Friday, May 8, 2009

America as a Price Taker

Oil is creeping back up again in price; it recently crossed $58. This rally seems anticipatory rather than demand driven; US crude oil stockpiles are at 19 year highs and China moderated their oil consumption in Q1. With only partial information, I'm waiting for USO to pull back to circa $28; then I'll buy leaps. If domestic or developing world demand is ramping due to data I as humble blogger cannot see, then I'm waiting for Godot, and I'll miss the party. C'est la vie.

Long term, of course, oil will go up. As I alluded to previously, commodities prices will not necessarily moderate in the face of American economic weakness; in other words, as developing nations increase in economic power America will increasingly be a price taker, not a price maker.

Natural gas is different in ways that are good for America but bad for speculation. Natural gas prices are radically below last years levels, and there are good reasons for this. First, the US is swimming in natural gas, thanks to a new extraction technology recently developed. Second, the infrastructure to import or export natural gas has been neglected; this adds up to the US being a price maker and not a price taker. However, natural gas has a lower carbon footprint than coal (for electricity) or oil (for transportation) and it is a proven technology for both cases (although, a large scale switch to natural gas for transportation is harder than for electricity). Clearly long term the United States is going to greatly increase its natural gas consumption. A movement into natural gas for transportation would be great for national security, the environment, and our balance of payments; but it is not imminent, and demand is forecast to fall this year. So I'm waiting to invest.

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