Tired of getting hammered tank with gas thanks to crazy high gas prices? Me too! The price of oil is on every newscast with headlines shouting about the latest record in oil prices. And most worrisome of all, according to the headlines, this is just the beginning. How much will it then?
So who is responsible? Lets examine some of the reasons why you are having to shell out more at the pumps.
This oil price shell game is wrecking the lives of millions of people. Is the tension in Middle East to blame? Is it Big Oil companies who are laughing all the way to the bank while your budget runs on empty? So who do we have to thank for these wild price swings? Is it due to a battle between traders going short or long on oil futures contracts at Big Banks? Is it all connected to the Alberta Oil Sands?
The most frequently heard reason is that there has been a huge increase in the demand for oil thanks to China and India's explosive economic growth. Countries that produce oil justcan't keep up with demand. Even Saudi Arabia announced recently that it was increasing supply to counter demand, and the market yawned.
Is there any truth to this argument? Of course. Is it the main? No.
The economies of going full tilt during the last few years which has resulted in an increased demand for oil. The truth is, the US accounts for about 4% of the world's population, and 25% of the world's use of oil. Nevertheless, that's not the only reason for oil's price painful increase.
The demand for oil although hasn't increased by 100% like the price of oil has over the last 11 months. What's wrong with this picture?
For for over a generation, the US greenback has influenced the price of commodities. A strong US greenback most times resulted in lower oil and gold prices. The incredible weakness of the US dollar has resulted in commodities hitting unprecedented highs. Commodities are priced in US dollars and move to compensate for changes in value of the US dollar.
A lower US currency has resulted in both oil and gold moving up in price, resulting in you getting squeezed at the pumps. Since September 2007, Fed Chairman Ben Bernanke has lowered interest rates 7 times, with the largest of those cuts occurring in 2008. During that same timeframe, the price of oil has moved from $69.26 in September 2007 to $110 in April 2008 when the last cut was made. Today, oil is around $130 a barrel.
This provides an explosive mix for drivers. Hard working Americans are paying the price at the pumps for a devalued dollar thanks to Mr Bernanke. Lower interest rates were meant to help the banks in light of the housing crisis. Instead, it helped to lower the value of the US dollar and by effect, increasing the price at the pumps.
I hate to say this, but, traders, especially the large commodity and futures are fueling the commodity bubble. Like with any bubble, emotions take over. “Its different this time". If history has taught us anything, its that its never different this time. They continue to feed the perception of that demand for oil will force the price of oil over $200, and they don't want to miss the boat.
So what can you do about it? In our next article, we'll tell you how to take advantage of this trading opportunity.
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