Can This Economy Handle $80 Plus Oil? (NYSE:USO), (NYSE:UGA)

[inthemoneystocks]

Oil made a short term bottom on February 5th, 2010 after hitting an intra-day low price of 69.50. Since that time oil has rallied over 10 points to a high of 82.50 on March 9th, 2010. The continuous gasoline contract on the NYMEX was 1.87 on February 5th and it hit a recent high on March 9th at 2.29. These short term rallies for oil and gasoline have been powerful and very sharp. Can the U.S. consumer absorb these prices should they remain at these high levels?

In July of 2008 oil rallied to a high of 147 a barrel. At that time the NYMEX gasoline contract was around 3.40 and the price at the pump it was around 4.00 a gallon depending on your location in the country. A case can be made that this was the straw that broke the camels back and sent oil and the stock market into a virtual free fall.

Today most of talking heads and government figures talk about the so called economic recovery that is taking place in the United States. Meanwhile, unemployment in the U.S. is 9.7 percent according to government standards and nearly 20 percent according to others. The country is still facing a huge foreclosure problem with countless homes in default as we speak. All of this takes place as major global bank stocks continue to surge as the new accounting standards allow them to hide their bad or toxic assets.

The X-factor that many of the economists are overlooking is the high energy prices that plagued the market in 2008 and may certainly do it again in 2010. As many families scramble to keep their head above water the high energy prices will simply act as an automatic tax on the consumer. Regardless if this economy is in a deflationary spiral or an inflationary environment the price of necessary goods are going higher and will hurt consumers.

Oil and gasoline can be traded by using futures contracts or by trading the U.S. Oil Fund LP ETF (NYSE:USO), and for gasoline it can be traded by using the U.S. Gasoline Fund LP ETF (NYSE:UGA).

Nicholas Santiago
Chief Market Strategist
InTheMoneyStocks.com

[Cosmic]

Should be not problem with $80 oil. In fact we probably have to have something in the $70 - $80 range longer term to allow all the alternatives for oil to develop. Saudi's are saying they can live with $70.

The scenarios on Peak Oil are not unfolding exactly as predicted. Peak Oil probably has occurred in 2008 but we will not get the disaster scenarios as predicted with rapid run ups in gasoline / fuel costs.

The assumptions on production are wrong. Technology changes in both gas and oil were not considered. Gas for shale areas with horizontal drilling is giving a gut of natural gas for as far as can be predicted. Lots of down pressure on prices for NG. Big users that have the option of using oil or gas have a choice which should help limit oil demand if prices try to spike. We will get a broader, flatter, longer peak on the oil curve than predicted. The replacements for oil will probably start to parallel the decline in the out years far better than predicted. Hence, the disaster price spikes predicted are probably too harsh. Might not get total World production much above today's capacity but don't have too.

Technology in oil is also impacting supply. Various secondary recovery options / methods are allowing the USA to actually increase production as will most of the rest of the World at some point for some period giving Peak Oil a soft landing. Next few years will maybe see pressure down on prices, not up. Energy sources other than oil as the main source Worldwide.

Plus at $70 oil and above all the alternatives to oil probably can still continue a development path which will again limit oil demand in future. Cellulosic ethanol, sny-fuels, solar, geothermal, windpower, coal, on and on. Lots of ways to play the energy game.

The general assumptions about Peak Oil were too simple. Increased efficiencies will also start to play a part in many ways. Lots of ways to make money investing in energy. Does not have to be directly in the production. Something like ESPH is interesting. The new shale drilling is having some environmental problems. Technology like ESPH's could be part of the answer. Company way too small but could be a candidate for a buy out or partnering with a far larger company. Also not enough compressor or pipeline capacity. The supporting players might make more money than the producers. Still lots of opportunity with modest prices for energy, best of all Worlds if it can remain stable at present levels.

If we get a market crash, which is totally possible, might have a tempory oil glut in the next down cycle. Energy is one of the few bright spots in the economy right now. Same deal as in the past tho, boom - bust cycles might still occur.