The Effect of the Price of a Barrel

What we need now is a Black Swan in the oil industry (eg a successful attack on Abqaiq or Ras Taruna) for the screaming to start.

Google's view of Ras Taruna
hong_kong_fuey said:
If we look back to the Arab oil embargo of October 1973, following the Yom Kippur war, then we can see that a shortage of supply did affect the price of oil. However, this shortage in supply was not caused by an actual shortage of the mineral, but rather political and economic measures taken by OPEC including increasing the spot price by 70 per cent to European countries and withholding the supply of oil to the USA.

But you're right, we've never a faced genuine shortage of actual supply before. Maybe we are in uncharted waters and, if peak oil is for real, then the price of crude will sky rocket to unimaginable levels in the next few years. Compound this with the almost inevitable collapse in the purchasing power of the dollar and the results are unthinkable.

The historical prices of oil in the chart below (Fig. 1) have been adjusted for inflation and are in 2007 dollars but, we can see that in inflation adjusted terms, the price shot up from $20 to over $40 around the time of the embargo:


With regard to commodities, history has shown that bull markets in equities and commodities tend to last around 20 years. That is, stock markets tend to perform well for between 20 and 28 years before the bear sets in. As the bear sets in then the bull switches to commodities and they tend to perform well for on average 22 years. If we look at the chart above (Fig. 1) then we can see that, around 2000, there was the beginning of an upside breakout in the price of oil. During 2001 there was a minor retracement, but that was soon replaced by a severe upswing that continues to this day. Conversely, if we look at Fig. 2 we can see that the DOW index began to move into a bear market around 2000.

If history is anything to go by, we are in the midst of a perfectly normal cycle and currently the momentum is with commodities. As this bull market is only 8 years old then it may be logical to assert that commodities may continue rising for the next 12 or more years. Furthermore, commodity bull markets tend to occur after booms and during times of economic uncertainty. Add to the equation the billions of additional people in the world who are now part of the commodities market and we have, in my view, a long way to go with this bull.
Thank you for explaining all that HKF. I won't pretend I understand any more than 5% of that but I get the gist! Your findings are based on research and facts, mine are based on gut feeling, being ripped off as a motorist for 25 years and becoming cynical in older age!

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