Oil at $113

The price of crude oil passed $113 per barrel today.  It has been climbing steadily for the last few months.  If you are looking for a good mutual fund with energy stocks, there is an energy fund by Fidelity with the symbol FSESX.  I have no opinion in trying to time it.  You really should have bought this fund a couple of years ago, but if you think oil is going higher still, then this may be a good mutual fund to own.  If you want to own it, just buy it and don’t try to time the market.  If you fear a pull back in the short-term, then dollar cost average your way into it, but don’t wait.

The price of oil had already been climbing, but it really started to take off when the protests in the Middle East and Africa began.  When Libya started to erupt, then the price really took off and has continued.  It is easy to blame the situation in Libya for our current oil price, but it really misses the big picture.

The Fed’s program of QE2 (money creation) is the elephant in the living room that many don’t want to talk about.  The Federal Reserve has almost tripled the monetary base since 2008.  Although most of this new money has gone into excess reserves with the banks, the new money is still having an effect on prices.  We are starting to see that now.

When new money is created, it is not evenly distributed throughout the economy all at once.  It can go to certain hot spots.  It causes bubble (and later busts).  Right now, it seems to be going into oil, precious metals, and other commodities.  It is also going into stocks to a certain degree.

When something happens in Libya or there are reports of things happening in other oil producing countries, the hot money starts bidding up the price of oil.  It is almost as if the market is looking for a reason to bid up certain prices.

So although the supply and demand (and the perceived supply and demand in the future) of oil affect its price, the supply and demand for money also affect its price.  The supply of money is going up.  Expect prices to go up.  Oil and precious metals are going higher right now.  Food prices will probably not be too far behind.  Be prepared for higher prices.

2 thoughts on “Oil at $113”

  1. I’m a novice on this, so forgive me if I’m off-base, but your statement that created money goes into hotspots (and the idea of bubbles) seems to conflict with my understanding of commodities. I thought that commodities were an accurate gauge of inflation, so gold (and oil) going up, would indicate a devalued dollar, not an artificially created “bubble” in oil (or gold).

    In any case, we would be in agreement that with the money supply being artificially created, inflation and hyper-inflation is a real risk, and commodities would be a safer bet. Plus, with the legitimate unrest in the Middle East, and their control of much of the oil supplies, oil might be a lucrative investment (though that doesn’t take into account the real possibilities of the US and their allies simply stealing oil by way of invading/occupying/leveling these countries).

    Sadly for me and my investments, I’m an even bigger novice on the logistics of investing (all I currently have is my 401k), so I won’t even attempt to try to invest in anything, since I’d probably screw that up somehow.

  2. And another unrelated question…I’m looking for advice about life insurance. I already have a term life insurance policy (till age 75), but my wife doesn’t think it’s big enough. Can you point to any good libertarian/anarcho-capitalist articles about what makes sense in terms of life insurance?

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