OIL (All historic prices cited are indexed to inflation)
Pretty much everyone I saw in person in the late spring and summer heard me very enthusiastically telling everyone who would listen (and many I am sure wished I would shut up after hearing it several times) about the upcoming crash in Oil. I clearly remember the disbelieving looks and sneers when I told some individuals that I believed Oil would be at $50 per barrel within 5 years. I didn't think that it would happen quite this fast, but I knew it would. I posted a short note on this blog on Friday, June 13th, 2008, and I shared my unfinished in-depth entry with a few friends who were interested. I do want to put it up eventually as I still find the logic behind it interesting.
Right now I still see some room for oil to continue down. Demand destruction has not let up. I believe that we may return to the average price that oil has been at over the last 60 years which is right around $25 in current inflation indexed dollars. After the last energy crisis when oil peaked in 1981 to the mid $70's in today's dollars, it fell back to the $20's by 1985 where it stayed until 1998 (with the exception of the quick spike to $50 due to the first gulf war.
In the very near term, we will probably see some spikes especially with OPEC threatening that it will cut production at its next meeting on December 17th. I believe that they will probably be aggressive and cut quotas in the 2-3 million barrel per day range. OPEC has traditionally had a hard time enforcing their quotas and I believe that demand destruction will continue and outstrip the decrease in production. I would not be surprised at all if demand in the US fell to the 15 to 17 million barrel per day range.
I do feel like the easy money on the downside of oil has already been made, and I would not recommend that anyone without significant experience trade this market to the downside. I bought $80 USO (United States Oil fund ETF) puts when crude was trading around $130 per barrel. I have closed all those positions out except for one with a January 2010 expiration date which I am watching very closely.
We are finally in a relatively good place when it comes to oil. I actually think output cuts are a good thing for the overall balance of the market. We won't be strained against hard production limits and if demand does pick up, more production can be brought online relatively quickly and easily which means we should be safe from crisis conditions for awhile. Having prices kept a little higher than those that would occur with no cuts is also a positive because it encourages continued conservation and investment and adoption of alternative energy technologies.
ONLY YOU CAN PREVENT HIGH OIL PRICES!!
Here's the thing. During the massive run up in oil prices I felt that there was a lot of misguided anger toward all sorts of entities, especially oil companies (whose actual profit margins did not increase by very much at all). While I feel that speculation was one of the biggest causes of the insane runup and subsequent bubble, the other big cause is the oil consumer and the fact that oil was so cheap for so long which discouraged investment, development, and adoption of alernative energy sources.
I am happy with the many steps that Americans and citizens of many parts of the world have taken to become 'greener' such as increasing conservation and the investment in and use of new practices and technologies which are more sustainable and eco-friendly. The key is that we as a society must continue along this path for environmental reasons and for economic ones.
Each one of us has a choice and we each must continue to do our part, as a people, we cannot go back to being wasteful as that will put us right back into a crisis situation. Americans use twice as much oil per person as citizens in most developed European countries. We must continue to reduce our dependence on oil even if it stays cheap as only then will renewable energy realize the economies of scale which will bring the price of alternative energy down. So keep the smaller car, keep taking the train or carpooling, continue to replace your light bulbs with florescents and to cut energy consumption in other ways and continue to invest in and support companies who make an effort to be 'green' and who develop alternative energy technologies.
If you choose not to, I will be ready with a mirror for the next time you complain about how the 'greedy oil companies' are 'making' the price of gas high.
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