Oil...where is it heading? A good read.

THIS IS NOT MY ARTICLE. THIS WAS WRITTEN BY A FRIEND OF MINE. IM JUST POSTING IT HERE FOR EVERYONE COZ I THINK IT MAKES A GOOD READ. I HOPE YOU BENEFIT FROM IT

I've been doing some further thinking about oil. There's something happening behind the scenes here that isn't readily apparent. What I think is possible is that oil could break below $50/bbl. I'm not saying it will, just that it's possible. 50 is likely an incredibly important technical and psychological barrier. If it's breached, oil could really tank.

It's long been suspected that the US gov't has a huge control over the price of oil. Maybe that's true and maybe it isn't, but we have seen something happen in the market that we know is true: Ever since we started hearing about oil producing nations diversifying out of the $ and all the talk started about oil being denominated out of $'s and into Euros, the price of oil has dropped and the $ has strengthened against both currencies.

Be that as it may, what sort of economic effects is lower oil likely to produce? Oil exerts a tremendous psycholigical effect on people. Rising oil prices make people angry. They depress economic activity. People can't drive their cars as much and their freedom is curtailed. It costs more to heat their homes and people have to start wearing sweaters in their houses. Their kids complain that their rooms are cold. The kids complain to their moms and the moms complain to the dads. People can't buy the big fat gas-guzzlers they love and have to buy the little gas-sippers they hate. It's a bad situation. Everyone starts thinking negitively. Inflation goes up and GDP goes down. However, oil has developed into something much more important then that.

Obviously oil is crucial to the economies of the developed and emerging nations but it is also crucial to the security of the free world. This has never been more self-evident then since 9/11. Oil prices have only spiked one time since then and we've seen them quickly slapped back down. The powers that be absolutlely will not accept 70/bbl oil.

The pro-western oil producing nations (Saudi-Arabia, UAE, Kuwait, etc) are just as concerned about their survival as we are and they realize the threat that Iran poses to their survival. They are even more concerned about a nuclear Iran then the US, are spending a lot more on defense and will continue to do so in the future. Their continued survival depends on the US, since the US is on the forefront of the fight-they know that. IMHO, the law of supply and demand regarding the price of oil has been over-riden by the first law: survival.

I believe that all this is what's behind the drop in oil. The war against terrorism and chaos is being fought on many fronts-on the streets of Iraq and in the oil trading pits. It's a war we have to win-our survival depends on it.

How could this play out as far as what we're concerend with-trading? The 2 major effects oil high oil prices-depressed GDP and increased inflation-will be reversed when oil prices are low. Look for US growth improving to the upside and inflation to stay under control. How far can GDP go? Possibly quickly to the 2.5-3 level and beyond that if oil prices do hold. IMHO-I don't think we'll see 70/bbl oil for a very long time.