The big question nowadays is what is going on in oil. Our most recent experience with a major commodity and its price action has been in precious metals. For the past three years (going on four), precious metals have been in a bear market. On a side note, it is possible that we’ve seen gold bottom out in November 2014 and we are in the early stages of what might be the reversal going forward. Nonetheless, this isn’t what I wanted to discuss today. Precious metals being down for this long sets the precedence in the markets for what could be the future for oil over the next 3-5 years.
Or Does It?
Although it might be tempting to try and compare the two and predict the actions of oil based on what has happened in precious metals, the two cannot be compared.
First of all, the oil industry dwarfs precious metals (gold and silver) in yearly production value. It even beats today’s depressed oil prices by about 14 times. Oil is so much more of a part of the economy than precious metals are, and it’s something the mainstream will focus on more than precious metals. In the western world, oil is a direct part of nearly all households (see below for rough calculations).
It’s in the Interests of Most Governments to Have Higher Oil Prices
Other than Obama being able to stand up in front of the nation and take credit for lower gas prices under his presidency, it’s in the interest of the world’s powers to have higher oil prices. The luxury of the citizens paying less at the pump is not in the best interests of the governments, even though more money to spend in the economy would theoretically be an economic booster.
First of all, high oil prices means higher tax revenue that comes in as a percentage of what gets paid. Right now, this has collapsed. That’s just right off of the top. In addition to that, OPEC is significantly more dependent on higher oil prices to balance their budgets, since oil production is pretty much the only industry supporting their entire economy. At home, the U.S. is dependent on higher oil prices (to an extent) because a major part of what has helped get the U.S. back on track was the unexpected shale oil boom that has brought about high-paying jobs and fueled much of the fundamental growth that the U.S. economy has seen. Across the waters in Russia, collapsing oil prices has had a significant impact on revenue, and they also need a higher price to sustain themselves long-term.
The Saudis’ threat to crush competition is not likely going to run every competitor off of the market. Eventually, they are going to have to give in themselves and allow for a higher oil price to balance their own budgets.
In my own personal opinion, it’s not likely that oil prices will snap back over $100 overnight, but it will slowly climb higher than where it is now because the powers that be will inevitably do what they can to push it higher because it’s in their best interests.
Comparing Oil to Precious Metals
As I’ve already eluded to, precious metals are in a totally different arena than oil — and here’s why.
Governments don’t benefit substantially from the higher prices in precious metals. There are few countries that have precious metals being mined as a significant percentage of their GDPs, and there isn’t a whole lot of pull these countries have to control prices upwards.
As I discussed in regards to the economic impact of higher oil prices previously, higher precious metal prices are actually a threat to the world powers, as opposed to an economic benefit.
The reason entities like the Federal Reserve and governments around the world fight against a rising gold price is that it raises concern about fiat currency devaluation. These entities will fight tooth and nail to protect the faith the world has in fiat – specifically the Fed with the U.S. dollar.
This is important to understand because governments and world banks essentially control the population by controlling the money. If the population loses faith in their money and opts to save and transact in gold, for instance, they lose the ability to inflate and spend in the manner they want.
Final Thoughts
So much more could be said and discussed delving into this topic, but I just wanted to bring up this thought in this week’s edition “High Metals Prices Hurts Fiat, Low Oil Prices Hurts Economies” for all of our readers to consider. Oil is likely to rise because it’s in the interests of the most powerful entities in the world. Precious metals, at this point, are likely to rise since they are due, but not because it’s in the interests of the most powerful entities in the world.
Precious metals will see their move when the most powerful entities in the world lose control over their fiat and the monetary system unravels. Until then, they will fight this tooth and nail.
Calculations:
Oil Production (Rounded numbers)
90,000,000/barrels/day * 365 = 32,850,000,000/yearly barrel production
32,850,000,000/annual barrel production * $55/barrel=$1,806,750,000,000 (annual production value)
Precious Metals Calculations-Gold and Silver (Rounded Numbers)
(Production ounces per year or 2,500 metric tons a year) * (Price Per Ounce)
90,000,000 * $1,300 = $117,000,000,000
819,000,000/(Silver Yearly Production Ounces) *$20/Ounce= $16,380,000,000(annual production value)
Gold and Silver Annual Dollar Values
$117,000,000,000 + $16,380,000,000 = $133,380,000,000
Oil To Precious Metals Ratios
$1,806,750,000,000 / $133,380,000,000 = 13.54 or 14