Thursday, January 19, 2012

FIVE Top Reasons Why I Believe Fuel Costs Will Skyrocket Shortly!

NOTE: I originally wrote this to my Golden Hard Hat mentoring members last month. I've been informing them to update their fuel pricing index in all estimates to cover the oncoming increase in fuel. I'm now sharing this with you with hopes you may find it of value to you and your construction business.

Before the holidays I emailed all of you and suggested that you increase your fuel index price for fuel consumption in your estimating. Fuel pricing dropped at the pump but barrel costs still hovered at the $100 per barrel. However, I emailed you again and told you I thought this was temporary and to keep your higher price index for future estimates. The reasoning was that this would cover future jobs when pricing shoots up. This still holds true.

Crude pricing is based on supply and demand. Raise the supply or lower the demand, and prices retreat. The opposite holds true.

As we look around us, the global economy is in a state of disarray. Some Europeans are seeing riots in the street and severe cutbacks. Something we should watch closely, since we are also in the same state of disarray.

With all the major events happening and the fact that any one or two can cause the price of oil to go up, we need to take a prudent position and cover our bases. If we are wrong, we can also, and very quickly, change positions.

Here are the FIVE top reasons why I believe we will see a sharp rise at the pumps sooner than we can imagine.

#1 The “lack of” value in the U.S. dollar: Bad outcome

Much to the great dismay of some oil-producing countries, oil is priced and traded in U.S. dollars. Everything else being equal, the price of oil varies in relation to the fluctuation in the value of the dollar.

The two are inversely correlated. When the dollar is up, oil is down. The reverse is also true. The dollar will likely remain the primary money this year, given all the issues in Europe, and to a lesser extent, Japan, and the BRIC who would want it changed to some other currency or precious metal.

The fact that crude prices are up simply highlights the complex interactions of the many factors that affect the price of oil. However, the runaway and ill-thought reasons for printing money without anything backing it will in fact come back to haunt the Fed and our delicate economic system. See Figure 1, the FRED Graph and note how many dollars have been recklessly printed during the Obama Administration to fund his progressive agenda.

Each time the Fed print dollars, the value and/or buying power decreases.

Figure 1

#2 U.S. Fuel Supply: Bad for us

Because of the recession in our economy, fuel demand in the U.S. has dropped. The result is that now for the first time in history; U.S. refineries are exporting more oil than they are producing for domestic consumption. This is happening for two reasons. One, domestic demand is down, two, foreign demand and the pricing is better.

In the past, jet fuel was always the leader, however, that has changed. Now, gasoline and diesel are leaving our soil and heading overseas. The other main concern is that our fuel storage or supply for these grades of fuel is pathetically low and one catastrophic event or run-on will raise panic with our system.

#3 Iran – Mideast Powder Keg: Bad for everyone

No doubt about it, Iran and its saber rattling is enough to start a stampede of panic within the world markets, let alone if it finally owns a nuke!

Grant you, the U.S. Fifth Fleet would make a quick disappearance act of the Iranian Navy, but there would be a cost. Imagine if they are able to sink ships and block the Strait of Hormuz? Imagine for one minute if they elect to set off a “dirty” bomb, not a nuke in some large city somewhere in the world. They can easily do this using a third party terrorist organization. This could be forced upon them by the sanctions that Obama is working on.

What if, Israel decides its safety is in great danger and they need to strike, what will that do to the flow of oil from the Mideast to the world? This situation could explode at any moment. We're talking about Ahmadinejad here, and a country whose desperation level is growing by the day.

#4 Our National Debt – Really bad for us

The debt that has been recklessly and thoughtlessly run up by our politicians is unforgivable. Imagine for just a moment this scenario. For every dollar you need to spend, you have to borrow fifty cents from someone. Could you survive?

What about if you had to borrow half of every dollar you owe on just the interest on the funds you borrowed 30 years ago, 10 years ago or even last year. Could you do it? Not one dollar going to pay off the principle. Just the interest you owe.

What about if the bank or person who always lent you the money, suddenly decides that it is not in their best interest to lend you anymore. What would happen to you?

That is the situation we are in at this present moment. Our country now owes more than it brings in, more than the entire country produces, and with a staggering compounding of interest, it can’t keep up.

Our country is bankrupt and the present group of politicians is more worried about re-election than fixing their problem. Sooner or later, that person who lends to the government will say no more and then pricing will go through the roof, the dollar will crash, riots will erupt in the street and a complete breakdown will take place in our system.

However, the right change in the mindset of Americans and its leaders can quickly put this on the right track. Hopefully, they see the light at the end of the tunnel, stop the spending and running up deficits and come up with a plan to payoff this debt.

By no means am I “chicken-little” here, however, it deserves our attention and we should all be closely monitoring what is happening and have a strategy in place in case all hell breaks loose. Meanwhile, it does have a profound impact on the pricing of commodities such as oil, as it plays out.

#5 Oil Reserves – Someone is missing the boat here!

We have a lot of problems in our country at this time. One is jobs, and the other is the economy besides what I’ve already mentioned. It behooves me that any politician or leader of the world’s greatest nation would ignore the fact that we have enormous gas, oil and coal reserves in this country. We should be drilling for oil not trying to capture the sun or wind and lining the wallets of our cronies with taxpayer’s monies instead.

We also have easy access to oil from our great friend Canada who wants to ship oil to us. The proposed Keystone pipeline would create jobs, bring billions into our economy, solve one of our pressing oil problems, and release us from some of our foreign oil dependency. Instead, this president would rather lend money to Brazil for deep water drilling (which he refuses to let happen here without stringent and almost intolerable procedures and barriers), and then buy the oil from Brazil. Makes no sense whatsoever to me, but who am I.

America has more oil than Saudi Arabia, who is running out and a lot more natural gas than we could use in the next 200 years or so. Yet, it remains untouched because of progressive policies and the whacko environmentalist.

Meanwhile, we as business owners must recognize that anyone of these ‘things’ could have a profound impact on the price of oil. In the ‘micro’ view of things it would be prudent to use a higher price for our fuel needs in all future estimates. I might also be considering storing fuel to handle the short-term panic if it happens. Your choice.

Let’s cover our bases and watch things play out. If it changes for the good, we can always reduce the index.

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  1. How easily you forget to mention the cost the our water supplies with the fracking and the damage to the aquafer with the pipeline. Evan the Republican Governor of Nebraska is against the pipeline. There is a great documentary called "Gasland" that demonstrates the problems with natural gas exploration. I wonder if you have the courge or the curiosity or the honesty to watch it. Just google it. Mark Schad

  2. Unfortunately, Gasland is over-flowing with false facts and scaremongering journalism. He "forgot" to mention that lighting water occured as early the 1930's, long before fracking. See it at: