Oil the Finite Resource

Ceri Shepherd
Trend Investor
Jun 9, 2004

Do you remember the beautiful pictures taken of planet earth by the astronauts as they walked on the surface of the moon. Personally I was very moved by how serene and beautiful our planet looked blue seas and white clouds against a backdrop of black deep space [see photo]. It is also striking that our small round planet obviously contains a limited quantity of resources beneath its surface in particular Oil and Gas.

These resources are rare and finite and should be available to improve our life together with our children and our grandchildren and also their children. Is it not a tragedy that in the pursuit of our own instant gratification we have needlessly squandered so many of these resources in such a relatively small period of time ? Do we really need such large houses that are so energy hungry ? Do we really need so many electronic appliances? Do we really need to drive such a large SUV?

Because of years of waste together with new emerging markets primarily in Asia we are now rapidly facing an energy crunch. It is fashionable to slam OPEC, or to slam the greedy oil companies, or to scream for more supply. The simple but hard truth is that there is only so much oil available and the tankers do not need to go only to North America or Europe there are plenty of new customers, it is a suppliers marketplace. Higher prices should lead to increased exploration and new supply that was simply not economic at $25 a barrel but all of this takes time to bring onstream. Higher prices will also force people to buy more fuel efficient means of transport therefore leading to decreased fuel demand. However all of this has to be balanced against constantly increasing demand among the emerging countries. The west may finally economise and be more frugal in use but their savings will be mopped up by new and increased demand. It is extremely obvious that supply is very tight and demand very buoyant otherwise we would not have reached the situation of $40+ a barrel in the first place.

Another important point to grasp is that Oil is priced in dollars. As part of Alan Greenspans efforts to fight what was, and in my opinion still is, a very serious economic situation he has chosen a policy that has sacrificed the Dollar which is down already by about 35%. If the dollar has approximately 35% less international purchasing power and oil is priced in dollars would it not be fair to assume that oil a tangible commodity should rise by at least 35% ? The Europeans and Japanese have not seen very large oil price increases because their currencies have not been debased as much as the Dollar. As Adam Hamilton of Zeal recently pointed out as part of his excellent series of weekly essays, Oil, even in Dollar denominated terms by historic inflation adjusted standards at present, is certainly not expensive.

My personal opinion is that the future for Oil and Gas is much higher dollar denominated prices for the following simple reasons, supply is limited and yet demand is strong and growing, also as part of Greenspan's ongoing "inflate or die" policy the dollar will weaken further relative to other fiat currencies which in itself will generate price rises as the dollar loses relative purchasing power. If we enter a period of "beggar thy neighbour" competitive currency devaluations, which is very probable, then Oil and Gas will rise relative to all currencies. The recent small pullback to the $38 dollar range should be viewed as a minor pullback within a longterm primary bull trend.

Ceri Shepherd
website: Trend Investor
email: ceri@trendinvestor.info

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