If it seems to you that the rising oil price situation has dragged on for quite awhile, you are correct. What follows is the market commentary I wrote in April 2005–more than three years ago:

“I’m growing tired of writing about high oil prices, but unfortunately, the cost of crude remains the dominant feature of the economic landscape. Over the past week crude oil fell about 15%, but it must continue to drop and to remain below $50 a barrel before other market sectors will again regain leadership.

“Earlier this week I read comments from a couple of pundits who opined that $100 a barrel oil and $5 a gallon gasoline would resolve our problem of oil dependency. These are very smart folks whose opinion I value. But in this case, I also disagree. One argument was that at $5 a gallon, Americans would be forced to conserve on fuel.  The author noted that when gas reached that price in Europe, Europeans cut back on driving and eventually even became an oil exporter.

“I’ve spent a lot of time abroad, including in Europe. And when gas prices reached high levels there, the people did quit using so much gasoline because they had other alternatives. Europe has always had available mass transit for its citizens.
Mass transit works well there because population centers are tightly grouped and distances between centers are manageable.

“Those same factors do not hold true in the United States. While it is certainly true that the U.S. could and should do much more mass transit, there are vast areas across the country where it simply is not a viable solution. Because Americans prefer to live in single-family homes with yards, even our most populated cities tend to cover large areas, making mass transit a more expensive proposition.

“When gasoline reaches $5 a gallon, many Americans still will not be able to take the bus to work. Instead, they will have to cut back in other areas of their lives—meaning less discretionary spending. Multiplied by a couple hundred million people, the economic ripple effect will be devastating because consumer spending accounts for two-thirds of the U.S. economy.”

Well we’ve obviously blown right through the $100 a barrel level. Gas has not quite reached $5 a gallon, but it is getting close in some areas. Diesel fuel in my community is currently about $4.35 a gallon. While the economy is suffering, I suspect that what is next on our horizon is economic weakness on a scale we have never experienced before. I am truly worried that the U.S. is on the verge of extreme inflation.

I’ve lived in countries where double and triple-digit inflation persisted for years. I’ve also experienced hyper-inflation–rates approaching 1,000% or more. I don’t have time today to explain the repercussions of those situations, but suffice it to say that while it creates problems, it also provides easy solutions to some significant challenges.

I’m sure most of you have noticed some examples of dramatically increasing prices either at the grocery store or some other retail establishment. As some point soon, prices across the board will explode because of rising fuel costs.

I have a neighbor who is a furniture wholesaler. He travels throughout the world purchasing furniture from manufacturers for sale in the U.S. He noted that costs in China have risen about 20% in the past year. Combined with higher transportation costs some manufacturers are considering shifting production back to the United States.

As long as oil costs remain this high or continue to rise, it is going to be very difficult for American companies to profit unless they raise their prices. And it will also seriously impact the amount of disposable income people have, so the market’s will continue to struggle.
We’ve seen the S&P 500 gain back about half the loss from its October 2007 high. But this has been a bear market bounce. The trend remains bearish and economic and market fundamentals paint a picture of a deteriorating market instead of one that is strengthening. Remain on the sidelines or in defensive positions.
F.S.

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