Great Depression Online Archive Issue:

Oil Price Dynamics

Great Depression Online
Long Beach, CA
February 18, 2011

Inside This Issue You Will Discover…

*** Severely Insulted
*** Feeding Asia is Becoming Increasingly Difficult
*** Oil Price Dynamics
*** And More

Severely Insulted

“Obama budget to cut deficit by $1.1 trillion,” reported a Reuters headline earlier this week. 

At first glance this appears to be a notable improvement.  In fact, it appears the proposed budget cuts would reduce the deficit to the $400 billion range…back where it was during the quaint George W. Bush days.

Upon reading the first sentence of the article, however, we were severely insulted…and if you pay taxes you should be severely insulted too.  Here’s what we mean…

“President Barack Obama’s 2012 budget plan would slash the deficit by $1.1 trillion over 10 years.”

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Do you know what $1.1 trillion over 10 years is?  It’s $110 billion a year.  Do you know what the current deficit is?  It’s $1.5 trillion…the highest it has ever been.

In short, Obama’s budget plan is committed to reducing the annual budget deficit from $1.5 trillion to $1.39 trillion.  What this means is, over the next 10 years, the U.S. Government will add approximately $13.9 trillion to the National Debt…nearly double what it is today.

If that doesn’t make your blood boil we don’t know what will.  But don’t get too excited.  Not yet, at least.  Things could always be worse…

Feeding Asia is Becoming Increasingly Difficult

In Asia, for example, basic food stuff has become an expensive luxury…

“Inflation is climbing across Asia as the cost of food jumps, echoing the previous global food crisis that peaked in 2008” reported AP.  “While people in the U.S. and other wealthy Western nations will barely feel the effects of higher prices, getting enough to eat is a big challenge for tens of millions in Asia.  Poor families typically spend more than half their household income on food and are bearing the brunt.”

Yet, unfortunately, feeding Asia’s population will become even more difficult over the next several years…

“Unlike the food-price spike of 2008,” says Bloomberg, “this one may be more secular than cyclical.  Asia alone, for example, will have another 140 million mouths to feed over the next four years.  Add that to almost 3 billion people in the fast-growing region and you have a recipe for booming demand.”

Of course, as we’ve seen in Egypt, when people get hungry, they get angry.  When nearly half the planet’s population in Asia goes collectively hungry, will they go collectively mad?

We’re confident we’ll find out the answer with a little time. 

Since we’re on a roll today, we won’t stop with the doom and gloom just yet.  Here’s another suboptimal trend heading your way…

Oil Price Dynamics

Oil prices are trending upward.  And regrettably, the price increases won’t stop anytime soon.  Monetary policy and global demand are making the days of cheap plentiful oil distant memories of a bygone era.  What’s more, one analyst says oil could hit $300 per barrel…

“Weeden & Co. oil analyst Charles Maxwell says oil prices are bound to move steadily higher during the next decade, eventually hitting $300 a barrel,” reported MoneyNews.

“Demand will inevitably outpace the ability of oil companies to create supply.

‘“In three or four years, will the ability to produce the extra barrels needed be met?  The answer is increasingly a question mark, and that pushes higher and higher the present values of the oil in the ground and the desire of holders of oil to add to their supplies,’ Maxwell said.

“Maxwell notes that current production is 88 million barrels a day, to which he adds global capacity of another 5 million barrels a day.  He predicts that capacity will peak in five years at 95 million barrels.

“It will be a little bumpy in 2015, 2016, 2017 and 2018.  But by 2020, the first signs will become very evident that we can't go any higher than that in production. So we will begin to settle very slowly and gradually in a world in which we need more oil each year, but we can't get more,” Maxwell said.

Did you hear that?  We’ll need more oil, but we won’t be able to get it.  In other words, demand will increase but supply won’t.  This should make for some interesting oil price dynamics.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  Every successful trader or investor has a method that they rely on to make investment decisions. Without a method, investors must rely on the advice of others or their own emotions to make these decisions.  Change the Way You Invest Forever

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