Oil Gain Dollar Pain

The currency market has a lull in astounding economic news, so today we will address the 800 pound Gorilla everyone tries to forget. $140 a barrel oil is unprecedented and well above the inflation adjusted price of $101.70 in the 70’s. Here is where the conspiracy theories start, the Rockefeller’s have a depot under there house, maybe the Kennedy’s, no no it’s really the Bushes who created a reservoir under the White House. Probably not so, why is oil rising? There is really no one aspect rather a slew jumbled together that give no relief at the pump. The fall of the dollar has a strong correlation with the rise in the price of oil, simply because it’s a dollar denominated commodity. OPEC is the cartel we all love to hate, because they restrict production to augment the price. With control of over two thirds of the proven reserves in the world they are a force to be reckoned with. Oil nationalization, countries with little or no engineering experience does not allow the seven sisters to come drill in their backyard. Kindergarten politics that has lead eastern bloc countries to stagnated oil production, not to mention Latin America, and the Middle East. Engineers are a plenty in the West but not to valuable if there is nowhere new to drill. The ever so popular demand argument from China and India has some credence yet it is definitely over played. These two countries are about as efficient as Afghan steel mill, so for every 1% increase in GDP oil consumption ticks up by a ridiculous amount. Subsides in developing countries have lead over consumption; it is not a coincidence that the oil boom in Venezuela has been accompanied by a large increase in the sale of Hummer’s in Caracas. Finally refinery bottle necks, the Saudi’s could open up the spigot as much as they want it doesn’t change the fact that a refinery hasn’t been built in America for decades. A barrel of oil isn’t aesthetically pleasing, and it’s pretty useless unless some Texan refines the thing.
Let’s face the music oil is going to be very sticky at the current price. OPEC loves the profit margins, and if the price retreats so will the amount supplied. Oil nationalization is definitely in vogue and the swagger of Russia highlights the liquid courage these nations are drinking. Fact of the matter is these countries all suffer from the Dutch disease and once the price of oil falls so does the Russian economy. As for demand from India and China they can’t wait to play baseball, drink Johnny Walker, and burn oil like those funny Americans. China has officially retired the bicycle and has converted to the gas guzzler. As for subsides they are not going anywhere because politicians are in politics for themselves not the good of world. Now how can you make money, know this Canada exports more oil to America than any other country. Norway is another stable oil producer that will likely see some appreciation in the future as oil prices increase. As for any OPEC country forget about investing in there currency because I’ve seen mud that is more transparent than Venezuela’s monetary authority. The Gulf States that peg to the dollar are only going to experience more inflation as the U.S. continues expansionary monetary policy. In the meantime expect a negative correlation between the dollar and the price of oil. This correlation could be used as a hedge, ie buy oil and the dollar in order to decrease your investment variance. What ever you choose to do know oil is going nowhere but up, so get used to it.