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Mark's Market Blog

12-23-08: Oil and Gasoline Prices

By Mark Lawrence

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Another boring week in the market. We're stuck right now in a trench, with the S&P trading between about 860 and 915. We've been there for about three weeks, and we look to stay there for another couple weeks. When the market gets to 900 or so, people want to cash out. When it gets to 875 or so, people want back in. If you look at the 90 day chart below from about Nov.25 to Dec.23, you can see there's not really much of a trend up or down.

By contrast, oil continues to free fall. A week ago OPEC (remember when that name made us all shiver?) announced an enormous cut in production, and oil promptly sat up and begged. Didn't last, we're trending down again. You can mess with markets, but they will have their way. One cannot look at this chart and project a bottom, it's simply not in evidence. I expect oil will continue to go down, undershooting a bit due to high oil stocks in most countries - oil companies have missed in their projections of demand and overbought. It looks to me like 2009 will be a year of cheaper oil than we have had for several years.

I think it's interesting to look at the price of oil and gasoline, adjusted for inflation, over the last several decades. What we see is that oil was around $20 per barrel from just after WWII until 1973. This is when the Arabs decided they'd had enough of the Jews, and they would attack in any way they could, including cutting off oil to the creators of Israel, the US and Europe. Oil prices were highly volatile from '73 until '85, when the market calmed down and oil settled around $30ish a barrel. This period of stability was broken in the early '90s, when stock markets started going seriously up world-wide and China and India started their modern-era growth spurts. The chart below ends in early 2008; we know that there were some very interesting developments this year. . .

Gasoline is currently averaging about $1.70 around the country, down from about $4.20 a few short months ago. I don't expect gasoline to go much lower - oil would have to drop to about $20 per barrel, about half what it's selling for today, for gasoline to drop to $1.25 per gallon. We're in a price range now where taxes, refining costs, and delivery costs are more important than a couple dollars off a barrel of oil.

Also interesting this week was the collapse of the Madoff investment trust. Bernard Madoff, a former head of the SEC, had been running an investment trust as a Ponzi scheme, using new investor's money to pay high "returns" to previous investors. This was revealed last week, and it was found that the losses exceed $50B. There's already been one suicide because of this collapse.

The belief in Washington for the last 20 years has been that markets can work things out on their own. I consider this view naive. We all depend on the FDA to tell us what's really in that box of cereal or can of beans we just bought, and to make sure that the drugs we're given by a pharmacist matches our prescription. Similarly, it's clear to me that we need the SEC and the Fed to make certain that Wall Street discloses what we're buying from them. One of the major problems we've faced in the last six months is that no one had any clue what the hedge funds were doing with the couple trillion dollars they had to invest. Of course, this all started due to poor disclosure of the actual income and expenses of people getting mortgages; of the actual interest rate and mortgage payment that would result after the initial teaser rates wore off; of the expected foreclosure rates on people who couldn't actually afford the houses they just bought; and of the actual investment grade of the bonds made up of these fantasy mortgages. I am ok with substantially unregulated markets - if investors lose a bundle on GM stock (I may be one of these), that's the problem of the investors. I am not ok with financial markets based on secrecy, misinformation and lies. We need some truth in lending, truth in banking, truth in investing acts. In my non-humble opinion.

And finally, two decades before its time:

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