We are back to 2006/7 gas prices and for what, exactly? It’s not demand. That has fallen by roughly 2 Million barrels a day. It’s not Geopolitical. While tension between Iran and Israel continues, what we are seeing is nothing new. We are now seeing two factors:

1) Oil producing countries need the money to fund government operations, therefore cut production to raise cost. (spoke about that here)

2) Now investors are looking at the economic conditions, see that inflation is coming and are turning to commodities as a way of protecting themselves, as well as hoping that the worst for the economy being over

Oil prices soared above $71 a barrel Wednesday to reach a 2009 high, as investors poured money into crude markets to protect themselves against the inflation risks posed by a weakening U.S. dollar.

Oil, which typically trades inversely to the dollar, has more than doubled in price in three months as traders also cheered news showing the worst of a severe U.S. recession is likely over. They brushed off data — such as a 9.4 percent U.S. unemployment rate in May — that suggest crude demand will remain weak. Even growing inventories have not checked crude’s stellar rise.

The bottom line here: this is Bull! If there was ever a time that the consumer should pay attention to the price of oil it would be now as our current situation shows how vulnerable we are to just about anything. There is no realistic reason oil should be this high. This is purely a profit drive by producers and investors.

American’s just don’t get it, and I fear the masses won’t internalize our national dependency and the  need for alternative energy sources until it is too late.

This is not a rant about global warming – that is another discussion for another time – this is simply pointing out that American’s just don’t get get that the price of oil will rise once again.  Just because it’s $38 today doesn’t mean it will be $38 tomorrow.

According to edmunds.com, pickups and SUVs will outsell cars in the month of December.

Trucks and SUVs will outsell cars in December, according to researchers at the automotive Website Edmunds.com, something that hasn’t happened since February.

 

Meanwhile the forecast finds that sales of hybrid vehicles are expected to be way down.

 

Combined with discounts negotiated at the dealership, the actual prices consumers pay can be amazingly low, said Edmunds.com sales analyst Jesse Toprak.

 

“I can get about $10,000 off a large SUV,” he said.”There’s probably not going to be a better time.”

He is right, he could get roughly 10K off an SUV but what about when the price of gas goes back to $4/gallon, be it a year from now or three years from now?

Let’s say a large SUV has a tank size of roughly 20 gallons and gas goes up to $4/gallon once again.  This means the consumer will be paying $45 more per fill up.  If we assume they fill up the tank every week, that means they will spend an extra $2340 per year and if 4 years that “savings” would have vanished.

Now is the worst time for oil to have fallen because everyone, from corporations to the consumer, will be moving away from researching and investments in alternative energies because there is no cost savings. Why spend the money on research and development if it costs less to simply buy oil?

Now is the time we should be moving to hybrid technologies, now is the time the nation should be going to solar and natural gas… basically, now is the time we should be looking forward and attempting to find a way to free our nation from dependency on foreign oil, not trying to go back to our old ways.

I’ve written about the price of oil and gas a few times, and by no means am I an expert, I do have some experience on my side that allows me to objectively – and intelligently – discuss the subject.   That said, let’s get the main point out now: The price of oil is too low.

When previously talking about gas and oil prices (12/6) the price was right about $40, and as of today, December 27th, a barrel of oil fetches $37.71.  So, what is going on?

News concerning the global economy, the massive drop off in spending, and credit issues has energy traders selling as if a drop of oil will never be used again. Much like there was a dramatic upswing this past summer, the market correction is moving dramatically – and unrealistically – in the other direction. Even when OPEC announced a cut of 2.2 million barrels starting in the new year, the price oil moved lower.  In many ways it feels as if people are treating oil as if it a renewable resource all of a sudden – it’s not.

Isn’t oil a supply and demand commodity?  Yes, but the market is trading oil as if the demand falling at a rate greater than the cuts OPEC has recently announced.   As it stands today, oil is trading as if the expansion of the economy in the last 5 years never happened.  It’s acting as if the population of the world has not grown, as if China and India never grew, and as if there are less cars on the road, worldwide, today than 5 years ago. Energy traders, in the bearish mood and focus they have, are simply guessing at what a potential reality may or may not be when it comes to the price of oil in the current environment.

With price falling we can expect another impact on the economy – oil producers shutting down exploration rigs. Basically, the decline in oil price has lead to a marketplace it has become unprofitable to produce as much as they had previously.  

If downward pressure continues, which it looks as if it will until there is a catalyst to change the mood of the market, the consumer will be able to enjoy low gas prices.  Just remember, oil is not a renewable resource… the price is bound to rise once again.

The collapse of the commodities market, specifically the major drops in the price of oil and natural gas, has caused an economic crisis in Russia due to their high dependence on both commodities.  Add in the falling price of the ruble and roughly 70 banks going under, Russia now faces their version of the 2008 collapse.  

While their government tries to calm investors by saying the volatility is due world economic conditions, the falling price of oil may significantly impact their ability to quickly – and independently – come out of the crisis on their own.

Last Friday, the World Bank came out and ward that Russia may need a bailout of their own.  

“If oil prices in 2009 and 2010 average $30 a barrel, that would be a nightmare scenario for a global economy,” Zeljko Bogetic, the World Bank’s chief economist in Russia told investors on Friday. “The pressures on the current account and public finances in Russia would quickly rise to a point where the financing constraint would become so sharp that it’s possible even to envisage Russia’s return from a creditor to international organizations to (that of) a borrower.” 

Translation – if oil continues to fall the Russian government will have revenue decline significantly, and as a result, the government will need to turn to the World Bank or other governments for loans in order to continue to function.

I believe this is exactly why OPEC countries decided to cut output as drastically as they did recently. Each country relies of oil revenue in order to fund government activity.  As the money dries up, so does the ability for the governments in question to provide funding for needed programs – like military spending.  

So as we look at Russia potentially turning to the world for money to survive, other countries dependent on oil revenue may not be far behind.

Last evening I was reading my RSS subscriptions, commenting on some threads about the Feds decision to lower interest rates, and I really started to think about the US (and world) economies. Ultimately, the question “is another depression on the way” came to mind yet again…  So I decided to put some things down on paper (and then into the blog) in order to assess the question.

• The speed of current deep recession

The US went from a shallow recession, with low unemployment, to one of the worst financial crises since 1929 in a matter of weeks.  Yes, the events were in the building for months, if not years, but it all came apart in roughly 4 to 6 weeks…. and no one was prepared for how quickly it happened.  

• Credit is hard to come by

The credit industry is contracting, and contracting fast.  Credit Card companies are cutting limits of superior borrowers, for some it’s hard to get a mortgage, companies – solid companies – cannot find funding even though they have revenue to cover their costs, and banks are not lending to each other.  Basically, spending is crawling because the pool of money has shrunk

• Oil is down today, but…

The price of energy (oil, specifically) was on a wild ride the last 4 years, up to almost $150 this past summer and down to $40 the past week.  However, due to limited supplies and production, oil will start to rise over the next year once the economies of the world begin to stabilize, causing pressure on economic growth once again.

• Debt is overwhelming…

The government is so far in debt, it will never be repaid, and our financial institutions are in the same boat . Essentially, we are spending money today that we don’t have in order to solve a problem.  In doing so, however, we may be creating a bigger problem down the road.  

Oh, yea, and the consumer is so far into debt that they have no money and cannot obtain credit (see #2).  If the consumer cannot spend, how will the economy recover?

• Unemployment is on the rise…

Going from historic lows to levels not seen in about 20 years, unemployment will play a big fact in any the economy’s recovery.  If it continues to rise, problems will persists.

• Mortgage meltdown, real estate bubble…

Huge over production of housing, mortgages to anyone and everyone that had a heartbeat and property values inflated beyond true value…. it plays into everything.  Spending, debt, credit…. and if this does not stabilize, how will the credit markets stabilize?

There were initial thoughts…  I do believe the economy is dangerously close to moving into another depression.  While I do not believe any depression will mirror the Great Depression, it is strikingly like the Long Depression on 1873.

Without a doubt, the actions taken by the government will provide some type of recover in the market – I just doubt if it will be a sustained recovery.

Oh, and another random thought… 

I am slightly concerned about how the stock market has been acting the last two weeks.  It is back to trading upward on negative news.  The economic situation has not changed, so why the movement towards the positive?  

Either a bottom has been found or a suckers rally is taking place…. I just hope it is a bottom.

As I had mentioned previously, the storm track for Ike seems to change by the hour.  Models have the system moving back toward Houston about 24 hours after it looked as if Ike was going to the US/Mexican border and a Hurricane warning is extended almost to New Orleans.

The evacuation orders in Texas are also starting, and Houston is starting to feel the worry that a storm of this size can bring.  What really surprises me is, with nearly 96% of oil production off line in the Gulf, the price of oil continues to decline.  That says a lot, I believe…

More to come.

It’s funny what people, or governments, will do when it comes to money.  All of 20 hours ago the countries that make up OPEC were hinting production levels would remain the same until their next meeting.  Surprise, they were just blowing smoke.

Apparently “production levels would remain the same” means “cuts output to shore up falling market” in some languages.  News came out around 10 PM eastern that a 520,000 barrel a day (1.7%) cut was being put into place because “a shift in market sentiment causing downside risks to the global oil market outlook”

Translation – Out government budgets are directly tied to the price of oil and, with oil under $100, we cannot continue to grow.

5 years ago a barrel of oil was $30, today it is roughly $105.  The governments of OPEC countries had no budget issues then and sure do not now.  If there was ever a sign that OPEC is not looking out for the world this is it – they want the money.    Expect more cuts in the coming months.

Other Reactions:

Stocktock: OPEC Cuts Oil Production
Indiblitz.com

First the good news – models suggest New Orleans looks to miss the brunt of Hurricane Ike.

The bad new – compare the storm track above with the Gulf Coast Oil platforms and you’ll see the production area is on the east side of the storm, not a good area to be. I’m surprised oil prices managed to stay below $110 with the storm on the way. Maybe the oil bubble is over, maybe the market really doesn’t think this will hurt production…

The really bad news – Houston could be the new target of the storm.