Will Black Gold Make Investors Rich?
The Dynamic Wealth Report
March 31, 2010
by Justin Bennett, Editor
You may remember these lyrics to the old sitcom from the 1960s “The
Beverly Hillbillies”.
“Come and listen to a story about a man named Jed
A poor mountaineer, barely kept his family fed,
Then one day he was shootin' at some food,
And up through the ground came a bubblin' crude.
Oil that is, black gold, Texas tea…”
I’m sure most of you know how the story goes.
Jed was a poor ole country bumpkin. His family lived in a shack out in
the middle of nowhere. One day Jed discovered oil while shooting at his
evening meal. Yep, the black stuff made ole Jed a wealthy man. And the
rest, as they say, is history…
Now, good ole Jed isn’t the only one to make his fortune off of “Texas
tea”.
Empires have been built on the back of crude oil. How is this possible? Well, obviously crude oil is a very valuable commodity. But it’s more
than just that. It’s the lifeblood of the world economy.
Without oil, life as we know it would be completely different…
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Transportation of every product imaginable is made possible by oil. That
nice fresh bag of salad didn’t walk itself from the field to the grocery
aisle. Neither did the steak, or the potatoes… (or anything else in the
store for that matter).
Very simply, crude oil allows for readily available cheap goods and
services.
Without cheap transportation, cheap goods aren’t available for a
consumer based economy. The efficiency of the supply chain depends on
the price of the main ingredient… oil.
The higher the price of oil, the more costly it is to support the supply
chain.
Remember the summer of 2008 when the price of crude was skyrocketing to
$147 a barrel? Prices in the grocery aisle shot higher to reflect the
increasing cost of delivery and production.
Of course, prices at the gas pump skyrocketed as well. Businesses and
consumers alike were squealing.
Every aspect of modern life becomes more expensive when oil prices
rise...
Thankfully, the price of crude collapsed to $35 as the financial markets
were unraveling in late 2008. (Every cloud has a silver lining!)
But now the financial crisis appears to be coming to an end. And crude
prices are back above $80 a barrel, a 130% jump from the lows created
during the financial meltdown. Compare this to the rise of the S&P 500,
which is currently up about 75% from its lows.
What’s keeping oil prices inflated?
Well it depends on who you listen to.
Some analysts say it’s the “peak oil” effect. So just what is peak oil?
Well, in theory, peak oil is the point in time where world oil
production reaches maximum output. In this scenario, oil simply cannot
be drawn out of the ground fast enough to support growing global
consumption.
When this point in time is reached, oil prices will shoot to the
stratosphere.
But some analysts say peak oil theory is bad science…
They say we have decades of supply to support global economies. These
people blame speculators for the rise in oil prices. They say the fear of
peak oil is causing oil to be overhyped as an investment and trading
opportunity. This investment demand is what’s driving prices higher.
So who do you believe?
Personally, I think the surge in oil prices has to do with both factors…
First of all, peak oil is an unfortunate fact. There is a time when
world oil consumption rates will approach production rates. There may be
billions of barrels of oil left in the ground, but we won’t be able to
pump it out fast enough to support growth rates around the world. (Growing economies require increasing amounts of energy.)
So peak oil theory is not about running out of oil, as some will lead
you to believe. It’s about losing a cheap supply of oil to sustain
economies and current standards of living. When world production and
consumption start to equal out, oil prices will explode.
So the real question is, “When will peak oil happen?”
Well, your guess is as good as anybody’s. Nobody knows for sure when
this pivotal point will be reached. It could be twenty years down the
road… or it could be happening right now. If we have a couple decades,
human ingenuity may solve the problem.
If it’s happening right now or in the near future… humanity has some
major challenges ahead of it.
What is for certain is many investors are drooling at the mouth to be in
on the oil trade. They want to profit from what they think is another
moon shot for oil prices.
This in itself could be creating inflated prices for oil…
What’s happening in the oil market right now? That’s my topic for
next week...
• Natural Gas (Under $4)
Natural gas continues its weakness from the last two months. The Energy
Information Administration (EIA) will be releasing their report on
natural gas inventories tomorrow. Since prices have receded back below
$4, we could see a small pop in prices if inventories come in lighter
than expected.
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