How to make Money in the Stock Market.This blog looks at how you can make money trading and investing in Forex, Stocks Options and Futures.


Thursday, 8 May 2008

The Case for $200 Oil

On Tuesday I wrote a post about the prediction from a Goldman Sachs Analyst that Crude Oil could hit $200 a barrel, $200 Crude Oil-surely not ? today I want to spend a bit more time looking at some of the reasons why that is not a crazy prediction and may even be on the low side.

The world’s known supply of crude oil has decreased by about 13% since 2001 It was estimated that the total world supply of Crude Oil was around 2 trillion barrels. We have already used around half that in about 150 years. As the planet’s supply of oil slips below one trillion barrels, and America’s pile of liabilities soars above 54 trillion dollars, crazy things might start to happen – crazy things like $200 oil.

But crude oil is not the only natural resource that is depleting and/or in short supply. And the U.S. dollar is not the only currency on fertility drugs. So a forward-looking investor could expect to see the prices of most major commodities rise in terms of most major currencies. But this simple conclusion is easy to miss when most of the relevant data points contain nine to twelve zeros.

Most of us have some vague idea that one trillion is the number that lies somewhere north of one billion ,beyond that, we have no clue. So how much is one trillion anyway?

• 1 trillion seconds = 31,546 years.
• 1 trillion dollar bills placed end to end would reach 96.9 million miles, far enough to reach the Sun.
• The average new car costs $28,400. $1 trillion would buy more than 35 million cars.
• The entire Federal budget is $2.8 trillion. A stack of that many dollar bills would circle the Earth more than 7 times.
• Gross Federal debt is more than $8.7 trillion, which would make a stack of dollar bills that would reach from the Earth to the Moon and back with some to spare.
• $8.7 trillion in one-dollar bills would cover an area larger than each U.S. state except for Alaska and Texas.”


But there is something else at play that doesn't help the situation-the weakening of the US dollar which helps pay off the US debt but it also has some undesirable results in the form of $1000 gold and $120 crude oil.

In other words, the skyrocketing oil price is as much a monetary phenomenon as a geophysical one. Paper currencies and debts proliferate rapidly. Natural resources do not. That’s why the prices of natural resources like crude oil MUST increase over time. And that’s why you should listen to that little voice inside your head when it tells you: “$200 crude oil may be crazy, but not nearly as crazy as the size of the US Deficit.”

We are running out of Natural Resources there is no doubt, it is unlikely that we will see them completely depleted in most of my readers lifetimes,however if the Dollar continues lower (or is allowed to weaken to cover up for poor fiscal policies) then it will accelerate the incessant rise of these Natural Resources.Since the vast majority of Natural Resources are paid for in Dollars it stand to reason that as the resources become scarcer and the dollar becomes worth less that suppliers will be demanding more of them for whatever it is they have to sell.

Best Wishes