Sunday, July 17, 2011

What goes up must come down (please, please, please)

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Over the centuries, our world has experienced many financial bubbles, most recently from real estate.  Most of these bubbles have been burst in large part by some increase in supply, either through improved crop yields or just building more homes or silicon chip factories.  However, as the emerging economies become wealthier, their populations healthier, the ability to continue to limit price increases by upping supply has diminished.  This is particularly so in the world of finite commodities and even more so in oil.  Recently, the International Energy Agency stated that even with soft global economic growth, the oil producing nations will find it difficult to meet the world’s demand requirements of 89 million barrels a day in the second half of 2011.

 

The result of this supply constraint – which cannot be remedied in weeks will be the pushing up of oil prices (Brent crude has been trading at triple digits for almost the entire year).  Motorist will feel the pinch immediately and the rest of society will feel it in the following months as wheat prices (50% of which is derived from the price of oil), transportation etc. move up or possibly down in the case of houses in the exurbs.  For those living in the risk world the demands for hedging will possibly move from idea to necessity as business’s struggle to lessen the pace and impact of another wave of commodity price increases.  I believe that it will be the pro-active risk managers that are acting now that will survive and possibly thrive in this new environment.  Hopefully you will be one of them.

 

For more Jeff Rubin’s thoughts on oil prices, click on the link:

http://tinyurl.com/5wnlwdb

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