I've mentioned before in this space that I'm not a car guy. I
drive one, sure, but I view a vehicle simply as a means to get
from one place to another. I think my disdain for cars comes from
when I was 16. I got my license and my brother-in-law gave me his
old, no-frills Subaru hatchback. My first car.
Except I couldn't afford the insurance, $1,600 for 6 months-more
than I pay now for two cars annually! While working hard to
cobble together the money for the insurance, one day I came home
from sorting photos at Fotomat to find the car gone. My Dad had
sold it for $150. He had the right to, he argued, because it sat
in his driveway for months. I've been unable to get emotionally
close to a car since <sniff>.
For much of my adult life, though, I didn't need a car. Until I
had kids a few years ago, I lived in and around Manhattan, so I
took the subway. When I worked late, my employers paid for town
cars home. It's easy to be a mass transit snob that way.
It doesn't mean I don't admire cars: A winery-owning friend let
me drive his $250,000 Ferrari around Tuscany one day-that was as
nice as any car commercial. And through very little effort of my
own, I ended up owning a near-pristine model of a relatively
scarce BMW 325 ix, the first all-wheel drive sports car. But
ultimately, a car is a depreciating asset and the road to wealth
is best navigated by owning appreciating assets.
I may be fairly comfortable now, but I think my father's
influence remains pretty strong there too. He went from having to
poach wild salmon from the rivers of his native County Kerry to
eat as a boy to the comfortable confines of Garden City, N.Y.,
while helping my Mom put six kids through college. And that
didn't happen by plopping a big red bow on a luxury car for
But now that my wife and I live on the coast north of Boston and
have two growing girls, we're thinking about a bigger car. I
don't think the decision is so interesting to justify prattling
on about what we're considering, but it brings me to something
that's become a big psychological factor in our decision: gas
Here in Massachusetts, where gas tends to be a penny or two above
the national average, a gallon has breached the $3 mark, 16%
higher than a year ago. The average price in 21 states is up over
40 cents from a year ago, according to AAA, and nationally, gas
costs the most it has since October 2008.
It's no surprise, since gas is refined from oil, that its price
moves with the price of oil. Oil actually has had an uneventful
year, starting the year at $81 a barrel and closing recently at
$84. It's easy to pass over those numbers, since it doesn't seem
significant. But if you consider the fact the world has had large
excess refining capacity all year and global demand had been
relatively tepid thanks to the lingering effects of the
recession, the fact oil didn't fall in 2010 is pretty remarkable.
There are three reasons I see for this: One is the fact
institutional investors are returning to commodities as an
investment, boosting prices like we saw in 2007.
The second is that it simply costs a lot more to produce oil now:
The Saudis have said they see $75 as a fair price for oil-a
decade ago they said the same about $28-and even at $75, many
OPEC members including Venezuela and Iran, are believed to be
pumping oil below their cost of production. And, as I have
mentioned in the past, all the large, easy-to-tap oilfields are
past their peak, meaning more expensive oil sands and deepwater
oil need to be produced.
The third reason: The weakening dollar. A weaker dollar has
always brought higher oil and gas prices. There are a few reasons
for this, but one of the big ones is pretty basic: Oil is priced
globally in U.S. dollars. The weaker the dollar, the more foreign
producers need to sell oil at to stay level in their own
Thanks to those reasons and the fact as the economy strengthens
worldwide oil demand is returning in force, I see oil prices
rising significantly higher in 2011, cresting over $100 a barrel
by springtime and bringing the even tougher sight of $4 a gallon
gas by Independence Day.
I'm not unique in predicting this. But it sure makes our decision
to buy a bigger car harder. Maybe we'll wait and buy one of the
85 new electric and hybrid car models automakers are due to roll
out in coming years.
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Higher oil prices get people antsy and anxious for alternatives.
This sends them looking at electric cars and hybrids.
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And it has a clear connection to hedge fund and mutual fund
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Of course, runaway oil prices can stifle economic recovery,
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All the best,
For Cabot Green Investor