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Oil Speculations

Mychal Raynes
November 5, 2006

Mainstream media frequently talks about the price of oil being high because of speculators driving the price up. I think that oil is undervalued and will be over $100 a barrel by the end of the decade. Hereís why.

If the money supply doubles the price of oil should double. The Federal Reserve will probably increase the money supply dramatically to ease the suffering housing market. With a 9 trillion dollar national debt the fed will likely need to inflate to pay itís bills. Not to mention, having excess money available for retiring baby boomers starting in 2008. Inflation factors alone could probably push oil to $100 a barrel.

China and India
China and India continue to grow sucking up many resources including energy. With no signs of slowing down well over 2 billion people are going to consume more oil. This will lower supply and increase demand, so much so that this alone could probably push oil over $100 a barrel by the end of the decade.

Turmoil in the Middle East
The Middle East produces a massive amount of oil. Every time a war breaks out or there is conflict in the region the price of oil jumps. All you have to do is listen to politicians talk and you can form the impression that meddling in the Middle East is not going to cease soon. There are at least three conflicts in the Middle East, Afghanistan, Iraq, and Lebanon. The continuation of these conflicts could push oil over $100, without factoring possible future conflicts involving Iran, and Syria.

Peak Oil
Peak Oil is the theory that the world production of oil cannot sustain its growth and will begin to decline. When looking at the history of United Stases oil production, peak oil becomes more than a theory. Existing wells around the globe are increasing in age leading many experts to believe that we can expect less production out of the older wells. New production doesnít look much more promising. Many new discoveries are small and are located in places that are expensive to bring into production. Peak oil paints a bleak picture for a low oil price.

Commodity Bull Market
Commodities are currently in a long-term bull market. Commodities that have no business going up in price will experience an increase, just like questionable tech companies grew in price during the tech bubble. Even if oil were a questionable commodity (which itís not), oil staying at a low price would be unlikely. The fact that we are in a commodity bull could easily drive the price of oil over $100.

Other Factors
Other factors like weather, oil cartels, and government regulation play a huge role in the price of oil. It could take the oil industry a few years to recover from a bad hurricane season not to mention threats of production cuts from the wannabe cartel OPEC (or threats from the communist bark dog Chavez). New taxes, increased requirements, and other government meddling can also cause difficulties in the industry driving the price per barrel higher.

Importance of Oil
Oil is directly or indirectly related to every product and business in the world. Oil is how we ship all of our goods. A high oil price can wreak havoc on an economy. This is probably the reason that the mainstream media always predicts that the price of oil is going down. Oil will not be in the double digits for long. By 2010 oil could easily be $150-$200 a barrel. I am curious if the media will say itís because of the reasons stated above or speculators driving the price up.

Mychal Raynes
November 5, 2006


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