Oil pump on sunset background. world oil industry
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The best ideas are the simplest and the biggest markets are the best. So here’s a simple idea for one of the biggest markets. This is oil.
For nearly 10 years from 2005 until late 2014, oil (in this case West Texas Intermediate) was above $100 a barrel, reaching slightly below $200 a barrel in 2008. During that period it spent years in a channel between $120-$140.
The thing about commodities like oil is that although they can be highly volatile due to supply and demand and political events, over the long term their price is a function of the technology required to make them and the inflationary conditions in the denominated economy. Basic commodity prices rise in line with inflation. So in a country with high inflation the commodity becomes the currency and as any gold fan will tell you, the dollar is valued in ounces of gold, not the other way around.
Oil can be seen as a good example of this idea. The dollar price is determined in barrels of oil, not vice versa. You could even say that the very definition of a commodity implies that it is something that can be exchanged for money.
It’s an interesting metaphor because there has been a lot of inflation in the US since 2005. So right now, $1 in 2005 is worth $1.57 in 2023. You need 57% more money to buy the same stuff in 2023 than you did in 2005. This is serious, but let’s look at the chart for oil:
Oil Chart Adjusted for Inflation
credit: ADVFN
When I was a kid I saw that in boom times everyone cares about the environment but nobody cares about the economy and when the recession comes nobody cares much about the environment and everyone cares about the economy Was. If the same pattern is repeated this time too, the oil’s recent sheen will end. This would be great for oil stocks. Then there is the question of consumption. It was fashionable to predict that oil was going to become an orphan commodity that everyone would discard, a biddable energy source that no one would tap. This always seemed ridiculous to me but it was a heartfelt idea that was embraced by many and saw oil companies on the backfoot for years. Now the question is, is all this about to change?
They need to move if countries are to continue their democratically mandated and mandated spending. They need to add as much valuable “real” GDP as possible because their figures are currently stacked with fake public sector GDP, the retirement of armies of civil servants dreaming of their feather beds. will not pay for There is a need for cheap energy and lots of it and no new technology yet has the flexibility or infrastructure to deliver it.
While oil doesn’t need to be the case for this to work, inflation has already loaded the price cannon, moving away from energy restraint will only increase price tensions.
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