Oil Prices Soar Over $70 a Barrel

Crude oil prices are above $71 a barrel this morning.  The value of the U.S. dollar has fallen again.  One has to wonder whether the oil price rise reflects the market's belief that the economic recovery will drive demand, or is it because of the continued debasement of the worth of U.S. dollar, or is it something else?  In our view, we believe the price move is speculative based on various forecasts of $85 a barrel oils by the end of 2009 and higher - $90, $100 and $250 in future years.  But the underlying factor is investor reading of the legal and economic developments of recent days.

Any believer in the rule of law has to be disappointed by the Supreme Court's denial of hearing the case against the Chrysler bailout cramdown of secured lenders in contravention of histoical bankruptcy precedents.  The start of the slide in the U.S. dollar coincided with the Chrysler bankruptcy.  Yesterday's development cements the view that whatever the Obama administration wants on economic and financial policy will become law.  That is bad news for the U.S. energy policy as the Obama plan means less oil, gas and coal and much more expensive renewable fuels that are unproven as an adequate replacement.

The U.S. savings rate is rising, consumption is falling.  Energy demand will likely continue to drift or fall.  Worse, the economic incentives to find and develop more supplies are being eroded to the detriment of consumers somewhere down the road.  At risk is the pace of the U.S. economic recovery, and that of the world, which further undercuts any quick energy demand recovery.  Stay tuned for more energy market turmoil.