After falling from $70 a barrel last week, the price of oil has been balancing at $60 for the past three days. On one side of the teeter-totter is the pretty girl. She is the idea that the second half of 2009 will show a rejuvenated economy and expansion, thus driving up demand.
On the other side is the fat kid. He’s the ever-present weight of recession, bankruptcy, excess supply and joblessness.
Over the past few days the pretty girl has gotten a few new ribbons for her hair. Goldman Sachs surprised to the upside. Intel beat earnings. Alcoa and Exxon are up today on good news from the New York State manufacturing index, which rose from minus 9.4 to minus 0.6, beating estimates of a rise to minus 5.0.
This is good news for those of us who have been long on oil since December. I’ve been pulling in my bullish horns of late and banking some very nice triple-digit profits. In other words, I’ve been building my cash position for the inevitable dip. Without resumption in demand we could see oil in the high 30s.
Don’t get me wrong. Over the next few years I expect oil to eclipse $150 a barrel and keep going. If you are making long-term choices about energy use, I’d suggest you go with the smaller house closer to work, as well as the fuel-efficient car. Because once the price of gasoline climbs over $8 – and it will – everything will change.
I know that oil will ramp up in value for three simple reasons. One, we are running out of cheap oil. Of the 17 largest oil fields in the world, 14 have peaked in their rate of production. All the new oil, like in the tar sands of Canada or that was found in deep water off Brazil, is very expensive to produce.
Number two is emerging demand. There are 75 cars per one hundred people in the U.S. There are four cars per one hundred people in China. And it’s not because the Chinese don’t like to drive. Car sales in China were up 48% this quarter. Car sales in Brazil are setting new records for units sold.
Number three is inflation. Oil is priced in U.S. dollars around the globe. The U.S. is focused on a path of dollar destruction and inflation. As the dollar falls, oil rises.
I predict a short drop over the next few weeks followed by an increase in demand and price over the next 10 years.
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