Will Crude Take Out $ 100/bbl in 2011?
If it does and the probability is high, it will hurt almost every sector across the global economy-for from each product on earth ranging from contraceptives to cars is either shaped out of an oil derivative or it's functionality arises out of crude.
First let's look at a long-term chart of oil, since 1965.
I subscribe to 'Peak Oil' theory by the way. This is the idea that there is a finite amount of oil in the world, and at a certain point we will be consuming more than we can readily produce. Indeed, judging by all the deep-water exploration that goes on, it's probably fair to say that the easy-to-find oil is already long gone.
However, the inexorable rise you see in the chart above is as much a result of the declining purchasing power of money as it is of oil 'running out'.
There are periods, such as the 1970s, early 1980s and the 2000s, when the oil price races ahead. And there are periods, such as the 1990s, where the oil price trades in a more limited range.
If you measure oil in a currency that governments, for all their efforts, cannot debase so easily by over-issuance - I'm talking about gold, of course - then you see that the oil price has in fact remained in a fairly constant range. Here we see a chart that shows how much gold you'd have to hand over in exchange for one barrel of oil, since 1959.
That chart may look volatile at first glance, but a bit of scrutiny reveals how tight the range really is, unlike oil's inexorable rise when measured in US dollars. How much better for global trade and investment would it be if the price of the world's key commodity were this stable?
Broadly speaking, when you have to pay more than 0.1 ounces of gold for a barrel of oil, gold is cheap and oil is expensive. Below 0.06, oil is cheap and gold expensive. The all-time record occurred at the peak of the oil mania of 2008 when it took almost 0.17 ounces of gold to buy a barrel of oil.
Currently it takes 0.065 of an ounce of gold ($90 divided by $1,400) to buy a barrel of oil. I would say that makes oil fairly, but not extremely, cheap, compared to gold.
How does oil compare to the Dow Jones?
This next chart shows how many barrels of oil the Dow Jones (judged by its total points value) can buy you. Again broadly speaking, when that ratio is high, as in around 2000, you want to be selling stocks and buying oil. When it's low, as in the late '70s and early '80s, you want to be selling oil and buying stocks.
The long-term mean is 200 barrels of oil for the Dow. At $90 oil and roughly 11,500 on the Dow, we are currently sitting below that mean, at around 130 barrels. The high point - where stocks were very expensive compared to oil - came at the turn of the century, as oil reached the end of its bear market and the dotcom boom peaked. Then, with the Dow nearing 12,000 and oil in the $10-15 zone, the Dow could buy you as much as 830 barrels of oil.
My thanks go once again to Tom Fischer, professor of financial mathematics at the University of Wuerzburg, for putting these charts together for me. It was Tom who first alerted me to the gold-to-UK-house-prices ratio.
How low could these ratios go?
So right now, the oil price looks relatively expensive compared to stocks. Does that mean you should be piling into the Dow?
Perhaps not. Tom is about as extreme an inflationist as you can get. Just as he sees the UK-house-price-gold ratio sinking to all-time lows in the course of this current chapter in financial history, he expects the Dow-to-oil ratio to fall back to somewhere near the lows of the late 1970s and early '80s. Then - with the Dow near 800 and oil spiking to $40 a barrel - the Dow would buy you a mere 20 barrels of oil.
I'm not as convinced as he is that we'll see these extremes. I can see his logic, but when something is trading markedly below its long-term average (as the Dow-to-oil ratio is right now), I'm reluctant to bet too heavily on it falling further.
But 'the trend is your friend' as they say, and this trend, which began in 2000, is clearly heading lower. Should rampant inflation coincide with fast-declining oil reserves, then Tom's target prices will be realised.
This is, of course, a very long-term trade. So - if it appeals to you - there is no rush to go out and do anything right now. And in the short-term the oil price could easily pull back. But one way to play this might be to buy quality oil stocks with growth potential which are not yet at full production.
First let's look at a long-term chart of oil, since 1965.
I subscribe to 'Peak Oil' theory by the way. This is the idea that there is a finite amount of oil in the world, and at a certain point we will be consuming more than we can readily produce. Indeed, judging by all the deep-water exploration that goes on, it's probably fair to say that the easy-to-find oil is already long gone.
However, the inexorable rise you see in the chart above is as much a result of the declining purchasing power of money as it is of oil 'running out'.
There are periods, such as the 1970s, early 1980s and the 2000s, when the oil price races ahead. And there are periods, such as the 1990s, where the oil price trades in a more limited range.
If you measure oil in a currency that governments, for all their efforts, cannot debase so easily by over-issuance - I'm talking about gold, of course - then you see that the oil price has in fact remained in a fairly constant range. Here we see a chart that shows how much gold you'd have to hand over in exchange for one barrel of oil, since 1959.
That chart may look volatile at first glance, but a bit of scrutiny reveals how tight the range really is, unlike oil's inexorable rise when measured in US dollars. How much better for global trade and investment would it be if the price of the world's key commodity were this stable?
Broadly speaking, when you have to pay more than 0.1 ounces of gold for a barrel of oil, gold is cheap and oil is expensive. Below 0.06, oil is cheap and gold expensive. The all-time record occurred at the peak of the oil mania of 2008 when it took almost 0.17 ounces of gold to buy a barrel of oil.
Currently it takes 0.065 of an ounce of gold ($90 divided by $1,400) to buy a barrel of oil. I would say that makes oil fairly, but not extremely, cheap, compared to gold.
How does oil compare to the Dow Jones?
This next chart shows how many barrels of oil the Dow Jones (judged by its total points value) can buy you. Again broadly speaking, when that ratio is high, as in around 2000, you want to be selling stocks and buying oil. When it's low, as in the late '70s and early '80s, you want to be selling oil and buying stocks.
The long-term mean is 200 barrels of oil for the Dow. At $90 oil and roughly 11,500 on the Dow, we are currently sitting below that mean, at around 130 barrels. The high point - where stocks were very expensive compared to oil - came at the turn of the century, as oil reached the end of its bear market and the dotcom boom peaked. Then, with the Dow nearing 12,000 and oil in the $10-15 zone, the Dow could buy you as much as 830 barrels of oil.
My thanks go once again to Tom Fischer, professor of financial mathematics at the University of Wuerzburg, for putting these charts together for me. It was Tom who first alerted me to the gold-to-UK-house-prices ratio.
How low could these ratios go?
So right now, the oil price looks relatively expensive compared to stocks. Does that mean you should be piling into the Dow?
Perhaps not. Tom is about as extreme an inflationist as you can get. Just as he sees the UK-house-price-gold ratio sinking to all-time lows in the course of this current chapter in financial history, he expects the Dow-to-oil ratio to fall back to somewhere near the lows of the late 1970s and early '80s. Then - with the Dow near 800 and oil spiking to $40 a barrel - the Dow would buy you a mere 20 barrels of oil.
I'm not as convinced as he is that we'll see these extremes. I can see his logic, but when something is trading markedly below its long-term average (as the Dow-to-oil ratio is right now), I'm reluctant to bet too heavily on it falling further.
But 'the trend is your friend' as they say, and this trend, which began in 2000, is clearly heading lower. Should rampant inflation coincide with fast-declining oil reserves, then Tom's target prices will be realised.
This is, of course, a very long-term trade. So - if it appeals to you - there is no rush to go out and do anything right now. And in the short-term the oil price could easily pull back. But one way to play this might be to buy quality oil stocks with growth potential which are not yet at full production.
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Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
Nothing in this article is, or should be construed as, investment advice.
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