Energy and food prices are surging. While the mainstream media likes to show the pain at the pump, they act like this crisis will pass, and things will get back to "normal."
Let me show you why $100 oil is the new normal ... and I'll throw in some links to helpful tips to ease your pain at the pump as much as possible.
What most people don’t realize is that natural resources were undervalued for a long, long time. Heck, agricultural commodities were in a bear market that lasted 20 years. So now they’re playing catch-up. And the fact is, there are strong, fundamental reasons that are driving prices higher. Let’s look at two – agriculture and oil.
AGRICULTURE – PRICES AS HIGH AS AN ELEPHANT’S EYE
Worldwide stockpiles of cereals (wheat, corn, etc.) are expected to fall to a 25-year-low of 405 million tonnes in 2008. That's down 21 million tonnes, or 5%, from their already reduced level last year.
U.S. wheat stockpiles are at a 62-year low, even though farmers are planting from fence-to-fence. And with the U.S. dollar falling fast, foreign buyers are lining up to scoop up as much of Uncle Sam's grain as they can carry away. Wheat soared to the highest price in 28 years. Then it pulled back. That only fired up foreign demand, and now U.S. wheat exports are flying out the door.
Soybeans? Same thing. U.S. soybean oil exports have doubled in the past year, as China struggles to keep up with a population that wants more and better food.
And as for corn — well, more and more of that is used for ethanol. The price of corn is up over 70% in the past year and has more than doubled in the past two years.
Bottom line: The world wants to eat like big, fat Americans. You are now competing for the wheat in your Cheerios with a family in Beijing. OF COURSE prices are going to go higher.
Now, the good thing about agriculture is we can always grow another crop. The United Nations' Food and Agriculture Organization (FAO) said that world cereal production may jump a record 2.6% this year as farmers boost plantings. In other words, supply is fine. Except ... wait a minute ... what's that other report I read in March? The one that said world cereal demand is growing at 3% a year.
In short: While prices may moderate and pull back from time to time, the general trend in agricultural commodities should remain higher. I have written a lot about this at MoneyandMarkets.com. You can read my latest column on the subject by CLICKING HERE.
If nothing else, the rising cost of fuel inputs will drive grain prices higher. And with that, let’s look at oil ...
WHY CRUDE IS SOARING
Saudi Arabia said on Friday that it would raise its daily output by 300,000 barrels per day ... Angola is scheduled to start shipping a new blend of crude oil in July, boosting production by about 90,000 barrels a day... Iraqi oil production rose to more than 2.5 million barrels a day last week, the highest this year...
... and yet crude oil shrugged off all this "bad news," threw back its soot-black face and laughed, and kept on climbing to higher prices on Monday.
By just about any metric, crude oil is overbought and due for a pullback. However, the Chinese may have something to say about it. The Chinese are hoarding diesel fuel ahead of hosting the Olympics this August. You see, the Chinese don’t trust their power grid, so they’re positioning emergency generators all over the place to keep the lights on if the grid goes snafu.
And since the prices of oil, diesel and gasoline are made on the margins, China’s demand for diesel is having an effect on what you pay at the gas pump.
Some facts ...
- The U.S. consumes about 20.6 million barrels of oil per day, or roughly 25% of global demand. China is the second-largest consumer, at 7.2 million barrels per day. Japan, with 5.2 million barrels per day, is third.
- China's crude oil imports rose 15% in the first quarter and 25% in March. Its imports are rapidly accelerating! And every barrel the Chinese buy is one that we can't buy.
- Across the developing world, oil use is ramping up. This year, emerging markets combined (China, India, Russia and their other "life in the fast lane" buddies) will pass the U.S. in oil use.
And as for oil production -- it peaked back in 2005 and has remained flat ever since. So even if our use stays the same — even if there's no big emergency, hurricane in the Gulf of Mexico's Energy Alley, war with Iran, etc. — the global oil supply/demand balance is going to tighten and squeeze prices higher.
Still, Americans are the world’s biggest users of gasoline and oil, and Americans are cutting back their demand. So when China’s demand sets global prices, that’s a bit like the tail wagging the dog.
But the fact is, Chinese fuel demand is growing rapidly, buoyed by state subsidies that keep prices low for consumers and keep their magic growth engine humming along. Since we ship China more and more of our money every day in return for lead-painted toys, poisoned dog food and other gee-gaws, the government there isn’t going to run out of money to subsidize fuel anytime soon.
And there are about 2 billion people in China, India, and other emerging markets who want to hop in a car and drive, baby drive like big, fat Americans. In the long-term, they’ll use every gallon we don’t.
People who say oil prices are going back to $60 or even $40 are dreaming. I do expect a pullback to $120 a barrel, and after that there is strong price support at $110 and $100. It wouldn’t surprise me to see us test both of those levels this year. But the general, longer-term trend should be up.
The world is rapidly running out of cheap oil. The time to adjust your life is NOW.
I wrote a MoneyandMarkets.com. column on what you can do to ease your pain at the pump. You can read it by CLICKING HERE. That story contains helpful tips on how to lower your gasoline bill.
Meanwhile, while President Bush was in the Middle East, he told OPEC nations that they're running out of oil. Well, the President already said that America is addicted to oil, so isn't that a little like a junkie telling his pusher that the pusher is running out of smack. Who do you think is really going to suffer here? Thanks for the heads-up, Georgie-boy. And OPEC has nixed the idea of calling an early meeting to boost production.
This diary started out as an answer to another Kos diary, which you can read by CLICKING HERE.