But they were wrong. The Datastream Internet Index reached its peak on January 3, 2000, and then collapsed, falling 93.8% over the next 34 months.

In 2005, investors thought the real estate market was “different.” Homeowners were buying houses more expensive than they could afford because they thought inflation would protect them. While home prices could stagnate, they wouldn’t go down.

But, as you know, they were wrong. Beginning July 2006, real estate has fallen 16.2%.

Investors will come up with any excuse to continue pumping money into a sector that’s produced amazing returns for them in the past. And when the money starts piling in, it’s time for you to get out.

Today, the sector is oil. In inflation-adjusted terms, the price of oil is up 140% in the last 18 months. At first glance, the logic seems plausible…

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Global demand for oil is surging. Most of this increase comes from emerging economies like China and India. And global oil supply is on the decline. A large cause is poor reserve management by nationalized oil companies.

Venezuela’s oil production, for example, decreased by at least 1 million barrels per day (bpd) since President Hugo Chavez nationalized the country’s oil fields between mid-2006 and 2007. And Iran’s leaders can’t attract private capital and technology, so production is down 3 million bpd to half of what it used to be under the Shah.

Russia and Nigeria are in the same boat… The problem is, high oil prices make governments greedy. They take over oil fields and mismanage them, decreasing supply growth… and leading to even higher oil prices.

This imbalance has catapulted the price of oil to stratospheric levels. Even when adjusted for inflation, the price of crude oil is now far above its 1980 peak.

In the long run, simple economics tells us the price of a barrel of oil should equal the cost of producing the most expensive barrel of oil needed to meet global demand.

According to the Energy Information Administration (EIA), the oil market has a small surplus of existing production. And according to a Dallas Federal Reserve economist, the most expensive barrel of oil needed to meet global demand is being produced at just $50. With oil currently priced at $137 a barrel, the incentive to find and produce more oil is enormous.

This process takes time… But there are already signs supply is climbing. Shale oil in the Dakotas and in the Canadian tar sands – which costs about $70 a barrel to produce in both places – is attracting enormous amounts of investment capital.

In addition, research into the process of converting coal to oil might yield a more environmentally friendly process sometime in the near future, which would overcome one of the major hurdles facing coal-to-oil production now. The supply of coal in the U.S., if you were wondering, is plentiful.

From the demand side, the EIA reports consumption in 30 developed countries has fallen 460,000 bpd since last year. Most of that decline comes from plummeting U.S. demand.

This commodity rally – and the oil boom in particular – is not any different than previous booms. The market will find a new equilibrium, and the price of oil will undergo a nasty correction.

Good investing,

Ian

P.S. As my colleague Matt Badiali explained in a recent DailyWealth essay, don’t confuse brains with a bull market. If you own oil and gas stocks, now’s the time to keep an eye on your stops. On the other hand, the market has mauled refiners. But I think right now, refining stocks are perfectly positioned for the coming oil rout.

Source:  Why Oil May Be Headed for $50

A colleague and I flew to Alberta and drove from Edmonton to Fort McMurray to visit an area I call America’s Gas Tank… the Canadian tar sands.

The drive took five and a half hours along what some people call the “world’s most dangerous highway.” It’s a narrow road traveled constantly by heavy trucks. Near Edmonton, the landscape is rolling dairy farms, dotted with oil and gas wells among the cows. About an hour away from town, you enter a pine forest that stretches for miles and miles.

Below those trees lies the largest oil deposit outside Saudi Arabia.

North of Fort McMurray, you come across the Syncrude mine. A mile-wide break in the forest stretches out in both directions. It takes something like two years to prep a site for mining. A company has to clear the trees and carefully strip off the muskeg, which is like topsoil, to use again when it remediates the area. Then miners strip off the top layers of sand to get to the tar layer.

The air is thick with the smell of raw oil. The shovel I stood in came right out of the mine, left on the side of the road as a monument when its replacement came. Today, the region’s three mines generate more than 860,000 barrels of tar-sand oil a day.

Just five years ago, these tar sands were more experiment than money machine. Those huge mining shovels are expensive, and refining the bitumen costs more than refining the light, sweet crude oil that comes through the drill pipes at work in other parts of the world. All told, mining a barrel of tar sand costs roughly $35. Back in 2003, oil traded for about $30 a barrel, and the only two companies mining here barely broke even.

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Today, oil costs more than $125 a barrel, and the experiment is over. It’s more of an explosion…

Forward-thinking oil companies began moving into the Alberta oil sands when oil prices climbed into the $50-a-barrel range. As oil prices moved past $60, the big oil companies started to scramble for tar-sand lands. They needed to get a slice of the world’s largest safe oil deposit. It was like a giant game of musical chairs, without enough chairs.

The companies lucky enough to find a seat are investing awesome amounts of money for the long run. An estimated $159 billion has been spent on infrastructure (mines, pipelines, power lines, wells, etc.) so far. Another $80 billion will be spent over the next two years.

That’s because, outside of Saudi Arabia, this is one of the only places in the world with spare production capacity. However, “turning on the taps” in an oil field takes time… even in Saudi Arabia.

In addition, many traditional oil-producing nations are generating much less than in years past. The single best example is OPEC member Indonesia. The country’s oil production declined 35% over the last 10 years. It no longer exports oil… Now Indonesia must import it. The country will quit OPEC at the end of this year. Mexico is also a big oil producer. It provides 11% of U.S. oil imports. Its production is declining.

At the same time, the developing world is consuming more and more oil. China alone is importing 10%-15% more oil this year than last year. Russia, the Middle East, India, and Latin America are all consuming more oil as their economies develop. We aren’t discovering nearly enough new large fields to meet this new demand.

This is why oil costs more than $125 a barrel. It’s also why the Canadian tar sands are so important… and why every commodity investor should be invested here for the long term. You shouldn’t just see this area as an investment however… look at it as a hedge against soaring gasoline prices. Sure, you many spend a hundred bucks to fill up the SUV, but you’ll be earning great returns on your oil money.

To get started on further research, check out the natural gas and infrastructure plays I’ve written about in these pages. There’s also an inventive oil sands ETF administered by Claymore. It’s tiny (far too small for me to recommend to my S&A Oil Report readers) and trades… where else but in Canada!

Good investing,

P.S. For my top ideas in Canadian oil sands, check out the latest issue of the S&A Oil Report. It’s a totally risk-free subscription, and you’ll probably make back the entire cost within a month in our next big Canadian winner. Click here to learn more.

Source: Here’s Where to Find the World’s Most Interesting ETF

“As the post-Memorial Day hangover lingers, and $4 per gallon gasoline becomes a national reality, expect more and more daily energy prognostications,” says William Patalon III in Money Morning.

“Goldman Sachs Group Inc. (GS) already is on record for $200-a-barrel oil. As you all know, our own Keith Fitz-Gerald has projected a crude-oil price of $225 a barrel. Do I hear $250? What about $5 a gallon gasoline by July 4th?

“Sometimes, these daily price gyrations take on lives of their own, but at the end of the day, the basic laws of supply and demand always work themselves out.”

There’s a new oil rush going on in Alberta, Canada, says Alex Green in InvestmentU: “Alberta’s oil sands are the largest known reserve of oil on earth containing between 1.7 and 2.5 trillion barrels.”

“For decades, these sands weren’t even considered part of the world’s oil reserves because the oil there wasn’t economically extractable at prevailing prices using then-current technology. But times have changed… And the new gold rush is on.

“Here’s the kicker: Exploration of Alberta’s oil sands is virtually risk-free. You can’t drill a dry hole here. There’s no drilling at all. It’s a mining operation – and the reserves are thoroughly outlined. So what you really need is a company with plenty of machinery, money and manpower to dig it up and process it as quickly as possible.”

Read on here to find out the one undisputed blue-chip play on Alberta’s oil sands.

CNN reports that US gas prices have now risen for 14 straight days.

According to the report: “For the first time since 2002, Americans plan to drive less on the holiday weekend than they did the year before, with high gasoline prices in a weak economy a prime reason.”

A great way to profit from skyhigh crude oil prices, which is causing high gas prices, is to invest in Canadian tar sands stocks, says Brian Hunt in DailyWealth.

“When oil is trading for $60 a barrel, mining the tar sands is a good business. When oil is trading for $80, it’s a great business. And when oil is trading for $120, it’s a money machine.”

Christian DeHaemer in Taipan Daily has another great way to play spiraling oil prices: natural gas.

“On Monday,” says Christian, “the Russian giant, Gazprom, shut down a quarter of its gas supply to the Ukraine to force the country to pay off a $600 million debt. This was settled today, but underscores Europe’s worries over the reliability of natural gas coming from Russia.

“The last time Gazprom played this game was two years ago, when the Ukraine went for three days without gas and pipelines in Europe saw a drop in pressure.

“Europe gets 20% of its gas from Ukrainian pipelines. The Ukraine, in turn, gets its gas from Russia. It’s a system that leaves Europe beholden to Russia, much like the U.S. is beholden to OPEC.

“As Lord Palmerston once said, “Nations have no permanent friends and permanent allies, only permanent interests.” This means that Europe is looking for other suppliers. North Africa fits the bill, and a pipeline is being built to Spain.

Read on here to learn more about ways to profit from the situation.

Today, we look at another sector the market is high on: Canadian tar sands. Our chart shows the past five years in Suncor Energy, one of the largest miners operating in Athabasca. When oil is trading for $60 a barrel, mining the tar sands is a good business. When oil is trading for $80, it’s a great business. And when oil is trading for $120, it’s a money machine.

As one of the institutional investors’ favorite ways to take a position in Canada’s tar sands, Suncor’s stock reflects all of the environmental, political, and economic concerns of Athabasca.

Suncor’s first-quarter cash flow increased 40% from one year ago. Shares have appreciated 480% in the past five years. The bull market in the world’s safest large deposit of crude oil is on!

Source: As Go the Oil Services, So Go the Tar Sands