10 REASONS A SUPER-CYCLE IN OIL IS INEVITABLE
Article also featured on thestreet.com and Minyanville
The argument has been made that the super-spike we saw in oil prices into 2008 was a simple aberration. It was seen as the type of cyclical event that takes place once a decade amongst different asset classes. As we are all slaves to the benefits of crude oil, this is the preferred path of thinking. Unfortunately, the reality of the situation is turning out to be much different. What awaits is a super-cycle in oil prices that takes crude oil prices to levels that are currently thought of as highly unlikely or impossible.
Here are the 10 reasons why crude oil prices are going to rise far beyond a point that any of us can imagine:
1. An Arab world that will be struggling between fundamentalist Islam and the thirst for a democratic
system for many years to come.
2. An Iranian government that will become all the more powerful as a result of the problem in all of the
Arab countries that surround it. They will exert their power through quiet acts of influence similar to what
they are doing in Iraq at present. Sunni and Shiite tensions will rise as a result.
3. A demographics issue with what is going on in North Africa, Middle East, Asia and South America.
The age of information has brought a “why not us?” attitude to these regions. They are quickly building
infrastructure and coming into the modern world, making up for decades of lagging behind the West.
Everything that they are doing and will want to do will require oil. From the production of their food, to
their transportation, to the containers they use to take their food home when they start serving portions
that are far too large…a natural side-effect of becoming westernized.
4. A market for US Dollars that has been in decline and doesn't show any signs of changing its trend.
5. A Russian government that will extend its power base through the economic superiority that higher oil prices bring the country. Russia is one of the largest producers of oil in the world. The major difference between Russia and other large scale oil producing countries is that Russia has geopolitical influence and dominance on its mind. Very similar to another top 5 producer of oil - Iran. These countries realize that their power base will increase or decrease as a direct result of oil prices. The higher the prices go, the more opportunity and influence they will have. Given these aspirations and obvious realizations, they have every incentive to assist the price of oil in its march higher.
6. A self-reinforcing technical trend higher. The fact that crude oil prices have been going sideways for the past two years - consolidating at such a relatively high historical level - very simply means that the price levels we previously thought of as being "normal" are in the process of being adjusted higher. The days of crude oil sitting below $50 per barrel for an extended period of time is far behind us. This recalibration, if you will, also causes the ceiling for crude oil prices to be raised. Often times, this ceiling goes beyond what the mind of a "normal market participant" can imagine. Guesses as to the eventual price during this type of trend in a commodity as important and widely observed as crude oil is more accurately achieved while on mushrooms or LSD, as opposed to common sense, everyday thinking.
7. Nationalization. Smaller oil producing countries (maybe even a couple of the larger ones) turning towards nationalizing their crude oil supply. This becomes all the more possible as crude oil prices rise to unthinkable levels. Countries will then have the financial resources necessary to pursue nationalization. This has the potential to cause further dislocation in an already sensitive commodity. Should it prove successful for these countries, it is possible that larger countries would pursue the route of nationalization, as well.
8. An eventual disbanding of OPEC. There will be no reason to have OPEC if their efforts to oversee and control oil prices are seen as useless. The caverns of greed run deep and pursue little in the way of camaraderie. As soaring oil prices create economic behemoths, they will disband and pursue their own interests exclusively.
9. A general trend towards inflation. Whether you want to blame oil, excessive liquidity, irresponsible government - the fact of the matter is that massive inflationary pressures are not an "if" type of scenario, but rather a "when" and "how severe" fact. The phrase "self-reinforcing, vicious cycle" will become a well-known reality. These types of trends, where assets are constantly in a battle to exert influence over one another, always end with a bang as opposed to a whimper. A cycle bent towards hyper-inflation, with a multitude of asset prices soaring higher, will always end with prices overshooting any reasonable target.
10. The massive shakeup of the current economic power structure. My 4 year old son recently got a new room. His room is decorated with various pictures of Batman in heroic poses as he flirts with dangerous situations. Various toy trucks, stuffed animals...a small palace for a young boy. Something you would think he would embrace with a passion. The transition away from his well established, plain room, proved to be difficult, however. He experienced a dislocation away from his normal pattern of behavior by not sleeping well at night, throwing temper tantrums more frequently and with greater passion. This was his version of volatility in reaction to a change in an established structure.
Much like my 4 year old son, asset prices - commodities especially - will experience bouts of rage, unpredictable behavior and senseless acts of emotion when their established routine and environment has been interrupted. The changing of the economic guard away from the US, Europe, Japan has caused and will continue to cause dislocations in all asset prices, until they become used to their new living arrangements, with comfort in knowing that they are as safe in their current environment as they were in their old one.
There will be massive challenges ahead as a result of this new reality. Just as with any dislocation in prices, there will also be massive opportunities for profit. Choose your investments accordingly.
