The Knows knows

Monday I posted the article “Relief at the pump”, where I discussed the oil market bubble, and the part speculators are playing.

Tuesday CNBC spent a good part of the day talking about oil (see their related article here), the speculators, and the bubble that oil appears to be in, as well as the possible correction in the oil market.

If I didn’t know better, I would have thought that CNBC read The Knows on Monday, because they talked about everything that I wrote in that post.

Since CNBC agrees that there is a bubble in the oil market, and they also agree that speculators are pushing up the price of oil, now let's see how soon the correction in the oil market takes place.

The Knows knows!!!

Relief at the pump

Brokerage firm Goldman Sachs recently predicted that oil would go to $141.00 per barrel.

Billionaire oil investor T-Bone Pickens priced oil at $150.00 per barrel short term and $200.00 per barrel within 18 months.

Week after week oil prices have been reaching new highs, hitting a new all time high of over $135.00 per barrel last week.

The high cost of oil has resulted in record high gas prices and the sense that everything we buy is effected by the cost to transport it to market; our money is buying less goods and services.

Oil is in a bubble right now and like the dot-com and housing bubbles it will burst, there is a thing called the law of supply and demand, which sets the market price of everything.

The fundamentals of supply and demand are not the only thing moving this market, sure the greedy oil companies, Opec and the president share a lot of the blame for the high price of gas, but the big reason prices have moved up so fast in the last few months is because billions of dollars in speculative money have been poured into the oil sector.

As prices continue to rise, people are starting to use less, resulting in larger inventories of gas. That's where supply and demand comes in to play, the less we use the more inventories will increase resulting in falling prices.

In the end consumer markets always work to bring prices in line with demand.

the Financial times, has already reported that US demand is falling more than expected and the Department of Transportation said figures from March show the steepest decrease in driving ever recorded.

How far will gas prices fall? Who knows, but rest assured of one thing this summer there will be a correction in the oil market.

Will oil eventually go to $200.00 per barrel? Yes it will if we do not get serious about developing alternative energy sources.

However, as I have said before adversity brings opportunity:

Option #1: I think this is a good time to short the oil market, there are some ETF's (exchange traded funds) called proshares ultrashort that short the oil market, when the price of oil goes down these shares go up, I expect to make about a 20% return within the next 6 to 12 weeks, not bad when you consider CD's (certificates of deposit) are only paying about 2% annually.

Option #2: just sit back and enjoy the lower price at the pump while they last.

NOTE: The statements on this blog are my personal opinion, do your own research.

Difficult choices are ahead...

As oil prices continue to rise, it's easy to look around and take note of the effect. Most obvious, is the pain you feel at the pump. However, the cost of oil-based fuels touch almost every good we buy. Food costs increase because the trucks that deliver foods (and other goods) run on diesel fuel. Air fares increase because jet fuel becomes more expensive. Potentially all petroleum-based products (e.g. asphalt, kerosene, plastics, and even tar) may rise in cost.

Gasoline

It's not difficult to imagine that soon the cascading effect of rising oil prices (and by extension gasoline) will cause us to make other difficult choices. Perhaps you'll reconsider the purchase of that SUV you've been eying. Or maybe you already own an SUV, and you're thinking about trading it for a sub-compact. Hybrid vehicles are growing in popularity because of their improved fuel economy, and the high cost of gasoline; however, there seems to be a premium for those types of vehicles as well. Some Analysts predict that gasoline will exceed four dollars per gallon before the end of summer. Something has to be done...

So what, if anything, can we do as a nation? Well, there are alternatives to gasoline...

Biodiesel

Biodiesel refers to a non-petroleum-based diesel fuel consisting of short chain alkyl (methyl or ethyl) esters, typically made by transesterification of vegetable oils or animal fats, which can be used (alone, or blended with conventional petrodiesel) in unmodified diesel-engine vehicles.

Ethanol

Ethanol fuel is ethanol (ethyl alcohol), the same type of alcohol found in alcoholic beverages. It can be used as a fuel, mainly as a biofuel alternative to gasoline, and is widely used in cars in Brazil. Because it is easy to manufacture and process, and can be made from very common materials, such as sugar cane, it is steadily becoming a promising alternative to gasoline throughout much of the world.

Conclusion

 
We could start building vehicles that burn fuel that is totally independent of oil production. So why don't we? Good question... The answer is... Greed. Oil companies, who seem to report record profits when oil prices are up, are making too much money from oil to allow any alternative fuel to be used. Oil companies are notorious for buying patents for vehicles that could free us of our dependence on oil, and burrying them.

The sad truth is, that until we reach a critical point, where the world's oil supply is so diminished that there is no choice but to pursue alternatives, we'll be paying those high fuel prices.