Will Black Gold Make Investors Rich?

| March 31, 2010 | 0 Comments

You may remember these lyrics to the old sitcom from the 1960s “The Beverly Hillbillies”.

Come and listen to a story about a man named Jed
A poor mountaineer, barely kept his family fed,
Then one day he was shootin’ at some food,
And up through the ground came a bubblin’ crude.

Oil that is, black gold, Texas tea…”

I’m sure most of you know how the story goes.

Jed was a poor ole country bumpkin.  His family lived in a shack out in the middle of nowhere.  One day Jed discovered oil while shooting at his evening meal.  Yep, the black stuff made ole Jed a wealthy man.  And the rest, as they say, is history…

Now, good ole Jed isn’t the only one to make his fortune off of “Texas tea”.

Empires have been built on the back of crude oil.  How is this possible?  Well, obviously crude oil is a very valuable commodity.  But it’s more than just that.  It’s the lifeblood of the world economy.

Without oil, life as we know it would be completely different…

Transportation of every product imaginable is made possible by oil.  That nice fresh bag of salad didn’t walk itself from the field to the grocery aisle.  Neither did the steak, or the potatoes… (or anything else in the store for that matter).

Very simply, crude oil allows for readily available cheap goods and services.

Without cheap transportation, cheap goods aren’t available for a consumer based economy.  The efficiency of the supply chain depends on the price of the main ingredient… oil.

The higher the price of oil, the more costly it is to support the supply chain.

Remember the summer of 2008 when the price of crude was skyrocketing to $147 a barrel?  Prices in the grocery aisle shot higher to reflect the increasing cost of delivery and production.

Of course, prices at the gas pump skyrocketed as well.  Businesses and consumers alike were squealing.

Every aspect of modern life becomes more expensive when oil prices rise…

Thankfully, the price of crude collapsed to $35 as the financial markets were unraveling in late 2008.  (Every cloud has a silver lining!)

But now the financial crisis appears to be coming to an end.  And crude prices are back above $80 a barrel, a 130% jump from the lows created during the financial meltdown.  Compare this to the rise of the S&P 500, which is currently up about 75% from its lows.

What’s keeping oil prices inflated?

Well it depends on who you listen to.

Some analysts say it’s the “peak oil” effect.  So just what is peak oil?

Well, in theory, peak oil is the point in time where world oil production reaches maximum output.  In this scenario, oil simply cannot be drawn out of the ground fast enough to support growing global consumption.

When this point in time is reached, oil prices will shoot to the stratosphere.

But some analysts say peak oil theory is bad science…

They say we have decades of supply to support global economies.  These people blame speculators for the rise in oil prices.  They say the fear of peak oil is causing oil to be overhyped as an investment and trading opportunity.  This investment demand is what’s driving prices higher.

So who do you believe?

Personally, I think the surge in oil prices has to do with both factors…

First of all, peak oil is an unfortunate fact.  There is a time when world oil consumption rates will approach production rates.  There may be billions of barrels of oil left in the ground, but we won’t be able to pump it out fast enough to support growth rates around the world.  (Growing economies require increasing amounts of energy.)

So peak oil theory is not about running out of oil, as some will lead you to believe.  It’s about losing a cheap supply of oil to sustain economies and current standards of living.  When world production and consumption start to equal out, oil prices will explode.

So the real question is, “When will peak oil happen?”

Well, your guess is as good as anybody’s.  Nobody knows for sure when this pivotal point will be reached.  It could be twenty years down the road… or it could be happening right now.  If we have a couple decades, human ingenuity may solve the problem.

If it’s happening right now or in the near future… humanity has some major challenges ahead of it.

What is for certain is many investors are drooling at the mouth to be in on the oil trade.  They want to profit from what they think is another moon shot for oil prices.

This in itself could be creating inflated prices for oil…

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Category: Commodities

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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