Tuesday, April 22, 2008

Oil Highest, Dollar Lowest


Quote of the day:
“ There is scarcely anything in the world that some man cannot make a little worse, and sell a little more cheaply. The person who buys on price alone is this man's lawful prey.”
--John Ruskin

I woke up this morning to news that oil is at $119, an all-time high, and that the dollar is at .62 euros, an all-time low.

It sounds like a broken record. Yet what makes this news is the relentlessness of these moves. Oil has been at or around all-time highs for the last four months. The dollar has been at or around all-time lows for more than a year.

There is no sign that either direction will change any time soon. The current surge in the oil price is partly due to a disruption in the supply coming from Nigeria. This is a short-term effect, which means that oil’s price will likely back off a bit after a while.

But the key words in that sentence are “a bit.” As always, there will be choppiness in oil prices. One day the price will be down a few dollars, the next week it will be up a few dollars. Or vice-versa.

But it is untenable to suggest that oil prices are “going back down.” Yes, in the short term, they probably will. The long-term trend, however, is inexorably higher. And eventually MUCH higher, as China’s and India’s economic development continues to accelerate.

Indeed, we are headed for an oil crisis in the coming years. There will come a point when world oil production cannot possibly keep up with both current needs and the needs of millions of new drivers and hundreds of new industrial companies. We don’t know when this crisis will happen, but it will happen.

The dollar will keep sinking as long as the primary direction of interest rates is down. A very weak currency is part of the price we pay to give ourselves cheap credit to buy what we want, and to help prevent businesses from having to scale back.

Everything has a price. Everything has a consequence.

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