May
14
Reasons to Worry About the Price of Oil
May 14, 2008 | 7 Comments
Some popular pages here are those about the why the price of oil is so high. I haven’t updated with a new post as the fundamentals haven’t changed other than the U.S. Federal Reserve has increasingly moved to protect the major banks and their management and stockholders instead of the American people by crushing the purchasing power of the dollar. It’s a good thing that understanding what the Federal Reserve does is hard to explain and what the effects are perhaps even more so. But killing the purchasing power of the dollar is the cause of the oil speculation and the root cause of the recession that isn’t and the inflation everyone experiences but the government denies. The power of the financial industry’s leaders to get away with taking wealth from the masses is astonishing.
What has happened is that the Fed has made capital available to banks for them to stay solvent by inventing money. That money which could be used to service customers is being used to invest in financial instruments that have “value”, such as commodities like oil and gold, securities and other things. Meanwhile all this new money makes dollars worth less as like everything in abundance, too much makes all of it worth less.
That makes the working consumer less well off, triggers the race to invest cheap dollars into “dear” commodities like oil and gold thought to “preserve value” of the dollars as those finance people are thinking to invest low and sell out high with more dollars in the end than they went in with.
But.
Markets are not hard fast reliable predictable things. There are lots of descriptive words, but steady and safe aren’t on the list.
So lets scare some finance people – the facts are available for all to see.
Commodity investors both in the banks and as customers are playing with fire in hoping that using the gold to oil ratio will support their bets. The gold to oil ratio over time has been a guide that shows the average price of a barrel of oil is about 8 to 10 barrels for an ounce of gold. Gold at about $880 today and oil about $120 the ratio says gold is underpriced at 7.3 barrels to the ounce. A sort of an “Oh, gold is way too cheap and must go up!” and get to $1,200+ per ounce.
Here’s that “But” again. Suppose you turn the ratio around and look again. It’s sort of an “how many ounces of gold can you buy with a barrel of oil?” It’s a gut check time. Instead of gold being cheap, oil is way too expensive, by about 50%. Think of it as $88 per barrel as the reality check.
The dollar, with a (Federal Reserve Bank’s) heavy hand betraying the American people, is worth less and less with each passing day and the money is leaving for foreign oil exporters. The exporters know full well that lots and lots of cheap dollars now will someday, when the mass of Americans catch on, work their way through a recession, and put an election behind them, become more valuable again. They can afford to wait.
Other than a few pounds of gold onboard space vehicles all the gold ever found could be put on the market. For centuries, humanity has used gold as a standard of value. Its “value” expressed in currencies usually leads other prices and if not, they close very quickly.
Oil once used is gone. But there have always been alternatives and more are coming. The dance between oil and gold will come to an end, but before it does the alternatives have to gain more of a share of the market and they are just beginning with much more to come.
So gold will lead oil now as it has in the past. Its off about 15% so far from its last high. This leads one to expect once again repeated historical trends will follow the facts. Oil is over priced.
Even in the face of the Fed flooding banks with new cash, a recession looming and the oil supply tight, gold can’t hit its 2005 high. Those investors know something lenders to oil speculators don’t. Oil can be unused, replaced, and avoided.
Another take on the damage done to the market itself.
So just be sure, that if you’re in oil futures that you can afford to lose maybe half or more of your capital.
Comments
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Great read. Thanks for the info!
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Interesting read, perhaps the best article iv’e browse today. We learn everyday cheers to you!
I was just having a conversation over this I am glad I came across this it cleared some of the questions I had.