Friday, January 4, 2008

The High Price of Oil

It finally happened! I never thought I'd hear any of the news reporters come right out and say it, but I was watching one of my favorite business channels yesterday morning and there it was. I've been saying for a long time now, when you hear about the high price per barrel of oil on the news, that price is what the commodities traders have bid the futures price up to, not necessarily the price dictated by supply and demand. This is what one of the news people pointed out, that perhaps the oil market is being driven more by commodities traders trying to make some big money than by actual consumption. This is exactly the reason that I think oil prices are headed for a fall.

Unfortunately for most of us, gasoline prices are artificially high because of the irrationally high bids on oil futures. It seems that every time the commodities traders bid up the price of oil, gasoline prices spike as well. Even though the price reported on the news is "futures" prices, we have to pay a higher price for the gasoline that we're using now. But let's think about this for a moment. What usually happens in the stock market when a company's stock price is bid up to the stratosphere? It may hover at the lofty price for quite some time, but inevitably some the market comes to it's senses and the price comes crashing down to a fair market value. I watch the news and read the papers and I've heard every argument supporting the high price of oil, but I still think that in the end it will boil down to supply and demand. When consumers are no longer able to afford the lofty prices and begin, en-masse, to cut back on consumption, then we're going to see the bottom drop out of oil and gas prices. I doubt we'll ever see the cheap gas prices we've had in the past, but I wouldn't be surprised by $2.00 per gallon.

If you've been keeping up with the news, change is already taking place here in the United States. People are switching from the big gas guzzling SUV's and Trucks to smaller, more fuel efficient vehicles. Hybrids are more popular than ever and with everybody jumping on the going green band wagon, I expect we'll see only more of the same for the foreseeable future. The American consumer is being squeezed to the breaking point and I just don't see these prices holding up much longer. If you think that the growing demand from China and India will send the prices higher, think about who buys their products. If Americans stop purchasing their products, then expansion in their economies will slow, which will also lessen the demand for oil.

In the mean time, the higher oil prices have helped me to boost my dividend income through my investments in energy trusts. I know you're not supposed to get attached to your investments, but I have to say I am quite partial to Pengrowth Energy Trust. It's been a solid performer for me and I hope they continue to do well for a long time to come. However, after my experience with REITs in the past year, I won't hesitate to drop the energy trust shares like a hot potato if I see any similar signs of weakness in their performance. But for now they seem to be doing quite well.

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