Many Forces Converge to Lift Oil Prices

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Some financial writers are advising mere mortals who don’t live anywhere near New York to hold gold and oil ETF’s in their “cash” accounts as a way to keep up with inflation. With ETFs just a simple mouse-click away, Joe Investor can easily substitute gold and/or oil for cash, and bingo, he is inflation protected. This is a trend that is non-trivial now but could really take hold as inflation accelerates.

If there were just end users consuming only the minimum of oil they need and upstream producers operating at maximum capacity and that’s how oil prices were determined - how much simpler our investing lives would be. We could see that old oil fields are declining a la Hubbert and new demand is exploding a la Chindia and prices would rise gradually as a constant stream of oil users become gradually priced out of the market. But alas, real life is so much messier.

The Consumer Class Expands, Ironically, With Higher Oil Prices

One complication obvious to all is that in addition to “real” users there are “speculators.” Egads! Not speculators!! Actually, it’s worse than that. We think of speculators as those rich Park Avenue and Greenwich over privileged high testosterone jerks who just feed off the misery of consumers. I have news. The specs nowadays come in a whole lot of shapes, sizes, and organizational structures.

Some financial writers are advising mere mortals who don’t live anywhere near New York to hold gold and oil ETF’s in their “cash” accounts as a way to keep up with inflation. With ETFs just a simple mouse-click away, Joe Investor can easily substitute gold and/or oil for cash, and bingo, he is inflation protected. This is a trend that is non-trivial now but could really take hold as inflation accelerates. In fact, it could become a self fulfilling prophesy by pushing down the dollar and up the price of oil which then cycle through the real economy further raising general price levels - and inflation fears. And so on...

So now various sorts of folks are buying oil for purposes other than to use it. Besides you and me, the innocents, filling up our cars and trucks, it’s also now the institution trying to invest like Yale (”be diversified across asset classes”), the private citizen afraid of inflation, corporate users of oil looking for cost predictability and various oil importing countries looking to enhance national security. Add that all up and you get a LOT of demand. And that does not even count Chindia and the oil producing countries like the Middle East and Russia where basic demand is growing at near double digit rates.

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