Sure Sign of a Top

Business Week is bullish on oil.

Is any relief in sight?
Not really. Price drops would come only through one of two ways: Either demand falls or supplies increase. Neither is likely. The U.S. economy has proved to be remarkably resilient in the face of rising oil costs — in large part because the oil shocks of the 1970s. Back then, oil reached its all time high of about $90 per barrel, in today’s dollars.
Those high prices touched off major improvements in energy efficiency, making energy costs a smaller percentage of the cost of doing business today. That development decreases the chance that soaring prices will cause a recession.
Meanwhile, economic growth in places like China is fast enough to offset the dampening effect of higher energy prices. So the demand for oil isn’t likely to be reduced — especially when Americans are driving more than ever.
Neither are supplies going to increase anytime soon. While a debate is raging about how much oil is left in the ground, today’s high prices should stimulate a boom in exploration and oil-field development. That will likely get an added boost from the just-signed energy bill, which offers new incentives for expanding supply. In a few years, therefore, the world will be able to pump more oil. But that’s still years away.
Another added premium in today’s oil prices comes from the threat of terrorism. With production capacity already nearing its limits, an attack that cut, say, Saudi oil production would send prices soaring. That’s why the price of oil is higher in the futures market than it normally would be in a calmer world, where the chances of a supply disruption are smaller.

As I mentioned in an earlier post, it was 26 years ago tomorrow that Business Week ran it s famous “Death of Equities” cover. The rumors of their death were greatly exaggerated.

Posted by on August 12th, 2005 at 12:42 pm


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