Nicholas M Ong

I’ve been meaning to ask this question on “how has the increasing price of oil impact your daily lives?” for weeks now. Just this week, crude oil breached the USD120 per barrel mark. Some of you will recall that I anticipated this to happen; but in October 2008 and not 5 months earlier.

Now, some of you will also recall my losses in mutual funds and equities largely due to the sub-prime mortgage issues in the United States. I had close to 80% exposure in the China and Indian markets and when the world’s biggest economy is in turmoil, every other world market reacts accordingly. I’m sure many others were in a similar situation to where I was. At one point, my gains and losses statement show a negative whopping 36% loss.

Well, I have switched my funds around quite a bit. Moving some into major indices like the S&P500 even to cushion the blow and wait the market out. While I was doing that, commodities naturally continued to perform well. In fact, the growth picked up pace as many investors began to hedge on gold, oil, aluminium, coal and such due to the falling US Dollar. Crude oil had not yet breach the USD100 per barrel mark. All that changed in a matter of weeks and 18 months ago, crude oil was doing the tango at USD50 a barrel.

Almost a month back, I decided to cut losses on S&P500 and switch to a commodities focused fund. Remember that I had switched funds to cushion the losses initially. Though falling slower, S&P500 was still dropping like a ton of bricks. Like most other equities, this particular commodities fund had a ‘BIG 10′ on it’s risk level scale (1 to 10) and was considered as risky as can ever be by most fund houses. After 2 weeks, I dumped all my China and India funds for another switch. Maybe I’m missing the point here but the increasing price of oil has not impacted me tremendously. Simply because I do not drive and use public transport most of the time.

From going 36% under, I have seen some gains in the past month. My current position is still 16% negative but I have seen an averaged of more than 9% gain since I first switched to commodities. Of course, there were the fees incurred when I did all the fund switching in the past 6 months. Analyst are predicting USD150 to USD200 a barrel by year’s end.

As the bubble gets bigger, something has to give and when the bubble bursts, even those like me who do not drive will feel the whole brunt of it. As it is, high oil prices and food shortages have driven up the cost of food by as much as 30% in some cases or even higher. For now, I’m riding on the black and yellow gold rush. One thing is for sure, I’m going to purchase a car that running on alternative fuels like CNG. Even the price oil palm oil is going up. Yes, that too is a commodity…

Wednesday, May 07, 2008

Analysis

Oil at $200 Will Wreak Havoc

Dunstan Prial

FOXBusiness

Related Content

• Goldman Expects $150-$200 Oil

Imagine paying $5.75 or more for a gallon of gasoline. How about $7 for a gallon of heating oil. Now consider shelling out $6.50 for a gallon of milk, or $5 for a dozen eggs.

Welcome to the United States of America if the price of oil surges to the once unthinkable level of $200 a barrel.

“From the consumer perspective, every single item we buy in a store gets there by ship, railcar or truck, all of which have seen dramatic increases in the cost of fuel. And that is factored into the price we pay for everything,” said Eric DeGesero, executive vice president of the Fuel Merchants Association of New Jersey.

Oil is hitting record highs seemingly every day, and as the price of oil goes so goes the price of gasoline. Americans are now paying on average about $3.50 a gallon at the pump, and much more (upwards of $4 a gallon) in areas with high gas taxes such as California and New York.

Now, in an almost apocalyptic prediction based on expectations of reduced supply and increased demand, comes the $200 a barrel scenario.

Citing an environment conducive to what it describes as a “super-spike,” the venerable investment bank Goldman Sachs has issued a report that makes a case for just such a price surge.

“The possibility of $150-$200 per barrel seems increasingly likely over the next 6-24 months,” the report states.

Goldman Sachs’ energy analysts based their prediction on “notable declines” in production levels in important oil-producing regions like Mexico and Russia even as global demand continues to rise.

None of this bodes well for U.S. consumers – especially when they pull up to the gas pump.

Tom Kloza, of the Oil Price Information Service, broke down the bad news.

At around $120 a barrel, the current level, motorists will pay:

• $3 - $3.15 a gallon wholesale cost
• 45 cents a gallon for taxes and freight costs to distribute the fuel
• 15 cents a gallon for the retail mark-up

This brings the retail price of a gallon of gas to around $3.60 to $3.75, where Kloza expects U.S. prices to reach in the next few days. (Higher on the West Coast and New York, where gas taxes have pushed a gallon of gas above $4.)

As the price of crude oil increases, each additional $10 per barrel of crude oil will translate into about 25 cents per gallon at the pump, according to Kloza.

Thus if crude oil hits $150 per barrel, U.S. motorists can expect retail prices to jump about 75cents per gallon, landing somewhere in the $4.50 per gallon range. At $175 per barrel, gas shoots up to $5 a gallon. And at $200 per barrel it hits $5.75 gallon of gas. (Again, higher on the West Coast and New York.)

All of this could be further impacted if U.S. refining capacity was crimped for any reason — most likely by a hurricane in the Gulf of Mexico.

Kloza said if that happened this year it could add another 75 cents per gallon at the pump, pushing gas well over the $6 level.

But all of this is hypothetical, Kloza noted . “These are all wonderful ‘thought experiments’ and flights of fancy. I think these numbers are in the realm of possibility, but not probable,” he said.

Businesses tied to the distribution of fuel and which purchase in bulk will also suffer. Consider tanker trucks rolling up and down the highway carrying 9,000 gallons of gasoline. At $150 to $200 a barrel of crude, the price of that shipment comes to about $45,000.

That’s up from $8,000 less than a decade ago.

In order to cover this rapid increase, trucking companies will have to dramatically change their methods of cash flow, likely requiring clients to put up more money faster so that the trucking companies can pay their suppliers.

Heating oil companies that also buy in bulk are in the same bind.

“Everywhere you turn it’s having a dramatic, negative impact,” said DeGesero. “It’s hard to even conceive of what the world will look like (if oil hits $200 a barrel).”

With so much of peoples’ paychecks disappearing on necessary items such as fuel and food, there will be little money left for discretionary items such as entertainment, travel and electronic gadgets.

And if U.S. businesses, already bloodied by the credit crunch brought on by the sagging housing market, are forced to take another hit, a severe and prolonged economic downturn is inevitable, said DeGesero.

Referring to the anemic first quarter U.S. growth rate of 0.6 percent, DeGesero said “that could look robust if we go to $200 a barrel.”