Oil Prices Will Rise Further Yet

I believe that the supply of oil is, for all practical purposes, inexhaustible. It’s just a matter of developing the new technologies required to discover and extract it, and the new technologies allowing the global economy to use it more efficiently. If there is ultimately a physical limit to the amount of the stuff hidden on Planet Earth, I’m confident that long before we hit that limit we’ll have moved on to some totally different form of energy.

So why did I become an oil bull? Three reasons.
First, a year ago everyone else was giving up on oil. It had fallen from a high of $77 to nearly $50. Suddenly, after years of hearing about “peak oil,” I was suddenly hearing about an “oil glut.” In my trader’s gut, I could tell that the “glut” talk was as silly in its own way as the “peak” talk had been.

Second, I was hearing too many stories about a sudden slowdown in global growth. I didn’t believe there was a slowdown coming, and I still don’t. While I believe that we’ll never run out of oil, I know there can be dislocations in which the demand from a burgeoning economy gets temporarily ahead of the ability of technology to unlock new supplies. With China and India merging into the modern world, that dislocation will last for a while.

Third, I started to get seriously worried about inflation, and about the depreciation of the dollar — which is really saying the same thing. Most people think of inflation as “rising prices” — but I think of it as “falling value of the dollar.” When the Fed is printing too many dollars, the price of everything in the world denominated in dollars appears to go up — commodities usually first and most strongly. That includes oil. Most people think that the rising price of oil causes inflation. It’s not true. In fact, it’s just the opposite. Inflation is what causes rising oil prices.

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