Oil Prices are Bound to Fall
It's a truism: don't confuse the price someone's willing to pay with the real value. Take the prices of oil, the stock markets, precious metals and housing. All of these markets are overheated right now.
And in each of those markets, folks are confusing the prices people are willing to pay right now with the true value of the commodity. They're saying it's different this time; here is where true value lies. Then, unfailingly, they subscribe to the "can't miss" theory. In other words, forget everything else, invest in this sector or that commodity and you will participate in wealth beyond your wildest dreams. They think it will never end.
Sorry Bucky, but it doesn't work that way. History is still bound to repeat itself, even if not exactly in the way it previously unfolded. Here's the thing: all commodity markets are cyclical. They always have been and always will be. So this time it's not different. It's the same. And you probably already know that those who fail to heed the lessons of history are doomed to repeat them.
Several months ago, this column indicated that housing markets were getting a bit pricey and that was cause for worry. It's more so now, as February's cross-Canada housing starts dropped by 7,200 from the month before. According to Canada Mortgage and Housing Corporation that's because interest rates and prices are rising simultaneously. They think that both prices and home building starts will moderate because of a softening demand.
Potential new homebuyers are finding it more and more difficult to justify their financing. It's only a question of how long before buyers jump from holding the shotgun to holding the reins. According to a recent RBC Royal Bank survey, there's a widening split between the number of people who say they intend to buy and those who are likely to buy in the next year. Alberta is holding steady and Atlantic Canada shows a small increase in expectations, but everywhere else, there's a lack of determination. I don't know if this is the thin edge of the wedge, but it bears watching closely.
It's the same with oil prices. On one hand, President Bush, repeating what former president Jimmy Carter said several decades ago, recently told Americans that they're too dependent on foreign oil. Fortunately, he didn't repeat Carter's declaration that there were only 10 years' worth of reserves left.
Analysts declared that Middle Eastern reserves are finite and then in the same breath, said that there is more oil in Alberta's tar sands than Saudi Arabia. The result: incongruously, oil prices shot up when cartoon riots erupted far from Canada.
In Brazil, sugar cane provides ethanol in such huge quantities that the country imports no more oil. Brazilian vehicles are dually fuelled with only minor engine adjustments and consumers buy the mix they want at every 'gas' station using separate 'pure' pumps. Brazil now exports both their excess ethanol and their technology.
Canada is into the ethanol experiment. China, the country that promises to absorb all oil production if you believe the prognosticators, built 100 ethanol production facilities only lately. They use corn, not sugar cane as the base product. Don't think we'll run out of oil any time soon.
Only a year or so ago, oil was almost 50% cheaper than it is today. Oil companies and exploration companies made money at that price, big money.
The change comes from current perception caused by Middle East instability. What is the real value of oil? What is the real value of oil companies that find it, refine it, pump it and distribute it? It's a sure bet that real values don't reflect today's high prices and an even surer bet that those prices won't last.
It's no stretch to believe that oil prices can drop by 50% in the future, however near or far off.
The companies will still make money, lots of it, but their share prices will reflect the current price of oil then, not now. And if oil is lower, their share prices will be lower too... by about the same percentage.
Learn the lessons of the past: Cisco Systems was a high flyer in the heady days of the tech boom. It makes switching mechanisms, real products, for an ever-increasing Internet market. It makes money, gobs of money. It's a market leader.
Yet if you bought Cisco stock in March of 2000 as 64,000,000 people a day did back then, you'd still be short of recovering your investment by 75%. You'd have bought it based on its price, not its real value.
EdmontonSun
And in each of those markets, folks are confusing the prices people are willing to pay right now with the true value of the commodity. They're saying it's different this time; here is where true value lies. Then, unfailingly, they subscribe to the "can't miss" theory. In other words, forget everything else, invest in this sector or that commodity and you will participate in wealth beyond your wildest dreams. They think it will never end.
Sorry Bucky, but it doesn't work that way. History is still bound to repeat itself, even if not exactly in the way it previously unfolded. Here's the thing: all commodity markets are cyclical. They always have been and always will be. So this time it's not different. It's the same. And you probably already know that those who fail to heed the lessons of history are doomed to repeat them.
Several months ago, this column indicated that housing markets were getting a bit pricey and that was cause for worry. It's more so now, as February's cross-Canada housing starts dropped by 7,200 from the month before. According to Canada Mortgage and Housing Corporation that's because interest rates and prices are rising simultaneously. They think that both prices and home building starts will moderate because of a softening demand.
Potential new homebuyers are finding it more and more difficult to justify their financing. It's only a question of how long before buyers jump from holding the shotgun to holding the reins. According to a recent RBC Royal Bank survey, there's a widening split between the number of people who say they intend to buy and those who are likely to buy in the next year. Alberta is holding steady and Atlantic Canada shows a small increase in expectations, but everywhere else, there's a lack of determination. I don't know if this is the thin edge of the wedge, but it bears watching closely.
It's the same with oil prices. On one hand, President Bush, repeating what former president Jimmy Carter said several decades ago, recently told Americans that they're too dependent on foreign oil. Fortunately, he didn't repeat Carter's declaration that there were only 10 years' worth of reserves left.
Analysts declared that Middle Eastern reserves are finite and then in the same breath, said that there is more oil in Alberta's tar sands than Saudi Arabia. The result: incongruously, oil prices shot up when cartoon riots erupted far from Canada.
In Brazil, sugar cane provides ethanol in such huge quantities that the country imports no more oil. Brazilian vehicles are dually fuelled with only minor engine adjustments and consumers buy the mix they want at every 'gas' station using separate 'pure' pumps. Brazil now exports both their excess ethanol and their technology.
Canada is into the ethanol experiment. China, the country that promises to absorb all oil production if you believe the prognosticators, built 100 ethanol production facilities only lately. They use corn, not sugar cane as the base product. Don't think we'll run out of oil any time soon.
Only a year or so ago, oil was almost 50% cheaper than it is today. Oil companies and exploration companies made money at that price, big money.
The change comes from current perception caused by Middle East instability. What is the real value of oil? What is the real value of oil companies that find it, refine it, pump it and distribute it? It's a sure bet that real values don't reflect today's high prices and an even surer bet that those prices won't last.
It's no stretch to believe that oil prices can drop by 50% in the future, however near or far off.
The companies will still make money, lots of it, but their share prices will reflect the current price of oil then, not now. And if oil is lower, their share prices will be lower too... by about the same percentage.
Learn the lessons of the past: Cisco Systems was a high flyer in the heady days of the tech boom. It makes switching mechanisms, real products, for an ever-increasing Internet market. It makes money, gobs of money. It's a market leader.
Yet if you bought Cisco stock in March of 2000 as 64,000,000 people a day did back then, you'd still be short of recovering your investment by 75%. You'd have bought it based on its price, not its real value.
EdmontonSun
posted by Ottawa Gas Prices | 10:39 PM
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