Oil: World's New Reserve Currency of Choice

 |  Includes: BP, COP, CVX, GLD, OIL, SLV, STO, UDN, USO, UUP
by: Michael Fitzsimmons

The price of oil is trading around $77/barrel today. Oil prices are up 40% year over year while total oil demand in the U.S., the world’s largest consumer of oil, was down some 7%.

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High unemployment and the economic contraction in the U.S. have led to a reduction in gasoline demand even in the non-discretionary driving months of January and February.

U.S. DollarClick to enlarge

While oil prices are up 40%, the U.S. dollar index is only down around 8% year over year. Since December of 2009, the U.S. dollar has rallied nearly 10%, yet oil prices are relatively unchanged. Worldwide oil supplies are brimming and the U.S. strategic petroleum reserve is filled to capacity. Given all the bearish fundamentals, the obvious question is: why are oil prices so high?

Some people would say it’s a conspiracy by oil traders, speculators, hedge funds, “big oil”, or market manipulators. However, the oil market is a very liquid worldwide market by many different producers and consumers all of whom have their own best interests in mind. There are national oil company players as well as large private oil producers. Is it possible for speculative money to influence the price of oil? Absolutely. Can it alone completely explain today’s high prices? My opinion is “no”.

My take is this: world governments, traders, speculators, producers, consumers and investors all realize a simple basic fact: the world economy runs on oil. It is indispensable to economic growth. Currently, there are no realistic alternatives in place to the gasoline (oil) powered personal car and truck markets within the world’s largest consumer market (the U.S.) and the world’s second largest and fastest growing consumer market (China). Meanwhile, it is becoming very apparent worldwide oil production will have much difficulty keeping up with worldwide demand in the years ahead given a functioning and growing world economy.

A U.S. Government Gone Wrong: a Financial Crisis to Join the Oil Crisis

What has been the response by the U.S. energy policymakers to the $147/barrel oil prices in 2008, current high unemployment, the huge transfer of American wealth to oil producing nations, and the economic, environmental, and national security issues as a result of the country’s 65% reliance on foreign oil? In two words: absolutely abysmal. The U.S. still has not adopted a strategic long-term comprehensive energy policy (like this for instance), the Obama administration is continuing the same failed policies of the Bush administration. The Federal Reserve continues to print dollars in an attempt to solve a commodity problem (oil) with fiscal and monetary tom-foolery.

U.S. energy policymakers continue to ignore the only domestic fuel capable of being scaled up to significantly reduce foreign oil imports: abundant, clean, and cheap natural gas. These policymakers continue to ignore the best solution to the unemployment problem: natural gas transportation and infrastructure jobs in the auto, energy, and industrial sectors. While creating good paying jobs, such an energy policy and jobs initiative would keep billions of dollars in the U.S. wealth which is now going to foreign oil producers ($365 billion in 2009, close to half a trillion dollars in 2008).

As a result of this breakdown in U.S. government “leadership”, failed energy policies, and very unwise (fraudulent might be a better word….) fiscal and monetary policies, the U.S. is now awash in debt. It is growing, and there is no doubt we will be servicing such debt for generations to come. Bottom line: the U.S. now has a financial crisis in addition to its oil crisis. All the time, excellent natural gas legislation (HR 1835 for instance) remains moth-balled in Congress as well as Ron Paul’s excellent proposal to audit the Federal Reserve and shed some well required light on the fraudulent un-Constitutional activities of that bureaucracy.

Let us reflect on this for a moment: the world’s reserve currency of choice (the U.S. dollar) is built on the fragile foundations of foreign oil dependence and very unsound financial policies. The country printing the world’s reserve currency is hemorrhaging its wealth to pay for foreign oil. The world’s reserve currency is being controlled by a very small group of people who, led by Benjamin Bernanke at the Federal Reserve, in complete secrecy and without Congressional oversight, and with the assistance of a corrupt U.S. Treasury department, print fiat U.S. dollars backed by nothing by thin air. Who can be surprised when the money printed ends up in the hands of people like Lloyd Blankfein at Goldman Sachs (NYSE:GS), Robert Benmosche at AIG, and Jamie Dimond at J.P. Morgan (NYSE:JPM) as “bonuses” for their roles in causing the recent near complete financial meltdown of the entire U.S. financial system?

As a result, countries like Brazil, China, Russia, India and even allies like Germany and France have publicly called for an alternative world reserve currency. However, this will be complicated and will take time to implement due to the wide use and of the U.S. dollar in worldwide trading systems. So, what are investors to do in the meantime? Buy oil. Buy gold. In my opinion, this is exactly why oil and gold are at trading at such high levels even in the midst of the most serious economic contraction since the Great Depression.

Investment Advice:

While investors can make money in individual stocks and sectors from time-to-time, long-term investing in broad U.S. equity indexes is a losing proposition. Returns on the S&P500 over the past decade, while oil has gone from under $20 to $147 to $30 to today’s $77, have been abysmal. It is clear the oil price roller coaster has not been friendly to the U.S. equity markets (which makes me wonder why those managing money at Vanguard, Fidelity, and other firms are not pounding the table for the U.S. to adopt a strategic long-term comprehensive energy policy – they must surely see the writing on the wall). So, the first step in successful investing is to simply get out of any broad based U.S. equity fund. In addition, considering the heavy debt load of U.S. Federal and State governments, high unemployment rates and a broken government, I would also recommend staying clear of bond funds and municipal “bombs” as that market is a disaster waiting to happen.

My advice is to stick with oil and gold. Buy oil companies that will pay good dividends while you wait for the next oil price spike that we all know is coming: BP (yielding 6.4%), COP (4.2%), CVX (3.8%), and Statoil (NYSE:STO) are all good buys. Statoil recently proposed a 2010 dividend of NOK 6.00 per share. This works out to $1 US per share, which means the STO ADR (NYSE) has a 4.5% yield. Statoil pays a once yearly dividend and it will be paid June 2, 2010. STO will go ex-dividend on May 20, 2010.

If you’re looking for oil production growth, you might want to consider Petrobras (NYSE:PBR) at these levels ($40.88).

Meantime, look for weakness to buy gold and silver bullion in addition to the GLD and SLV ETFs. As the commercials said, if I gave you a choice between $10,000 in U.S. dollars versus $10,000 worth of U.S. gold eagles, and said you couldn't touch either for 10 years, which would you rather own a decade from now? Gold is the ultimate preserver of wealth. Increasingly, America's governmental policies are leaving U.S. investors with fewer and fewer alternatives.

Disclosure: Long BP, COP, STO, gold