Oil prices have seen increased volatility along with most everything lately. We just finished discussing silver in our series on economic forecasts. Today we look at the main reasons we think oil prices will be higher to end 2012. We’ll also cover the reasons we think oil prices have much higher to climb in the coming years as well as the reasons why prices could move much lower temporarily.
It seems increasingly clear that there will be war in Iran. The US is engaging full scale war on Iran in every way other than actual combat. The US is using every possible financial means to bring Iran to its knees. Yet Iran is not going to give up its nuclear aspirations. Meanwhile, Israel is extremely concerned that if it waits too long to strike Iran, Iran will fulfill its promise to wipe Israel off the map just as Hitler tried to fulfill his crazy promise of eradicating the Jews. So whether it’s the US or Israel who attacks Iran, or whether Iran decides that the financial warfare has gone far enough, Iran is very likely to shut down the Strait of Hormuz.
Something like a third of the world’s shipborne oil travels through this tiny strait. The US, along with the French and others, have ships standing by to attempt to keep the strait open if Iran follows through with its threat to close the Strait. If it was closed for even a little while, there would be a huge shock to the price of oil. If it were to remain closed for some time, the price of oil would move incredibly high. It’s all unknown, but based on the actions of the US and Iran up to this date, one of these items looks likely.
In the longer run, prices will probably move much higher. There’s a couple reasons to believe this. One, is the same reason all commodity prices are likely to keep moving higher…the unstoppable US printing press. As the US debt piles up, the only way that it can be repaid is increasingly larger numbers of dollars. Oil is a sound hedge against this governmental destruction of your assets.
The other reason is that the emerging economies of the world are waking up. Most of the people of the world have been too poor to consume much oil. That is changing in a large way. Some peasants go from having a hand sewn thatch roof to having a roof that needs manufacturing (which requires oil). Or they move from a bicycle to a motorbike. Or up to a car or truck. Or instead of subsisting on homegrown food, they can afford to buy food that is trucked in. All these small steps to modern life require oil!
So while the “first world” such as the US, Europe, & Japan are not using anymore oil than we were a deacade ago. Most of the world is using much more. This trend will continue.
Meanwhile, most of the major oil producing countries are seeing prodcution declines. Many of them are government controlled systems that are poor stewards of their resources. They don’t poor the investment back into the sector like publicly traded independent companies do. Thus, overall world production is stagnant.
There are some bright spots in production. The Canadian oil sands have a lot of growth left in them. Iraq will come online with several more million barrels a day over the next decade because Saddam Hussein was terrible at exploiting their resources. Also, shale oil production techniques are a recent advancement. This will allow the US to once again be a major player in oil production in the future. These techniques will also surely be used elsewhere around the world. Still, the easy oil is mostly tapped and it seems clear that demand will outpace supply, so the future is bright as an oil producer.
Now, let’s look at the downside scenario…. If we’re right and this is the “year of the Black Swan”, then we’ll see a major economic crises become obvious to all this year. This will probably break out when the derivative mess that’s brewing becomes obvious to all. If we see across the board market crashes as we saw in 2008, then the price of oil is very likely to fall as well. This could mean it drops to a half or third of the current price conceivably. It probably wouldn’t stay that low for too long, but market panics can do funny things to prices.
Of course, if this scare is primarily caused by the value of the US dollar plummeting, then the price of everything will go up in terms of US dollars.
So we see tremendous opportunity along with some severe risk. Make sure you have a plan in place to protect yourself from the risk and to take full advantage of the opportunity!
This is the 19th post in a series. You should read the initial thoughts on these forecasts here. and the Overall Prediction Page here. Here are the rest of the posts: 3) Ben Bernanke’s Dollar Devaluation Plan, 4) The Coming US Dollar Devaluation, 5) Stock Market Volatility, & 6) Stocks to Fall in 2012, 7) The European Crises, & 
European Options, 9) European Prediction, 10) Recession in Japan, 11) Japanese Yen Crash,12) War with Iran, 13) Jewish Perspective on Iran, 14) Commodities to End 2012 Lower, 15) Where Will Gold Go Next?, 16) Gold, Should you Wait?, 17) Will Silver Move Higher?, & 18) Why Buy Silver Now?