Sunday, September 28, 2008

A Larger Crisis Looms

The real estate office that I work at was very quiet this weekend. I work in Charlotte, which is probably the top big city real estate market in the country right now. It's surprising when things are as slow as they were the past few days. Ironically, it is not the housing market that was keeping people from visiting, it's the fact that Charlotte has been out of gas for the past two weeks. Since the storm hit there have been major delays in getting trucks to our local gas stations. All the stations are empty, and when a trucker does come to fill one up there are long lines at that station and the gas is usually gone in a matter of hours.

This is only a temporary problem and it's only a problem in this surrounding area. I expect them to have everything back to normal in the next week or so. But it's been interesting to experience a world without gas for a short period of time. It's allowed the people in this area to peer into the future for what life will be like in America as we look toward the real crisis that's approaching this country.

By this point I hope I've made it clear and easy to understand that we are in a severe credit/financial crisis. I also hope that I've explained that this credit crisis is just beginning. This $700 Billion is just a warm up for the money that's going to be needed to keep our entire financial system from shutting down. Next year you will be hearing most about Credit Default Swap counter party risk and a new mortgage term called Option ARMS. These are the most toxic of the mortgages that were issued during the subprime years and their resets are going to slam into the financial sector all of 2009 and 2010.

Around this time next year we will be feeling the credit crisis' most destructive impact on our economy. We will be in a severe recession while the financial system continues to survive on life support from the inflation created from the Fed and the Treasury. However, while the words "Bail Out" are the front page news today, there will be an even more pressing headline in the papers; "Oil Crisis." This crisis will make the current credit problems look like a walk in the park.

Remember our oil problem? You may have forgotten about it being talked about over the summer. I guess everyone has figured the problem has been fixed because oil pulled back temporarily as it has during this entire bull market. From its rise a few years back from $20 to $147 you have heard every reason; The War, The Hurricanes, The Dollar, and most recently and my favorite; The Speculators. The entire ride up, oil has been a "bubble waiting to burst," and every pull back along the way we've heard that the bubble has finally burst. Unfortunately, the reason for the rise in the price of oil is based on supply and demand and there is no answer for that problem. There is no printing press that the Fed has that can print oil.

You've heard on the news the past few weeks that oil's fall in price is because of "demand destruction." Unfortunately again, this is completely wrong. While there has been demand destruction in our country, the global demand will rise by 1% this year and is projected to rise by over 1% next year even with higher prices taken into account. The rest of the world is more than making up for the United States using less oil, and that will continue into the future at an even faster rate.

Oil supply is falling. Supply is not how much oil is actually under the ground, supply is the amount of oil that we can get out of the ground and use. We have the opportunity to focus on additional drilling, but the leaders of our country don't think that is something important to focus on. It takes years to get oil out of the ground from the start of production. If we focused fully on this problem right now we would still be facing a major crisis.

Trust me, there is going to be an entire global economy hungry for oil in the next few years and there will not be enough for everyone. Prices are going much, much higher. $150 per barrel is going to be dirt cheap by the year 2011. We should cross over $200 a barrel in the next 24 months and when we do it will only be a stepping stone on the way to $300, and then $400. Of course when people talk about this now it sounds ridiculous. Just like people talking about the devastating effects of derivatives a year ago.

The oil crisis is going to hit this country next year at the worst possible time. There is going to be rationing for gas over the next few years. People without fuel efficient cars that live far away from work may be out of gas by Thursday and will not be able to go to work on Friday. Our economy is based on consumption, which is based on the never ending supply of credit, which is fueled by oil; the lifeblood of the economy.

What opportunities will come from this? Energy companies and their stocks, which have been killed the past two months, are going to see unbelievable price appreciation and profits.

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