Tuesday, May 27, 2008

Oil - Black gold or White Elephant - the Bust that must inevitably come

Why oh why do i feel like the price of oil is going to come a tumbling down?

So we have a weak dollar no longer trading at parity with some of the middle eastern currency, we have a strengthening China with an insatiable demand for oil... a china that will probably also decouple its currency in the 3rd or 4th quarter of 08.... and we have a US recession, no looming but already started....

All these factors tell me oil will become a more expensive commodity because the dollar has less buying power, the big question is though how low will the dollar go....

Why do i ask this, well we know that the oil supply is finite and some major fields are slowing production, therefore it is only natural that the price rise somewhat as the "owners" of the oil try to capitalize on the sole supporter of their economy (some like Dubai are trying to turn themselves into tourism hot spots and free trade zones so they have something to fall back on - very commendable and progressive)

Canada's oil fields are fairly poor quality, thick and viscous, Texas and Central America have nice sweet crude but alot of the surface supply is tapped and deeper drilling and exploration is more costly and risky, Alaska and Russia have a strong supply, there is always Brunei and of course the Middle East.

America consumes at least 20% of the worlds oil, but China and India are gaining fast, so what will the outcome be????

I think what is happening right now is the weakness of the capital markets have driven the spectators and many investors towards solid commodities, tangiable items that they feel are safe, this makes sense, Gold is tangiable, it is considered by many to be fairly inflation proof although i am not so sure with currencies having been decoupled quite how much this applies in reality.... Platinum and other metals with high value uses i like better, which leaves you with something like oil.....We all know ethanol isnt going to take over the work, I have tried HHO ands it isnt so hot, Hydrogen would be perfect but the car manufactureres and oil companies are too strong and have to much of a vested interest to let the money spinner go until they have to.... Note most of them are using their immense profits to diversify into Wind and Solar farms as well as Nuclear power plants!!! They are planning forward with their current wealth as the middle eastern nations are!!!

Thus we see why Oil has run up, and why it has run up beyond its true value, like the real estate boom and the tech boom, investors have a pack or herd mentality and are piling into a good thing, not realising that they are making the early smart front runners rich as is always the way. These individuals will soon pile out with Billions of dollars in profit leaving people holding overpriced assets!!!

I expect Oil to be sub $100 within 12-18 months possibly sooner and i think anyone buying oil futures and options based on growth and increased prices are going to be caught with their trousers down!!!

Which does lead us back to Real Estate which is in the process of crashing, far from done and far from bottomed out, we will see the best buying opprtunities of the next 20 years within 2 years, lets sell some Oil Futures to provide the cash we need to buy all the property that the people who are currently speculating on oil will loose to foreclosure........

Copyright Jonathan Rose 2008 - Creative Commons License

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