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[TTHQ Staff]

BEING STREET SMART
____________________

Sy Harding

HIGHER OIL PRICES ALREADY MAKING A DIFFERENCE! October 8, 2004.

The price of crude oil rose to a still higher record this week, breaking above $53 a barrel. Spiking oil prices have never been good for the economy, and as in 1973-74, have sometimes sent the U.S. economy spiraling down into serious recessions. Yet this time surging oil prices, up a whopping 70% over the last 12 months, do not seem to be creating much concern.

Washington and Wall Street tell us that energy costs don’t account for as much of U.S. Gross Domestic Product as in previous eras, and the U.S. economy is strong enough to withstand the rising energy costs, particularly since those rising oil prices are only temporary.

But are they temporary?

As recently as 1999, oil sold for as little as $10 a barrel. No one denied that was too low. At that level oil producing countries were losing money, and there was no incentive for oil companies anywhere to spend the money to explore for and develop new oil fields. By the year 2000, oil prices had gained ground to a more normal level between $15 and $20. When the price rose further, to $22, OPEC, the consortium of major oil producing countries, set a range for crude oil prices of $22 to $28, which they agreed to control by increasing or decreasing the level of their oil production. OPEC said it was satisfied with prices at the lower limit of the range as being profitable for them, but did not want prices to rise above $28 for fear it would slow world economies (which would be bad for them as demand for oil would decline).

But among other factors, OPEC had not foreseen the emergence of China as a world economic power, and the resulting demand for oil that would be created by China’s surging industrial growth, and pent-up demand for automobiles by its huge population. China’s additional slice of the oil pie, coupled with the recovery of other world economies from the 2001 recession, quickly eliminated OPEC’s ability to control rising oil prices by increasing production. As demand for oil increased, OPEC and other oil producing countries increased their production to its absolute limit. But oil prices continued to rise. Only Saudi Arabia is thought to have any excess capacity at all, and that thought has come into question recently as its promise that it would step up production fractionally has not materialized.

World oil demand is growing at its fastest pace in 16 years, and increases with every passing day. U.S, European, Asian, and Japanese economies are growing again, and their main source of energy to fuel those economies is oil. China is absolutely sucking in oil, importing 20% more this year than last year.

Meanwhile, the supply side is not promising. Oil fields in the U.S. and North Sea have matured and are producing less, while new discoveries contributed only 6.8 billion barrels a year in 2001-2003, down from the average of 11.4 billion barrels annually over the previous five years. Iraqi oil production, expected to come on line within months of the invasion, is still running at half its production level prior to the war.

Granted, there is some fear factor built into oil prices. With oil production running only 1% above demand, obviously a disruption to the supply from terrorist actions, hurricanes, or what have you, could be significant. So oil traders have built a speculative premium into oil prices that is above the fundamental pricing created by the supply/demand situation. But with world conditions becoming more volatile, not less, we can’t expect that fear factor to come out of the price any time soon. And barring a slowdown in world economies, it’s doubtful that the fundamental price of oil will drop by a significant amount.

The problem is that the longer energy prices remain high, the more likely they are to affect world economies, including that of the U.S. In fact, Bank of Canada governor David Dodge warned this week that high oil prices “could start to take a significant bite out of global growth soon”.

The first signs of that happening should show up in consumer spending, which accounts for 65% of the U.S. economy.

Already, the effect of an extra 10 or 20 bucks coming out of their pockets every week to gas up the family cars, and being warned that home heating oil will cost 25% more this winter, probably had something to do with retailers reporting this week that they had sluggish sales in the critical back-to-school season this year. Meanwhile, the Conference Board reported that consumer confidence fell again in September, the second consecutive month of decline for that barometer. The Conference Board blames consumer worries about jobs for the decrease in confidence.

I suspect it has as much to do with the dents that higher energy costs are already putting in consumers’ spending plans.


Sy Harding is president of Asset Management Research Corp., DeLand, FL, publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.

Sy Harding
Email us at Subs@StreetSmartReport.com
Website link: www.streetsmartreport.com

ABOUT SY HARDING:

Sy Harding is the founder and president of Asset Management Research Corp., which has been providing market and economic research to institutions and serious investors for more than 16 years. The firm’s research, market-timing signals, and portfolio recommendations, are published on-line at StreetSmartReport.com.

With a background in engineering, Harding founded and operated successful high-tech manufacturing companies in Connecticut and New Hampshire. After selling them to NYSE listed corporations in the 1980s, Sy turned his life-long obsession with the stock market into a new career, founding Asset Management Research Corp. With his background in engineering and business management, it was natural that his economic and market research combined both fundamental and technical analysis.

Less than two years after founding Asset Management Research Corp. in 1988, Sy was ranked in the Top-Ten market-timers in the U.S. as compiled by Timer Digest. He was ranked #2 in 1990, and has been consistently highly ranked since. He was ranked the #1 Gold Timer in 1991 (Gold Timer of the Year), and remains highly ranked in that category, ranked #1 Gold Timer in 2003, as of September, 2003.

Harding authored Riding The Bear - How To Prosper in the Coming Bear Market, which was released in March, 1999, just 9 months before the Dow rolled over into the severe 2000-2002 bear market. In it, he revealed Street Smart Report’s Seasonal Timing Strategy™ as a method to prosper in both bull and bear markets. And indeed, it has significantly outperformed the market, with a 5-year total return (1998-2002), through the last two years of the super bull market and the subsequent 3-year bear market, of 114.1% compared to 2.9% for the Dow.

Harding says he is ‘the unknown investment advisor that beats the big names’ because “while the 'big names' spend most of their time out on the interview and seminar circuits promoting themselves, we keep our nose to the grindstone, working on what our subscribers pay us to work on - constant analysis and research of the markets.”

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$21.95 per month. Cancel anytime on 30-day notice.

* One –year subscription includes Sy’s 1999 book, Riding the Bear as a bonus.