People keep asking us where we think the oil price will end up. Will it hit $100 a barrel by Christmas, they want to know. We’d love to be able to tell them the answer, but the truth is that we have no idea.
What happens over the next few months will depend on the number of hurricanes that hit Mexico; on how much the Opec nations overproduce or are capable of overproducing; on how overexcited or not speculators get about the fundamentals of the oil story; and on how many men with guns have a go at upsetting the fragile politics of the Middle East. It may end the year at $80 if fewer mad men act on their urges; the US midwest gets a mild start to the winter; and speculators get nervy. Or $110 if not.
I haven’t a hope of accurately predicting the interplay of all these factors. But here’s something I can say for certain. The price range for oil isn’t going to be $20-$40 again. It is – if we are lucky – going to be $60-$90. We started going on about this back in 2002 when oil was not much more than $20 a barrel, and the basic drivers haven’t changed since. China’s oil consumption has doubled in a decade and is still rising at 15% a year. Demand is on the up in the rest of Asia, in the Middle East itself and even in the climate-change-conscious west. Yet supply is tight: there have been no big finds for decades and the infrastructure required to ramp up production from current sources isn’t good enough.
There’s not much good that can come of this (unless you happen to have taken our advice and been invested in the sector for the past five years). There is a general view that this shift will not be as damaging as the soaring oil prices of the 1970s were – and to a degree that is true. It has been a gradual rise, not a sudden shock; the price in real terms is not as high as at its 1970s peak; and thanks to our rising income we spend a lower proportion of our means on oil-related products.
But the problem is in the combination of difficulties facing the world, in particular the US consumer. If you are already up to your ears in debt and in arrears with your mortgage (as one in 20 homeowners are), you need gasoline at $3 a gallon as much as you need the 1% teaser rate on your loan reset to 7.5%. Sadly you are probably getting both.
So the rising oil price will not only lead to inflation but also up the odds of recession in America. There’s much talk about how cheap US assets are now the dollar is at all-time lows. But given that a currency is not much more than a reflection of the strength of an economy, no one at MoneyWeek is rushing to buy a condo in Florida. Instead, we’re still coveting gold. The tight supply in the market has been masked for years by central bank sales, but with the end of the dollar as a reserve currency in sight and not much to replace it, what central bank would sell gold now? For more on gold, see this week’s cover story and the views of our new precious metals expert Dominic Frisby. Then sign up to our daily e-letter Money Morning: Dominic will be updating us in it every Wednesday from now on.