The crude market is making Uncle Sam pay
Today's Financial News - Posted June 11, 2009
Oil prices continue to rise. Will the trend top out anytime soon or are triple-digit prices going to become a reality once again? The news is not good.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): It is the worst fear of nearly every American economist; the global economy gets back on its red-hot track and the U.S. remains in a rut. If it happens, our reign as a lone superpower will be over… for good.
While the odds are still in our favor, they are getting smaller by the day. The more Washington spends, the more we prop up our economy by purchasing stakes in our most vital businesses and the more Americans depend on government handouts, the lower our chances of remaining atop the global leader board.
Interest rates are of top concern, but just one derivative away, crude prices are starting to get the attention of pessimistic investors.
The higher oil climbs, the stronger the indication that the home of the brave and the land of the free is in serious trouble. While we are finding a way to pay for our deadly expensive oil addiction, our competitors – especially those that tap their own energy wells – will easily pull ahead.
As I write, a barrel of Texas tea is trading for $72.36, nearly twice as much as it was just six months ago.
There are several reasons for the surge: hopes of economic recovery, growth in Asia, dwindling reserves, and of course, a hedge against the once-might greenback.
It is the latter two that has me worried.
No trust in a senile Uncle Sam
For the first time in a decade, oil exports are saying the world’s crude reserves are on the decline. In 2007, we had 1.261 trillion barrels of crude available. In 2008, the figure dropped by three billion barrels to a level of 1.258 trillion barrels.
It is hardly a monumental decline, but it does a fine job of reminding us of the first law of economics, supply and demand. As the availability declines, prices will go higher. Toss in increased demand and, oh boy, you have a recipe for soaring prices.
But if dwindling stocks are not enough to get the bulls salivating, an ever-weakening dollar certainly will.
As a dollar-denominated commodity, oil’s value is directly tied to the greenback. If foreign producers want to rake in the same kind of profits as the dollar weakens, they have to charge more for their product.
If you thought $147 per barrel was rough, just wait until the dollar loses a third of its value. Those far-flung predictions of $250 per barrel are not nearly as delirious-sounding as they once were.
My advice? It’s simple. Hedge your green with black. As the dollar weakens, oil prices will move inversely, likely with greater velocity (thanks, speculators).
Many exports believe we could be testing the $80 level by this time next week. If the trend continues, crude investors will have one less thing to worry about as the economy shuffles the nation’s wealth.
Obama wants a massive transfer of wealth. He is about to get it.
I will be sending TFN Strategic Traders a play to take advantage of this situation later today. Click here to get in on the action.
Next Article: Itron: The next hyped-up bubble
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