Oil prices, like stocks, took a few big hits last week. West Texas Intermediate
crude last week dropped below $80 per barrel before bouncing back up to $87 this
week. Meanwhile, Brent crude fell to a six-month low below $100 per barrel
before climbing back to $110 this week. To hear the mainstream media tell it,
much of the drop is based on the assumption that global growth is waning and oil
demand is soon to follow. But that couldnt be more wrong. Energy is one of the
most highly leveraged and most liquid trading vehicles on the planet. A good
portion of the decline weve experienced in recent weeks can be explained by
nothing more than trading houses raising cash to meet margin calls or redemption
requests from hedge funds, pension funds and other investors. Thats all there is
to it. Firms simply need cash and are selling the most easily sellable assets
theyve got. In the past, thats been gold, but lately its been oil. Longer-term,
demand still is going up, and $120-per-barrel oil is our next stop, followed by
prices of $150 or more in the years ahead. Whats happening now with the markets
and energy prices is like being in the eye of a hurricane. That is, it wont be
long before were once again caught up in the whirlwind growth of emerging
markets and energy demand shoots sharply higher. The Looming Demand Downpour
Global demand still is rising and its not going to slow down any time soon.
There are huge swaths of the world now adopting gasoline engines. Let me give
you two examples: Take the farmers in Cambodia. Many put up sheets in their
fields at sunset. They then mount small incandescent light bulbs on sticks
behind the sheets. The bulbs are powered by small gasoline generators to ensure
they stay on all night. In the morning, those farmers go back and harvest the
thousands of crickets that have collided with the sheet after having been drawn
to the lights. They wrap up the fallen bugs and head to the markets where they
are sold as food. Its much the same situation in Africa, where small villages
require simple engines to pump water. You might think bugs and small farm pumps
are no big deal, but theres an even greater energy revolution going on in the
transportation industry.
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