A Crude 10 Year Perspective: The DJIA, Oil and Gold

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Includes: BP, CAT, COP, CVX, DIA, GLD, IAU, OIL, PBR, STO, USO, XOM
by: Michael Fitzsimmons
Recently the DJIA passed through 10,000 once again. It was definitely more fun on the way up than it was on the way down. Achieving the 10k milestone again was interesting for a number of reasons, not least of which were comparisons based on when the DJIA first crossed 10,000 in March of 1999 ten years ago. That is a long enough time to draw some long term conclusions. Let’s compare the DJIA index, oil and gold indicators then and now:
Ten Year Comparison of the DJIA, Oil, and Gold
Indicator
March 29, 1999
October 14, 2009
Change
DJIA
10,000
10,000
0%
Oil
$16.44
$74
450%
Gold
$280
$1060
379%
Click to enlarge
Of course I’ll be accused by nay-sayers for cherry picking data, but I cannot think of a more simple chart to bring home what should be obvious to the American people and government: we are in an oil crisis of very, very serious proportions. In fact, as I have stated before, I believe that oil has become the world’s new reserve currency of choice (replacing the U.S. dollar). Oil has even outperformed gold. That is not surprising since cars and trucks cannot run on gold. That is, oil is a more strategic commodity than is gold. This is why we have oil wars and not gold wars.
Although many today think oil is cheap at $75/barrel, and I suppose that is true with respect to the $145/barrel high in 2008, one only has to look at the $16.44 price of a barrel of oil in 1999 to know that the only way oil is cheap today is from a psychological perspective. Five years ago, $75/barrel oil would have been thought an outrageous price. After 2008, we’ve been conditioned to think it’s now cheap. Well, it ain’t.
Let’s look at the U.S. oil import numbers for the last three months (EIA data):
U.S Foreign Oil Import Data (Last 3 months)
Month
Foreign Oil Imports (barrels)
Cost*
% Dependence on
Foreign Oil
July 2009
374,000,000
$24,000,000,000
65%
August 2009
355,000,000
$25,200,000,000
65%
September 2009
357,000,000
$24,700,000,000
63%
Click to enlarge
*Cost- yes, that is Billions with a “B”. For those interested in a tick-by-tick assessment, this means the U.S. is sending over half a million dollars a minute to foreign countries for oil.
Now I’m an engineer, not an economist. However, my common sense tells me that this is not only an economic problem of disastrous proportions, but also a huge national security issue. I would add that the cost of supporting the pentagon/petroleum relationship (i.e. the military expenditures required to secure oil shipping and future supply) are not even taken into account here. Should we be surprised that a nation that imports 65% of its oil has seen its main investment benchmark (the DJIA) go nowhere over the past decade as oil is up by almost a factor of 5? At one point in 2008, it was up over 700%. We should not be surprised at the resulting economic crisis we are experiencing today. At least I am not. Economic crisis will now be the norm, not the exception. As long as we remain addicted to foreign oil, each subsequent oil shock will happen more quickly and be more economically devastating for the good ole U.S. of A. as Archie Bunker called America.
If we annualize the $24 billion a month the U.S. spent over the last 3 months on oil imports, we come up with $288 billion. Again, I’m not an economist but let’s have some fun with the figures. Let’s say a “decent job” pays $100,000 a year. How many “decent jobs” would $288 billion provide? Answer: 2,880,000. Wow, that’s a lot of jobs man. This is a very simplistic analysis, but in today’s economy, even if that number were off by a factor of 2, that’s still a lot of desperately needed jobs. And if those jobs were created in the U.S., instead of enriching foreign countries (many of whom are very antagonistic toward the U.S.) these salaries would be further recycled through the American economy via consumer spending on cars, trucks, and oh yeah, maybe even houses. So, tangentially, that is even more jobs. But alas, the Bush and Obama administrations and Congress are content to send these dollars overseas. Minute by minute, day after day, month after month, year after year.
Despite the obvious long-term sickness of the DJIA and the U.S. economy as a result of its addiction to foreign oil, the U.S. government and major U.S. based business publications (Barron’s, The Wall Street Journal, Business Week, etc. etc.), both of which should be staffed by many professionally trained economists, continue to ignore the oil crisis. They continue to ignore the solution as well: a strategic long-term comprehensive energy policy centered on using American produced natural gas to power its transportation sector. Such an energy policy can be found here.
Instead, American policymakers (and business media) continue to support the dual wrong-headed policies first turbo-charged by George Bush: deficit spending and currency devaluation. Certainly deficits existed prior to George Bush, but his ridiculous tax policy combined with the administration’s loose grip on spending (to put it mildly) doubled the total U.S. deficit in a mere 8 years - a feat not accomplished since Bush senior and Reagan’s last term. And this doesn’t even count the cost of the war in Iraq, because for some reason that is “off ledger”. Of course now Obama is continuing and even expanding the deficit and devaluation policies (“d”-day times 2). Boy do I wish I had my vote back for Ron Paul! In the double-speak so common in America today, it’s very amusing to see such partisan economic hacks as CNBC’s Joe Kernen and Larry Kudlow moan about deficit spending and continue to ask for more tax cuts! Where were these Republican “deficit hawks” when Bush was in office? Well, of course they supported every Bush administration policy for lower tax rates and huge deficit spending while at the same time poo-pooing the need for an energy policy based on anything but “coal and oil”. Apparently alternative energy just isn’t “manly” enough for America. Today, it is readily apparent they have learned nothing even though the policies they supported were not only wrong, but proved disastrous both to the economy and to investors. But wait, isn’t CNBC supposed to be the nation’s leading financial network? Ha. No wonder the rest of the world looks at the U.S. and just scratches their head in wonder. What has happened to this once great nation? When did we stop thinking?
Obama, like Bush, often says “a strong dollar is in the best interest of the United States”. Then he goes off and spends money like a drunken sailor and allows the Fed and Treasury to turn on the printing presses. They have the media convinced this is good for American exports as though devaluing the currency actually has a chance of closing the yawning trade deficit and fixing all of America’s problems. Of course the fallacy is that the biggest component of the trade deficit is imported oil! So, they devalue the dollar, China pegs the yuan to it, and the net effect is that exports go up a little bit, but oil goes up a lot more and is the biggest component of the trade deficit! How can this end in anything but complete disaster for a country that imports 65% of its oil and is competing against China for future oil reserves in an era when worldwide oil supply won’t keep up with worldwide oil demand? It is worth noting that, from a historical perspective, no country has ever devalued their currency as a way to long-term economic success. In fact, just the opposite is true.
So, what should American investors do? Well, as someone said the other day, as long as President Obama and Congress are asleep at the wheel, Americans are in a situation where they would be better off investing in gold than in American companies (and thus we get the first chart above). If you must invest in stocks, invest in oil stocks like Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), Conoco Philips (NYSE:COP) and BP. These companies all pay nice dividends (well, Exxon being the exception…grrrrrr). Foreign oil companies may be even more compelling due to the currency issue. In this case, go with Petrobras (NYSE:PBR) and StatOil (NYSE:STO). Oil is going to skyrocket sooner rather than later. Oh, and they'll need those big Caterpillars to mine the gold and haul the oil sands and coal, so buy some CAT.
I hate to be a pessimist, but don’t be surprised if 10 years from now the DJIA is still below 10,000. Heck the DJIA itself may even become a non-existent relic of the past. If America doesn’t address the oil crisis head on, it too will become a relic of the past. At least it will not be recognizable to the America we live in today. There was a reason the U.S. was such a power after WWII – we were in large part self-sufficient when it came to oil. Why won’t the U.S. government and media acknowledge this fact and take corrective action? I have my own theories on this, but that’s for another time and another place. Meantime, good luck investing. If the charts above are any indication, you’ll likely need it!

Disclosures: the author owns COP, STO, PBR and gold.