t believe it. The lesson he learned in the ‘80s doesn’t apply. It really is a new energy world out there. Invest well, Andrew Gordon P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
This investment news is brought to you by Investor's Daily Edge. Investor's Daily Edge is a free daily investment newsletter that is delivered by email before the market opens. It's published by Fourth Avenue Financial, a subsidiary of Early To Rise (an affiliate company of Agora Publishing). In each weekday issue you'll receive practical strategies for protecting your portfolio and multiplying your money. You'll also learn about undiscovered opportunities in emerging sectors and markets, deeply discounted stocks, recommendations for bonds, cash, commodity and real estate investing, and top ETFs. To view archives or subscribe, visit Investor's Daily Edge .
|
||||||||
| < Prev | Next > |
|---|