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By Robert Rapier on Oct 29, 2007 with no responses

The Positive and Negative of High Oil Prices

Probably the most devastating personal impact if oil goes over $100 is that there won’t be a beer fund for people who stop by and see me in Aberdeen. Therefore, if you come see me you will have to pick up the tab. :-)

But a MarketWatch story today highlighted that energy stocks were tracking oil prices, which is why I am hedged against rising oil prices:

Energy stocks rise along with oil prices

NEW YORK (MarketWatch) — Energy stocks moved up Monday along with the overall market after oil futures broke through $93 a barrel for the first time on jitters over a production cut in Mexico on bad weather. Oil futures rose $1 to $92.86 after breaking through $93 for the first time earlier in the day.

For me, that’s mixed news. On the positive side, higher oil prices mean that people will conserve more energy. That is first and foremost, the most important thing. Also, the value of my company stock increases; a good thing for me personally. On the negative side, high oil prices really endanger the economy with a recession. Furthermore, I will soon be relieved of $1,000 if the price rise doesn’t slow down. Of course, forced conservation also means hard times for some people. We must conserve, but there are certainly people suffering at these prices.

On the price issue, I continue to see many analysts reiterate what I have been saying. From the same story:

Natixis Bleichroeder Inc. on Monday said in a note to clients that oil prices above $90 a barrel may not be justified by supply data. “The oil price move to record territory has been accompanied by some geo-political issues, continued inventory draws and very aggressive buying by non-commercial speculators,” Natixis said. “That said, we are less than certain that the fourth-quarter oil market undersupply condition of roughly 1.1 million barrels a day justifies prices above $90 a barrel.”

I firmly believe that oil is overbought. The question is, will it correct before or after it relieves me of $1,000? That is going to depend largely on Wednesday. If the Fed cuts interest rates, and crude inventories drop again, I think we will see $100 oil within a week. I think there is a pretty good chance the Fed will cut rates (although I think that’s a mistake), but I don’t expect that inventories will be down again this week.

For me, the worst case scenario is that oil cracks $100, and then corrects back down to $70. That means it wipes out the beer fund, as well as my company stock value, and conservation efforts will slow.