Oil Near a Peak? Yes.
Principles of the Stock Market

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Have You Seen This?

Have You Seen This?

OIL VIEW.  I’ve been reading a lot about oil, the current state and the history of oil as we see prices keep rising and we all wonder where a top is.  So below are some interesting tidbits which I’ve unearthed from the Internet (a great modern day development!) for you to ponder, some obvious, some insightful (I hope):

 

·         OPEC has used oil as a weapon against western countries in the past.  Schwartz View:  A bad precedent.  The October 1973 embargo effectively raised prices quickly and sharply to a new plateau (from $3 a barrel in 1972 to $12 a barrel) which lasted for the rest of the 1970s.

·         The Iran revolution (getting rid of the Shah) in 1978 and the following war between Iraq and Iran in September 1980 again raised the price of oil quickly, doubling oil prices from $14 to $35 a barrel by 1981.  Schwartz View:  So both times oil rose sharply in price and stayed there.

·         Oil is notoriously price inelastic according to some researchers.  Another reports says:  “The supply and demand for oil are both inelastic in the short run …”  Which is what commodity guru Jim Rogers sees, that it takes many years for oil supplies to increase when demand increases which is his basis for the whole commodity complex to keep rising.  Schwartz View:  I’ve been waiting a year or so now for “higher prices to resolve higher prices.”  Now I understand this is a too simplistic argument and why it hasn’t happened that way just yet.  Another reason is because we are much less dependent on oil today.  “Energy costs;’ share of GDP has fallen from 8% in 1973 to 2% today.”  (From an Internet article written in 2005).

·         Over time though, the supply and demand for oil is more elastic.  Schwartz View:  Thus the past history of oil prices rising sharply, then slowly sliding lower over time as more supply comes on board.  Probably the price pattern we’ll follow again although we’ve likely raised the base price level or floor such as transpired in the past.

·         Commodity (and China) guru Jim Rogers says his research shows commodity bull markets last roughly 17 years.  Schwartz View:  I see the price of oil slid from 1981 to November 1998 when it bottomed out about $13 a barrel.  Just about when Rogers called a new commodity bull market.

·         From the last bear market bottom in oil in 1998, we’ve had the first bull market leg up from the bottom in November 1998 to June 2000 as oil rose from $11 to $35 a barrel.  Then after a price  correction downward and a breather, we put in a 2nd bull leg up from November 2001 at $20 to a peak around Hurricane Katrina at about $75.  After that blow off peak, prices fell for five months coming back to $50.  Since it’s been straight up in a third bull market leg.  Schwartz View:  Since we’ve now put in the normal three legs up which compose a full bull market we could easily be due for a sharp and severe pullback in oil.. Especially so since I see a guest on CNBC talking up $200 oil, bullish predictions being a normal sign of bulls getting carried away just before a top.

·         The US placed price controls on domestically produced oil during the first energy shock in the early 1970s.  This caused US consumers to pay less for gasoline than they otherwise would have.  Longer term, price controls kept America from reducing our oil consumption in the middle 1970s and thus our dependence on foreign oil producers.  Thus when the 2nd oil shock hit in the late 1970s we were much more negatively impacted by prices jumping sharply.  Schwartz View:  This is why I advocate keeping oil prices high now, let America take the pain now, so money keeps flowing into developing alternate energy sources.  Let’s not repeat the mistakes of the 1970s!

·         History shows higher oil prices in the early 1970s, the late 1970s and then in 1990 after Iraq invaded Kuwait all led to recessions.  Schwartz View:  Maybe it will be different this time around but we all know predicting “this time it’s different” usually proves disastrously wrong.

·         Here’s the rationale behind higher oil prices leading to recession:  “Higher oil prices have historically led to recessions because they act as a tax on spending by absorbing consumer dollars that would be spent elsewhere, by reducing corporate profits through increased costs and lower demand, and by causing higher inflation which in turn causes higher interest rates.”  Schwartz View:  All of which seem to be developing today except, so far, higher interest rates because the Fed has been lowering shot term rates to free up the frozen-up financial system.  These lower rates which ultimately should lead to even higher inflation.

·         The 1970s were characterized by “stagflation” after sharply higher oil prices raised inflation levels while simultaneously reducing economic growth.  Schwartz View:  Isn’t the same economic ripple effect happening right now?  I’d say yes. 

·         The 10-year US Treasury bond yield rose from 6% to 15% during the oil shocks in the early and late 1970s.  Schwartz View:  This time the 10-year, benchmark Treasury bond yield has stayed low because of the credit crunch and the “flight to safety” trade by investors.  Doesn’t it seem logical that when the Fed stops lowering rates and/or says the credit markets are back to normal, long term interest rates will once again rise?  Does to me.  In fact, higher long term rates may be happening now.  That’s one big reason why I’m not recommending bonds and haven’t been.

 

SCHWARTZ SUMMING UP.  Actually I could go on and on researching and commenting on oil.  And I’m interested in continuing my research so I may add a few more comments/insights in coming days.  But for now the history & current spike higher in oil makes me predict that soon we’ll see some type of peak in oil very soon!

 

 





Posted 05-29-2008 1:56 PM by Richard Schwartz