I've talked at length about the direct connection between oil and oil prices and just about every good, service and commodity that can be bought, sold or stolen. For some industries - like shipping - oil prices are one of the biggest cost inputs. Other industries, like...oh say, online publishing, are somewhat less dependent on oil. But every sector of the economy does have an oil cost input.
That's why I'm extremely worried about oil prices, and where we all know they're going. For a small taste of what's in store, Charles Maxwell, senior energy analyst for Weeden & Co. - a man with 50 years experience in the field - recently predicted that we'll see $150/barrel oil within the next five years, and $300 oil by 2020.
I'm a bit less optimistic - because I think we could easily break the $150 barrier in the next 18 months. It was only 24 months ago that we saw similar prices - so it's not out of the question.
Being that I'm not in a field that relies on very much oil consumption, I'm not too terribly worried about my gasoline costs. My wife and I currently spend an average of $271 a month on gasoline. We know the exact average because we use a pretty nifty (and free) financial service available here.
It breaks down our expenses, income and debt into very tidy metrics. We have it set so that we get text messages to our cell phones when we're approaching budget limits on eating out at restaurants, account minimums, or when an important bill is coming due. I don't have any incentive to tell you this, but I highly recommend Mint if you're looking for a very sharp personal finance tool.
In any event, that $271 is a pretty reliable average number for us right now. Even if that number doubles or triples, it'll sting a little, but it won't break the bank by any means. And my wife and I can mitigate that cost pretty easily by carpooling more often, or working from home every now and then. So what exactly, am I worried about?
Well, like many of you, I worry that I might not be able to accumulate enough shares of the appropriate companies in the appropriate sectors between now and when the oil hits the fan. That's the thin end of the wedge however. I also worry that current prices for everything we consume right now represent a coiled spring, and that higher oil prices will be a catalyst for higher everything-prices.
This morning I went through and looked at spot price charts for the major commodities that I consume on a daily basis - like coffee, milk, wheat, corn, orange juice, pork, beef, rice - and everything is on the rise. As energy analyst Gregor Macdonald of Energy World Profits recently reminded me, all commodity price action is in some way affected by speculators in the short term, but I'm not looking at the short term.
Yes, prices for most commodities are up this year - mostly from movement in the past few months - but I'm looking at average prices over the past ten years at least. Here are some ten year charts of the most prevalent commodities - the stuff that you and I consume on a daily basis:
- Sugar: Up 150%:
- Orange Juice: Up 82%
- Coffee: Up 193%
- Wheat: Up 407%
- And one last chart, showing oil prices:
Oil is up 150% over the past 10 years, although it went much higher, as you might remember. And looking at the commodity charts above, you can see that some are more tightly correlated with oil prices than others. But in the past year, oil has traded flat, in a range between $70 and $85 a barrel.
The writing is literally on the wall: When (not if) oil prices rise, we're looking at much higher prices for nearly every commodity.
You and I can cut back on gasoline if we have to - but what about sugar, corn, wheat and (heaven forbid) coffee? I'm pretty happy with my level of consumption of these commodities, and I don't plan on cutting back.
The investment implications are clear: buy shares of oil companies when they're cheap - but more importantly, begin a stockpile of agriculture stocks, as well as physical goods.
The good news is that a great buying opportunity for agriculture stocks may be on the horizon. Everyone's favorite bank, Goldman Sachs (NYSE:GS), recently released an analyst report on commodities. In it, they predict that agriculture prices will drop 10% in the next 12 months.
So my advice would be to look for opportunities in the agriculture sector in the next year - and average into your favorite positions during dips. If you're looking for an agriculture ETF you should check out a recent write-up that I completed. I worked closely with Ian Wyatt to produce a special report on our three favorite ETFs. One of them is an agriculture ETF that holds every major ag producer. You can buy them all in one fell swoop.
Disclosure: No positions