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Americas:Crude Oil: Problem with the Pump

https://www.chemnet.com   Mar 14,2011 commodityonline
The cost of oil and other commodities might be slowing growth right now... or even reversing it. Pick your poison. Is it because the price of oil rose to a 2 1/2-year high this week? Maybe.

Is it because the dollar sank to a four-month low? Maybe.

Is it because gold hit another all-time high to start the week? Well, it's probably not that, but that certainly fits the rest of the story nicely.

The simple fact of the matter is, commodity prices are going berserk, and if they don't calm down, they just might cause a dip back into recession.

It's a simple formula. The dollar is weakening, so imports cost more. Demand is increasing for all commodities, as populations rise and, especially, get richer. (China and India, we're looking at you.)

Meanwhile, supply is simultaneously getting cut -- whether through poor weather and yields (grain supplies) or political upheaval (oil). Libya, responsible for about 2-3% of oil production each day, has already shut down many or most fields... and that's likely to continue until one side or the other gains the upper hand in this heating civil war.

That's enough to spook most investors. But what really worries them is the spread of unrest. We haven't heard anything about new protests in new places, but that doesn't mean we're out of the woods yet. Should Iran get crazy again... should a few smaller oil states go through a stretch of bedlam... or, of course, the great fear, should Saudi Arabia experience significant hiccups, then the price of oil will skyrocket. And $200 a barrel wouldn't be an insane guess.

To bring that down to the street level, every dollar oil increases makes for about 2.5 more cents at the pump. So an increase of nearly $100 would add close to $2.50 to the price of gas -- putting us at the $6 range!

The Problem With the Pump

That's a worst-case scenario. And the fact that it's even in the realm of possibility is starting to spook investors. Heck, the oil prices we're seeing are already worrying investors. Driving mileage, past a certain point, is fairly inelastic. Your commute isn't going to change distance -- you need to buy that gas.

As the price of gas goes up, consumers need to cut spending elsewhere. That's why the oil shocks of the '70s were so detrimental... and it's a scenario that may be playing out again today.

Only this time will be worse. Today, the U.S. gets nearly 60% of its oil from abroad; In the '70s, that percentage was in the 20s.

In the '70s, the oil was there, it was a matter of politics, an embargo. And the politics couldn't hold -- OPEC was hurting itself by hurting its customers, the situation couldn't continue indefinitely.

Today, it's partially a matter of politics again -- but not the same sort at all. It isn't bullheaded leaders that are threatening supply, but consuming chaos. No one knows how long it will last, how far it will spread, or what the next stasis will look like. It's possible we'll see a whole new string of dictators emerge -- only these won't be Western-friendly.

Where We Go From Here

Right now, everything is up in the air, and that's enough to spook everyone... and push one sector higher: commodities.

And with commodities rising the way they have been, things don't need to get much worse before the possibility of recession rears its head again.

Time to find cover -- and potentially profit -- in the very instruments threatening us now: commodities. From gold and silver... to oil... to even agriculture, we're in the middle of a commodities boom.

I know what you may be thinking: "boom in agriculture?" Yeah, you heard me right. In fact, we're facing a food crisis like we've never seen before because of what's going on in this market. The Sunday Times reports:

The specter of food shortages is casting a shadow across the globe, causing riots in Africa, consumer protests in Europe and panic in food-importing countries.
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