Isn’t that a scary thought?

Just a couple of days after Obama touched down in Washington, China makes a very American decree. It’s telling its banks it had better shore up their capital situations or face strong sanctions from the government.

They say imitation is the sincerest form of flattery. America did it first, now the communists are following.

In case you missed the news over the past year or so, China’s economy is flat-out soaring ahead. While no figure that disseminates from Beijing is ever trusted, most analysts believe the country’s GDP is growing by a rate of 7% or so. Some even say it has eclipsed the 10% mark.

Just like here in the States, very little of that growth is organic. China’s government is just as fond of manipulating natural market forces as our friends inside the beltway.

And, of course, anytime the government gets involved, some unnatural and unexpected economic reverberations will be felt.

Just as their American brethren did over the past decade, China’s banks are taking advantage of a fixed currency and an optimal lending environment by sending all the money they can dig from the couch cushions into the streets of China.

As the economy grows, the leverage on their books multiplies. Like we learned just 13 months ago, the situation will eventually collapse under its own weight.

That’s why Beijing has stepped in and told the banks that they had better save some money for their backup coffers… or else.

This is bad, bad news for a country surviving on borrowed money (no, not us… this time). China’s economy has been artificially inflated by the government’s cash infusions. But now the leadership is starting to pull back, realizing enough is enough.

Continuing with Friday’s lead, this proves natural market forces are still alive and well. Better yet, it proves China is in for some bumpy traveling.

If you would have asked me early last week about China’s economic health, I would have told you I like what I see. But then something odd happened.

Obama visited. And it’s been downhill ever since.

*** I love it when the markets make a mistake. After some positive economic data from the consumer front this morning, the equities market put in quite a showing today. In fact, even the ultra-bearish natural gas sector followed the crowd of bulls today.

It has created another fantastic buying opportunity. Natural gas prices climbed by less than one percent, but much of the sector is up by two or even three times that figure. Investors mistakenly got caught up in the rally.

Over the next few days they are going to pay for it.

Late last week, we locked in gains of 400% thanks to the natural gas market’s recent selloff. Thanks to today’s action, investors that make their move now have yet another shot at triple-digit gains.

To find out how, read my updated report.

This is going to be a fun week for the energy markets.

*** Let’s face it, the dollar is in trouble. But so is the sun at the center of our solar system. The big question is which will implode first. Now that the dollar has slowed its decline, the race may be tighter than you think.

The dollar will eventually be tossed aside, but will it happen in the next million years?

Here’s a bit of what I told Contrarian Profit readers this afternoon:

“Is the drop in the dollar worth watching? Just like the sun will eventually shine its last ray of light, the mighty dollar will someday buy its last barrel of oil or its final container of Chinese imports.

“We all know it is going to happen, so why bother discussing it. Right?

“There is no doubt the world’s currency of choice has more pressure stacked against it than ever before. But even with $12 trillion in debt and nearly a trillion of annual interest payments due within the next decade, the greenback is still stronger than it was just sixteen months ago.

“While so many of us are betting against the dollar and calling for its demise, plenty more investors are using it as a security net, buying American treasuries to protect themselves in case the bottom really falls out.

“With the sun someday going to fade, I could sit in my basement and wait for the big day to come, or I could live my life without worry.

“It’s the same thing with the dollar. We could bet against the greenback and profit as it drops, or we could forget about the minimal return potential and keep our eyes looking forward, where the real money is at.

“Here’s the scoop. The dollar is likely to fade, at most, six percent below today’s value against the Euro. That’s major erosion for such a massively distributed currency, but six percent over a few years doesn’t stack up to a hill of beans in the grand scheme of things.

“I can list a couple of dozen stocks that are up by twice that figure today alone.

“No doubt, you should pay attention to the dollar, as a six-percent decay in the value of the world’s most important currency will change all sorts of valuations. But don’t invest in the cause, invest in the effect.” Keep reading here.

The dollar is going to fall, but you and I may not live long enough to get rich off the move. The smart money is looking somewhere else. I say we follow.

And so it begins. Just yesterday, we here at the TFN offices got into a late-day discussion about the fate of the nation’s natural gas markets.

With prices remaining low and entirely removed from the recent commodities bonanza, the nation’s expanding natural gas drilling industry is headed for trouble.

Today we got the news that proves our theory.

ConocoPhillips (NYSE:COP), the third largest of the nation’s Big Oil players, announced it is cutting its capital spending budget by nearly 10% and is selling some $10 billion worth of assets.

Why the drastic moves? Thanks in part to stubbornly low natural gas prices, the company needs to make the cuts to shore up a leveraged balance sheet.

If you recall, just last week the company warned Wall Street to expect reduced earnings figures thanks to a 67% reduction in natural gas prices.

There was similar news yesterday from nation’s second-largest producer, Chevron (NYSE:CVX). The California-based company quietly announced all drilling has stopped at its Piceance Basin facilities in Colorado.

I bet you can guess why they plugged the well. Yep, you betcha, low natural gas prices.

Drill, baby, drill

So if the natural gas price conundrum is having this effect on the nation’s largest companies and their multi-billion dollar cash flows, what is it doing to the tiny, marginal players?

Early last month, Trident Resources gave us a glimpse of what is likely to come. Citing liabilities of nearly a billion bucks and assets worth just $10 million, the Canadian gas driller was forced to walk into bankruptcy court and ask for protection from its creditors.

Indeed, the same companies investors were pumping their money into when gas was soaring to record highs are now failing under the weight of massive debt.

Here’s the kicker that is really going to tear the gas industry apart.

That massive debt that was picked up over the past few years doesn’t simply go away now that prices have plummeted. Drillers still have to pay their bills. That means any bit of cash flow available is direly needed.

That is how we got to where we are today, with natural gas inventories across the country at record high levels and growing by the minute.

With bills to pay, drillers simply refuse to close the valves on their producing wells. If they do, they’ll go bankrupt. But until they slow the flow, the price they get for that gas will sink lower and lower.

Eventually, prices will get so low the weak will be shaken out of the market whether they like it or not. They won’t be able to produce enough gas even to make their weekly payroll.

One of many

I could pick on dozens of small drillers that are facing gale-force headwinds, but since Rex Energy Corp. (NASDAQ:REXX) recently expanded its drilling in the Marcellus Shale formation, which is the chief cause of the current market glut, I will put their issues in the spotlight.

With $70 million in liabilities, the $330 million company is one of the better positioned drillers in its category. But much of that debt is focused on bringing the company to the Marcellus Shale region. If the move does not pay off, Rex could be forced to pay on a dud for quite some time.

Common estimates put the break-even price for Marcellus Shale drilling somewhere around $3.70 per 1,000 cubic feet of gas. Right now, drillers are able to get that price from the futures market, but the overfilled spot market is not willing to spend so much.

With nearly $1.50 difference between spot and future prices, something has got to give. With inventories about to overflow, the spot price won’t budge an inch.

The common argument throughout the market is that typical winter demand will reduce supplies and bring the markets back in equilibrium. But remember, the markets rarely go with the crowd.

The speculators have gas prices going higher over the next two months, but the facts and economic laws show prices will be going lower.

If it happens, it won’t be good for drillers. ConocoPhillips knows it. Now so do you.

Source: Natural Gas Industry Braces for Impact

Qatar’s greatest asset is its natural gas reserves. In fact, the largest gas field in the world is here. Its discoverers were disappointed when they found it in 1971. They were looking for oil.

The boom Qatar now enjoys is the result of some daring investments in liquefied natural gas (LNG) back when people thought doing such a thing was a little batty. Faisal Al Suwaidi, the head of Qatargas, deserves the props for his wager, which have paid off handsomely. Today, Qatar produces about one-quarter of the world’s natural gas.

Qatar supplies such faraway customers as Japan, India and China. Qatargas also operates the largest LNG terminal in Europe at South Hook on the Welsh coast. This facility provides Britain with a fifth of its gas needs.

Qatar’s dominant position has filled its coffers and changed the country forever. On a per capital basis, it is one of the wealthiest countries in the world. And given the world’s growing energy demands and the appeal of clean-burning (and cheaper) natural gas when compared with oil, Qatar seems in a good position.

In Dubai, the story is quite different, as Dubai does not have Qatar’s gas reserves, nor does it have much oil. Dubai’s story is one of trade and finance.

As I write, the sun is just peeking over the horizon. It is dawn in Dubai. Out my hotel window, I can see two buildings with cranes over them and in the distance another building in scaffolding. For a city that was once booming and turned bust – as with most places – there is still a lot of construction going on.

As recently as September 2008, realtors could claim that no one had lost money in the Dubai property market. That’s no longer true. In fact, now the market has too much of just about every property type. One headline story noted how 32,000 homes are about to come on the market next year, which is a big number to choke down in any city. Dubai had a huge property boom and now must suffer the flip side.

The hotels, too, are pretty empty. We are staying at the new Address Hotel downtown, which has been open for only 25 days, we are told. I’m the first person to stay in my room. It still has that new carpet smell.

I wandered down for breakfast and was alone in a cavernous dining room. The hotel is brand-spanking new and everything looks wonderful. It’s just mostly empty. I think there are more hotel workers than there are guests.

In Dubai, revenue per room is down 35% from a year ago. Yet there is still an expansion going on. Next year, estimates call for a 15% increase in the number of rooms. This would mean a 40% increase in two years.

Over breakfast, I perused my complimentary copy of The National. One of the things I like to do in a foreign city is to read the local newspapers. I’m kind of a newspaper junkie anyway – I get three dailies delivered to my doorstep at home. In any event, I always find interesting nuggets from a perspective you might not get if all you read is The Wall Street Journal or Financial Times.

Today’s business page carried an array of tales… There was the arrival in Doha of a new LNG tanker, fresh from Seoul’s shipbuilding docks. There was a story about how UAE consumer confidence is up. Also, notes on bond issues in the Gulf, the latest figures on money supply in Kuwait (it’s rising at a frighteningly quick pace of 18.7%), the price of villas in Dubai and more. All sorts of little odds and ends that help paint the picture.

There was also a lot of chatter about infrastructure, which I found particularly interesting. Abu Dhabi, the capital of the UAE, which I will visit on this trip, is looking to raise $100 billion for infrastructure projects. From The National: “The emirate needs to fund new transport, electricity and telecommunications schemes…”

Dubai itself also has ambitious infrastructure spending plans. Last night, as we made our way to our hotel, we could see the new Dubai Metro stops along the way, which, lit up as they were in soft blue and white twinkling lights, looked like something out of the future.

Incredibly, the Dubai government last year spent about 45% of its budget on infrastructure projects – mostly on the roads and ports. But there is a lot more on tap, as The National reports:

“Dubai could invest as much as $20 billion in desalination projects in the next decade alone as it increases its water output by 2.72 billion liters a day… [There are also] plans to add 14,405 megawatts by 2017… Construction costs for those new plants amount to $11.6 billion, while infrastructure costs, including substations and transmission lines, will be about $11.6 billion.”

This massive build-out is not unique to Dubai, or even the UAE. There are also big infrastructure projects of all kinds in India and China and other emerging markets.

Regards,

Chris Mayer

Source: Greetings from Qatar!

Oil peaked at $147 per barrel in July 2008 — right before the house of cards came crashing down on the global economy. Once banks started to fail and credit dried up, other businesses slowed production and laid off workers. This created a massive trickle effect on the overall economy.

Big corporations and individual consumers alike were using less energy. That meant the prices of every energy-related commodity plummeted.

This spring, things started to turn around… The unemployment rate quit falling at such a rapid rate. Inventories were too low in many industries, creating a ramp up in production again. Energy prices climbed…

Since the start of this year, the price of crude oil has nearly doubled. In just the last six months, heating oil jumped as much as 90%. These two commodities are still cheap as far as we can tell. But they aren’t the real story…

Two other commodities are still low, but won’t be for long…

Coal and Natural Gas Are Commodity Buddies

Back in June, Greg Guenthner told you about coal’s recent history. Coal, being the most widely used fossil fuel in the U.S., took an extra-hard hit during the past several months. It’s down nearly 70% and hasn’t recovered in the slightest.

Demand will flood back into the system. In fact, that’s already happening. We have no doubt that the coal play we let our Penny Stock Fortunes readers in on is the best way to take advantage of the coming coal boom. But there’s another energy commodity about to shoot even higher, even faster…

Natural gas prices have utterly collapsed. After trading above $13 in June 2008, natural gas fell the whole way down to $2.70 today. Its decline happened as gradually as can be. Most of the financial world has been trying to time the bottom for months. But it keeps falling.

We don’t know if this is the bottom, but it can’t be far from it. It doesn’t matter to us even if it’s not. You see, we found the best natural gas seasonal laborer in the world, and we can just wait it out… no matter how long it takes.

Before we get into any specific natural gas play, we need to know how big natural gas’s recovery will be…

Why We’ll See Natural Gas 209% Higher By Year-End

Natural gas and coal go hand in hand. They are oftentimes found together in the same place. Natural gas hides beneath and between coal beds. It’s not uncommon for a coal company to come in and mine the same site an oil and natural gas driller just left.

When one of these two is no longer in demand, it usually spells trouble for the other. That’s one of the main reasons natural gas has taken such a hit. But just as they fall together, they rise together.

We already laid out the reason coal will see a price spike in coming months and years. Natural gas is just as lucrative, if not more…

Natural gas demand is continuing to increase around the world at an unprecedented pace. Many nations are starting to choose NG over traditional coal and oil in power plants. It burns about 29% cleaner than petroleum and 44% cleaner than coal.

And because of its recent price collapse, it’s now the cheapest choice for customers. Why pay more for coal or oil when you can get natural gas for $2.50 per thousand cubic feet?

The supply side of the coin is even more compelling…

The U.S. imports around 17% of its natural gas — almost all of which comes from Canada. Unfortunately, Canada’s natural gas reserves are drying up. Daily Canadian natural gas production peaked in 2001. We’re already back down to 1995 production levels, and falling.

Natural gas production here in the U.S. has also fallen off a cliff. Most drillers can’t drill for a profit at these prices. So they aren’t. We have almost no production right now. We’ll eventually burn through stored natural gas reserves. When they go too low, it will spur a panic.

This panic will be enormous. Natural gas is simply too cheap. It hasn’t been this cheap for decades. The average oil-to-natural gas price ratio is about 9.3. Now it’s at about 29.

It wouldn’t take much for prices to shoot upward from here. To reach the 20-year average natural gas-to-oil ratio, NG prices would have to climb 209%.

That doesn’t take into account the future boom in demand. It won’t take long for it to correct itself…certainly before the end of this year.

This panic is inevitable, and there are a number of penny stock plays that could take advantage of it… Union Drilling (NASDAQ: UDRL) and Pioneer Drilling (AMEX: PDC) are two that could be worth looking at right now.

Sincerely,
Jim Nelson

Source: Natural Gas’ Triple Could Give Us a 416% Gain by Year-End

It’s a world shrouded in deep myths and folklore that include stories of people losing their homes, or having 5,000 bushels of soybeans dumped on their front lawn.

I’m talking about the commodities world, of course.

But despite these tall tales, commodities aren’t necessarily dangerous investments. Not if you know what you’re doing and take adequate precautions. Rather, the “secret society” stuff comes from the belief that the sector is a murky one that many investors simply don’t understand. Just the mere sound of “commodity futures and futures options contracts” was enough to send people running for cover…

However, nothing could be further from the truth when dealing with commodities. And over the past few years, we’ve seen great changes in the financial world that have opened the doors to this “secret society.”

Step Out of Your Comfort Zone… Don’t Be Afraid of Futures & Futures Options

I’ll tell you what I’ve told my friends and acquaintances over the years: Don’t be scared of commodity futures and futures options, they’re essentially little different than stock and stock options. If you know how to trade stocks and stock options, then there’s no difference from futures and futures options.

For example, if you can buy and sell IBM (NYSE: IBM) shares and IBM options, then why can’t you buy and sell sugar futures and sugar options? There is no difference. As long as you have an idea of where an investment (be it IBM or sugar) might move to and its underlying fundamentals, then what is there to be scared about?

Here’s the problem as I see it (based on my 18 years of experience in the commodities sector): Most people just don’t know enough about the underlying fundamentals of commodities – how/why soybeans, cocoa, cotton, or live cattle trade in a certain way. The majority of people know stocks and that’s that. They don’t like change and are fearful to step out of their comfort zone.

But all commodities that are available to trade on various U.S. exchanges are highly regulated. They have strict rules, which are efficient and assure the integrity and safety of your capital.

So if you’re looking to add some great potential gains to your portfolio, then consider what commodities can do for you…

Four Commodities… Four Explosive Moves

Want some examples of how explosive the world of commodities can be? Just look at these moves for oil, natural gas, gold and silver over the past year…

How would you have liked to hop aboard some of those moves?

Oil: When it started rising in 2007 and topped in 2008, it encompassed a staggering $90,000 move if you’d held just one contract. And the freefall that ended last March brought in an unheard of $110,000 for anyone being bearish.

If you’d held 10 contracts during those moves, you could have seen gains of over $1 million! And that’s just one direction. Double it if you went both ways.

Natural Gas: The move up in the summer of 2007 to the top in 2008 encompassed an $85,000 move, while the drop back down to the lows hit just two weeks ago and saw an even larger haul of $110,000. And this was for holding just one measly little contract. Imagine if you had 100 contracts.

Gold: From the gold chart below, you can see the trend higher from 2002. But even if you got onboard as late as 2006, the move could still have netted you $45,000.

Silver: A bullish position taken in 2006 would have scored $60,000 on just one contract. And if you’d hopped on the bear train near the highs in the spring of 2008, you could have pocketed another $65,000 just six months later.

This is some serious money folks.

And the great thing about commodities is that it’s normal for them to cycle from highs to lows and then back again. This gives you opportunities to profit on the way up and the way down. Moreover, it’s in contrast to the stock market, where most moves are biased to the upside.

Now, if you want to profit today…

Three Reasons Why You Should Trade These Four ETFs

Due to the changes that have taken place in the commodities world, regular investors have a chance to take part in the sector without leaving the comfort of a stockbroker.

We’re talking about commodity-related exchange-traded-funds (ETFs), which mimic the moves of the underlying asset. So you can use them to play some of the most popular and active commodity markets.

For example, if you’d like to go for oil, natural gas, gold, and silver, consider these ETFs:

• Oil: United States Oil Fund (NYSE: USO)
• Natural Gas: United States Natural Gas Fund (NYSE: UNG)
• Gold: SPDR Gold Shares (NYSE: GLD)
• Silver: iShares Silver Trust (NYSE: SLV)

If you want to gain exposure to the often lucrative commodities world, here’s why you should trade these ETFs…

1. Simple: ETFs trade like stocks, so you can buy and sell them as you would with shares of any other company from a regular stock brokerage account. So you don’t even need to get involved with commodity brokers, futures, or futures options contracts.
2. Options: The ETFs also have options available, which offers you more leverage and can reduce your risk.
3. Liquidity: Because all four of these ETFs are the largest ones available for their respective commodities, there is enough volume to be able to get in and out quickly and safely.

Next time, I’ll show you one of my favorite ways to use an options strategy to execute a bullish commodity trade. But in the meantime, check out those ETFs above.

Good trading,

Lee Lowell

Source: Four Easy Ways to Trade the World’s Top Commodities

First, we hope you bought gold many years ago. That would make it simpler. Then, we could say: hold! Gold is an antidote to paper. There is so much paper…and so much more apparently on the way…that the gold play seems like a winner. It’s a bet that the money system that has been around since August ’71 is going to fall apart.

We still think that is a good bet. Our Trade of the Decade remains. Buy gold on dips; sell stocks on rallies. We’ve done well with this trade; we’ll stick with it a bit longer.

But what if you don’t own gold? The yellow stuff is now over $1,000. In fact, it looks like $1,000 could be a new support level for the metal – with most of the support coming from the Chinese. China has relatively little gold in its central bank. It must see what we see – the weakness of the dollar and of the dollar-reserve monetary system. It must worry about the value of the $2 trillion or so it has in dollars. It must also wonder how it is going to run its economy if the dollar falls apart. American buyers were its consumers of first and last resort. To whom will China sell if its most important customers’ money becomes worthless?

Recent comments by a group of Chinese officials make it clear that they are thinking of these things…and that they have decided to add more gold to their reserves. In fact, all the central banks have become net buyers. No more selling off gold reserves. That is seen as a mug’s game – which it is. Replacing gold with paper? C’mon, what were they thinking?

So China is a buyer. Trouble is, it has to be a discreet buyer. It has too much money. It could cause the price to skyrocket overnight. Then, it would be paying too much. So, perhaps it does what we do – China buys on dips! For example, the order may have gone out: buy gold whenever the price goes below $1,000.

We don’t know what their buying strategy is…but the Chinese are probably going to be big buyers over the next few years.

Should you buy along with the Chinese? Should you compete with the Chinese for each ounce of gold that comes on the market?

Good question. Unfortunately, we don’t have a good answer. So let’s try a different question: Is gold going up or down?

The answer to that is simpler: gold is going up…then down…then up again. It is going up because the feds – including the feds in China – are encouraging speculation. Then, it is going down when the next phase of the bear market reasserts itself and the speculators run for cover. Then, it is going back up…much farther and faster…when the Fed becomes desperate and finally throw caution – and dollars – to the wind. We’re confident this last stage will arrive. Our hesitation is that it will take much longer than we expect. Gold may rise in a deflation…but it soars in a period of inflation. That period could be a long way off.

The feds can’t revive the consumer economy. Despite all you read…the consumer economy is probably going to limp along for many years. No boom in consumer spending = no inflation.

“US retail sales surge as economy strengthens,” announces a Reuters’ headline. Don’t believe it. Between the seasonal adjustments and the feds’ giveaways the retail sales numbers are meaningless. The real story is that there is little – or no – real organic improvement in the economy. The largest banks that get federal bailout money, for example, have actually reduced their lending for 6 months in a row.

But the feds can stimulate speculation. The dollar has become the ‘carry trade’ currency. The big players borrow in dollars…and use the money to speculate – against the dollar! They buy gold. They buy Brazilian bonds. They buy aluminum futures. They buy stocks.

The Dow rose 108 points yesterday. Oil rose over $72. Almost all commodities are up – except natural gas.

The post-crash party seems to be going well. It may continue. But the underlying problems of the real economy have not been corrected. They will rise up like zombies in a bad horror movie and bring the party to a close. Absent support from the Chinese, the price of gold will probably go down along with everything else. Which brings us back to the question we dodged.

“Dad, I made $2,000 just in the last couple of days…on that gold play I got in. But I’m nervous…should I sell it?”

Jules has graduated from college. He’s investing his meager savings, trying to put together a big enough stake so he can take a year off from work and concentrate on his career as a composer and performer.

“Jules…I don’t know,” began the answer. “But you’re a young guy. You can afford to speculate. If it goes your way, you make money. If it goes against you, you learn something…and you have plenty of time to recover.

“It looks to us as though this party is going to continue for a while. If I were you…I’d stick with it a while longer.”

Our advice to a man of 21 is not the same as our advice to a man of 60. The older man would get older advice:

“Gamble not thy whole wealth on the gold market,” we would say.

The older man needs gold. But he needs it as insurance…as a reserve against catastrophe…as a form of savings. The Fed has been negligent and derelict. It is not protecting America’s money and Americans’ wealth. The average fellow has to do it himself. He has to have reserves of his own…reserves of real money – gold.

He should buy. He should hold. He should buy the dips. But he should not speculate on higher prices…nor risk his wealth gambling in the gold market. Most likely, after this speculative boomlet, the price of gold will go down. How much? How far? For how long? Of course, we don’t know the answer to those questions.

We’re not buying now. But we already have our position in gold. We will add more – on the next big dip.

“Why capitalism fails” is the intriguing and misleading headline of an article in The Boston Globe. It is a reminder of the theories of Hyman Minsky, who pointed out the obvious: capitalism is inherently unstable…it proceeds in booms and busts…not steady, incremental growth. Of course, that is just the way it works – like nature herself. And that’s why people don’t like capitalism…they can’t control it. So, whenever a bust comes, they imagine that it has ‘failed’ or ‘broken down.’ Then, they propose ways to fix it.

“Since the global financial system started unraveling in dramatic fashion two years ago, distinguished economists have suffered a crisis of their own,” starts the article. “Ivy League professors who had trumpeted the dawn of a new era of stability have scrambled to explain how, exactly, the worst financial crisis since the Great Depression had ambushed their entire profession.

“Amid the hand-wringing and the self-flagellation, a few more cerebral commentators started to speak about the arrival of a ‘Minsky moment,’ and a growing number of insiders began to warn of a coming ‘Minsky meltdown.’

“‘Minsky’ was shorthand for Hyman Minsky, a hitherto obscure macroeconomist who died over a decade ago. Many economists had never heard of him when the crisis struck, and he remains a shadowy figure in the profession. But lately he has begun emerging as perhaps the most prescient big-picture thinker about what, exactly, we are going through.

“A contrarian amid the conformity of postwar America, an expert in the then-unfashionable subfields of finance and crisis, Minsky was one economist who saw what was coming. He predicted, decades ago, almost exactly the kind of meltdown that recently hammered the global economy.”

Economists went off their heads in the last few decades. They thought capitalism would make us all rich. And they thought capitalism automatically tended toward beneficent equilibrium.

Here at The Daily Reckoning, intuitively, we guessed the contrary. The system produces a kind of orderly chaos…in which the rich are frequently impoverished, the proud are humbled…and the goofballs who think capitalism fails inevitably make things worse.

Until tomorrow,

Bill Bonner

Source: The Post-Crash Party Continues

• Reliable sources of energy.
• A modern, efficient infrastructure, consisting of a good road and rail system, reliable power grids and high-speed digital communications networks.

And if a country wants to be considered a “global economic powerhouse,” it’s nearly impossible for it to do so without these critical building blocks.

So it’s not too surprising that China is spending unprecedented amounts of money to beef up its infrastructure.

It’s also spending huge amounts of money on long-term oil and gas contracts. And with nearly $2 trillion on hand, it’s the perfect time for China to go on an energy acquisition spree.

Right now, it’s spending like a thirsty sailor on shore leave…

You see, despite the recent pullback in the Chinese stock market, the country is still on an economic roll that will continue for the next 50 years. According to The Economist, China’s capital spending is a whopping 44% of its GDP, and in raw dollars could exceed that of the United States for the first time this year.

And you can bet that its increase in energy use will track right along with its growth.

But China’s energy problems are similar to those of the United States: It doesn’t have enough of its own sources of fossil fuel to meet its needs.

So what is China doing to combat this? And is there a way to tap into this in terms of investing? Answers below…

China’s Energy Asset Acquisition Spree

At the moment, China is importing coal, liquefied natural gas (LNG) and crude oil. And to guarantee that those supplies are uninterrupted, it’s buying some major deposits of oil and gas, along with the refineries to process it.

We’re not just talking small potatoes, either. Since Christmas, China has been on an overseas energy asset acquisition spree. The country has spent a total of $17 billion, easily topping the $13.1 billion it spent in all of 2008. What’s more, the pace of acquisitions doesn’t appear to be slowing – and could even ramp up into 2010.

Many companies are teaming up, putting together joint deals that insure even the largest purchases have funding behind them. And some are very, very big. For example…

• In April, PetroChina (NYSE: PTR) partnered with KazMunaiGaz and plunked down a cool $5 billion to purchase JSC MangistauMunaiGas from Central Asia Petroleum. This was one of the first instances of Chinese firms partnering together to purchase a foreign oil company.
• June saw a highly publicized $20 billion deal, in which China National Petroleum Corporation joined forces with BP (NYSE: BP) to buy a 75% stake in the Rumaila oil field in southern Iraq. The consortium’s bid topped that of the Exxon/Mobil (NYSE: XOM)/Shell (NYSE: RDS) partnership.
• Just one month later, the China National Offshore Oil Company (NYSE: CEO) – often referred to as CNOOC – hooked up with Sinopec. The two of them coughed up $1.3 billion to acquire a 20% stake in a deepwater block off Angola from Marathon Oil.

China’s Knee-Deep In Canadian Oil Sands

Now, the Chinese have landed in Canada. And it’s not because they like hockey. They’ve quietly bought up several parts of different oil sands operations.

Just a few days ago, PetroChina announced a $1.7 billion deal, in which it will acquire a 60% stake in Athabasca Oil Sands Corp’s MacKay River and Dover oil sands fields.

This isn’t the first time that China has invested in Canadian oil sands. Back in 2005, CNOOC purchased a 16.7% stake in MEG Energy Corporation, while China Petrochemical Corporation plunked down $83 million for a stake in Syneco Energy, Inc.

So why is China interested in something like oil sands – oil that is very difficult and expensive to bring to fruition? Simple. All the easy, lucrative projects have already gone. It’s a disturbing indication of China’s quiet determination to increase its oil and gas reserves… at any price.

So what’s next?

How To Invest In China’s Energy Acquisition Express

As evidenced by the variety of different operations that China has acquired recently, the country is taking a shotgun approach to energy.

And while it’s not easy to see what it’s focused on next, the best way to play this trend is by owning shares of the buyer. This includes big Chinese oil companies like…

• PetroChina
• Sinopec (NYSE:SHI)
• CNOOC

All these firms have American Depositary Receipts (ADRs), which means you can trade them on the U.S. exchanges.

One note of caution before you do, however: If you read my colleague Louis Basenese’s piece on the China sell off earlier this week, he highlighted 10 reasons why the Chinese market is set to fall from here.

I agree with Lou – and I believe waiting until we see evidence that the Chinese markets have bottomed will represent an excellent time to take a position in some of these companies.

Good investing,

David Fessler

Source: China’s Energy Acquisition: Three Ways to Invest in China

– T. Boone Pickens

Inflation can do tricky things to markets. It creates distortions. In those distortions, an intrepid investor can find some big moneymaking ideas. I think we’ve got one opening up in oil and gas, and it is not without precedent in financial markets. In fact, it’s starting to look a little like the tail end of the 1970s in some respects.

In the spring of 1969, the Dow Jones industrial average stood at 969. By 1982, the Dow hit 1,071. That’s thirteen years of going nowhere. (We’ve had 10 years or so of going nowhere, though the ride between the poles has been anything but boring).

The problem is inflation makes that performance look better than it really was, like when a crooked judge makes a fight look close with a split decision even when the one fighter can barely walk to his corner and everybody in the building knows it was a rout.

Adjusted for inflation, or the weak dollar, the Dow was really more like 400. That makes it one of the worst stretches for the market since the 1930s.

The consumer price index, that flawed measure of inflation, doubled from 1960 to 1982. This is why a generation of people grew to believe that the best way to buy a house was to borrow all you could afford. And for a time, that looked brilliant. As Robert Sobel relates in a history of the period, a modest suburban home going for $30,000 in 1969 sold for $300,000 13 years later. With a lot of debt, your returns were much greater.

Of course, that kind of thinking eventually got us into a heap of trouble, as we now know.

But that period of time also had an effect on Corporate America’s balance sheets. When a company buys an asset, say a factory, it records its cost on its books. It will then depreciate this asset over time. So the value of the factory on its books will decline over time.

In a period of high inflation, its book value will be understated. The cost of a similar factory will be a lot higher in dollar terms, though the company will still show the old figure.

In other words, during periods of inflation, book values understate the true value of corporate assets. This happened in the 1960-82 period. Combine that phenomenon with a stagnant stock market and, eventually, you get some very cheap stocks. This is exactly what happened during the inflationary 1970s. Thus, by the early 1980s, stocks were quite cheap indeed.

In fact, by July 1984, S&P reported that 30% of the stocks on the NYSE traded below net tangible book value. The old value mavens like Ben Graham would have had a field day.

What happened next, though, is what interests us especially. The low stock prices kicked off a takeover boom. The 1980s takeover mania was the busiest since the “age of Morgan at the turn of the century,” Sobel reports in his The Age of Giant Corporations. The 1980s was the age of the LBO, Barbarians at the Gate, Michael Milken and the corporate raider.

The oil industry also had its takeover boom. In fact, the outlines of the 1980s oil and gas industry look similar to today’s. In 1970s, there was a drilling boom as people thought that oil and gas prices would rise indefinitely. That collapsed and then you had oil and gas companies sitting on huge reserves they built up during the boom.

So in a time when it cost $15 a barrel to get oil out the ground, many oil companies traded for $5 a barrel in proven reserves. Getty Oil traded for $72 per share, with assets of $250 per share. Marathon’s stock went for $68, even though each share had $210 in assets backing it up. And on and on it went.

Enter T. Boone Pickens. An Oklahoma-born geologist, Pickens was well aware of the value of these companies. He started going after them and making millions of dollars as bidding wars ensued. He lost several of these, but still cleared millions in profits.

There was a roll call of takeovers in the industry during this time — Shell bought Belridge Oil for $3.6 billion, DuPont bought Conoco for $7.4 billion and U.S. Steel took out Marathon for $6.5 billion. (Yes, U.S. Steel thought it would be smart to diversify). These were some of the bigger deals.

I won’t go too much into the history of this period, and perhaps I’ve already gone into too much detail. But I think something similar may be unfolding in today’s market.

In oil and gas, we have many companies trading cheaply in the wake of a drilling boom gone bust. What we need now is a T. Boone Pickens to shake things up.

When I look at some of my favorite oil and gas stocks, like Contango Oil & Gas (MCF:amex), I see stocks trading for far less than what it would cost you to find those reserves. If I were a natural gas producer, I’d look to pick up stocks like these, rather than drill new wells. At some point, I think that will happen and we’ll see lots of buyouts in the oil and gas sector.

Natural gas is very cheap right now, but it won’t always be the case. In a new research report by Tudor Pickering Holt & Co., a very good firm specializing in energy, $7.50 natural gas prices is forecast for next year! That’s pretty bold considering natural gas is under $3.00.

The firm bases this prediction on a comprehensive, bottoms-up model that takes into account rig count, decline rates on existing wells and other variables. According to Tudor Pickering, “The die is cast for 2010” — there is no way to get around a dramatic decline in natural gas production next year. And even assuming tepid demand for natural gas, we’re going to have a very different picture in natural gas next year.

After that, Tudor Pickering predicts the market will get full again by 2011. If it is right, we have a great window to make money between now and probably the middle of 2010 in natural gas.

Source: The Coming Takeover Boom

The first was an unprecedented $41 billion liquefied natural gas (LNG) deal with Australia, which was announced last week. The deal calls for PetroChina Co. Ltd. (NYSE: PTR) – Asia’s largest oil and gas company – to buy 2.25 million tons per year of liquefied natural gas (LNG) from the Gorgon field in Western Australia over a period of 20 years.

It is the largest deal ever brokered between the two nations.

The Gorgon field has yet to be developed but is considered to be a key global resource and an economic boon for Australia.

“The Gorgon Project is globally and nationally significant with a resource base of more than 40 trillion cubic feet of gas and an estimated economic life of at least 40 years from the time of start-up,” said Chevron Australia Managing Director, Roy Krzywosinski.

“Furthermore, the Gorgon Project is Australia’s largest single resource project and is set to deliver significant economic benefits and create around 10,000 indirect and direct jobs during peak construction.”

Chevron Corp. (NYSE: CVX) owns and operates 50% of the field.

Yet this is just one of the mega-deals signed between China and Australia. China was Australia’s second largest merchandise trade partner in 2008 with two-way trade of $56.3 billion (A$67.74 billion). Australian exports to China grew 37% in 2008 from the previous year to $27 billion (A$32.48 billion) and comprised chiefly of raw and lightly processed farm, mineral and energy products.

“China needs us, we need China,” said Australian Trade Minister Simon Crean.

Of course, China’s demand for natural gas and other resources is growing so fast that it needs more than Australia.  That’s why the Red Dragon recently signed a $5.6 billion deal with a consortium of energy companies operating off the coast of Myanmar.

The consortium, led by South Korea’s Daewoo International Corp., will supply China National United Oil Corp. (CNUOC) with 500 million cubic feet of natural gas a year from 2013 to 2043. The supply, which will come from Myanmar’s A-1 and A-3 offshore blocks, amounts to about 7% of China’s current gas consumption, Reuters reported.

The consortium – which also includes India’s Oil and Natural Gas Corp., Myanmar Oil & Gas Enterprise, India’s GAIL Ltd., and Korea Gas Corp. – will invest a total of $5.6 billion in the project and be responsible for production and offshore pipeline transportation.

Land transportation will be jointly managed with CNUOC. The two parties also plan to build oil and gas pipelines through Myanmar and into China’s southwestern Yunnan province, Reuters reported.

Few Western countries, or Western companies do business with Myanmar, which has been heavily criticized for its human rights violations. The military junta that controls the country is considered one of the most repressive and brutal regimes in the world today. Forced labor, child labor, human trafficking, and instances of sexual abuse are widespread.

However, China, which has itself been a target among human rights watchdogs, chooses to overlook these discretions, preferring instead to focus on Myanmar’s resources. And in its defense, China is rightly concerned about securing enough raw materials to support its booming economy and a population of about 1.3 billion people.

Natural gas, for instance, accounts for just 3% of China’s total energy needs, but its use is expected to grow rapidly as energy demand increases. China currently consumes about 7.3 billion cubic feet per day, but that is expected to grow at a 10% compound annual rate to 18 billion cubic feet per day by 2020, according to Bernstein Research.

And China is doing the right thing by securing long-term supplies of natural gas now, while prices are low and supplies are high. It’s taken similar action with other commodities over the past year, stocking up on large amounts oil, copper, and iron ore as prices swooned.

China Gases Up While Prices Are Low

Natural gas prices yesterday (Thursday) fell to levels not seen since 2002 after the U.S. Energy Department said the amount of gas in storage hit a record high for this time of year.

Natural gas stockpiles rose by 52 billion cubic feet to about 3.2 trillion cubic feet in the week ended Aug. 21 –21% above year ago levels. Levels are now so high that some experts believe the United States will run out of storage capacity before winter begins.

“We have never been here before in terms of what to expect when storage gets this high,” Aubrey K. McClendon, Chief Executive Officer of Chesapeake Energy Corp. (NYSE: CHK), told the New York Times. “It’s like a balloon; there comes a point where you can’t blow any more air into it.”

Natural gas prices tumbled more than 6% to $2.725 per 1,000 cubic feet of gas on the New York Mercantile Exchange (NYMEX), a price not seen since Aug. 7 2002, The Associated Press reported.

However, now that gas prices have tumbled roughly 80% from last year’s high above $13, some investors believe the market is bottoming out – or at the very least, significantly below its fair value.

Chesapeake Energy stock has risen nearly 8% in the past month, despite plunging prices and mounting inventories. Devon Energy Corp. (NYSE: DVN) is up about a 5.5%.

“The perception is that gas has finally gotten to its lowest point, so people are buying exploration and production stocks,” Marshall Adkins, energy analyst at Raymond James Financial Inc. (NYSE: RJF), told Reuters.

However, Adkins does not expect a rebound to come any time soon. His firm expects natural gas prices to fall below $2.50 per thousand cubic feet in the months ahead as an inventory overhang overshadows gas’ attractive price.

Still, there’s good reason to believe gas prices will have a strong rally in early 2010. To begin with, gas companies are slashing production exploration in dramatic fashion.

Newfield Exploration Company, for instance, has announced the plans to voluntarily curtail about 2.5 billion of cubic feet equivalent of gas of its third quarter of 2009 production in response to the recent lull in prices.

U.S. producers have cut the number of rigs drilling for new gas by more than half since Sept. 2008. Oil-services company Baker Hughes Inc. (NYSE: BHI) recently reported that 688 gas rigs were active in the United States, down about 56% from one year ago.

“We think the decline curve for production will be fairly steep because of the big drop in drilling,” Rich Howard, manager of the Prospector Capital Appreciation fund, told CNNMoney.

Source: China Landing Natural Gas Deals as Prices Plummet

It all started back in 1991, when J. Aron & Co., Goldman’s commodities-trading division, recommended that a large institutional client invest about $100 million in commodities.  The vehicle “du-jour” was Goldman’s own investment vehicle, the Goldman Sachs Commodity Index (now the S&P GSCI Commodity Index).

The GSCI is a 24-commodity dollar-weighted index, comprised of 70% energy (oil and natural gas), 8% industrial metals (aluminum, copper, lead, nickel and zinc), 3% precious metals (gold and silver), 14% agriculture (wheat, corn, soybeans, cotton, sugar, coffee and cocoa) and 4% livestock (cattle and hogs).

Goldman was to take the other side of the bet, meaning that should the index rise, Goldman would have to pay equivalent returns to the investor.  In order to hedge, J. Aron needed to institute similar positions in the futures markets for those commodities.

But the plan had one wrinkle in it.  At the time, the U.S. Commodity Futures Trading Commission (CFTC) – the agency that regulated the commodities sector – placed position limits on certain agricultural commodities, like wheat, corn and soybeans.  Other commodities weren’t subject to these same limits.  Yet it was necessary to hedge all the commodities concerned in order for this investment arrangement to work.

So with a large chunk of new business at stake, J. Aron asked the CFTC to grant it an exemption.  Goldman contended that it was not a speculator, but was instead a true “hedger.”

The upshot: In October 1991, J. Aron was granted the sought-after exemption.

Inspired by J. Aron’s success, other members of the commodities-trading oligopoly followed suit, and soon had similar exemptions in hand.

The Global Commodities Boom

In the 18 years that followed the exemption grants, the commodities sector was all in all a pretty orderly place. Between 1990 and 2002, in fact, commodities prices essentially traded sideways.

Unfortunately, that stability wasn’t to last. Like a greyhound that sets out after the hare after having been penned up for too long a stretch, commodity prices started to surge – and ended up doubling over the next six years, albeit in a relatively orderly fashion.

Finally, last year, a market that had been simmering for far too long finally came to a full-fledge boil – and last summer boiled over. Food prices soared, intensifying inflationary fears here in the United States while prompting the leader of the United Nation’s World Food Programme to warn that a “silent tsunami” of hunger was threatening to span the globe.

It seems, though, that the actual boiling point was reached last summer when oil went into a near-vertical climb, surging 63% in just five months, and hitting an all-time high of $147 a barrel last July. Given that oil is in many ways the most relevant commodity to the general public (think fuel for transportation and heating), the new record price touched off a media feeding and prompted projections that crude oil could be headed for $500 a barrel.

As commodity prices were shooting skyward, however, U.S. stock prices saw their already-steep descent turn into a nearly vertical plunge – thank to a worsening of the deepest financial crisis since the Great Depression.

As a result of that crisis, the world’s largest banks, insurance firms and brokerages have been forced to take nearly $1.5 trillion in writedowns, Bloomberg News reported. Because of that and some other related problems, U.S. Treasury Secretary Timothy F. Geithner is pressing Congress to somehow restrain the $600 trillion worldwide derivatives market.

And that has set the stage for a showdown that pits the regulators against the speculators.

What Gensler Wants …

As the spotlight has increasingly been focused on Goldman in the last couple of years for its trading prowess, it’s been suggested on many occasions that the investment bank must be benefiting from some sort of a “special” relationship with the federal government.

The suggestion is understandable on several levels.

Only a month ago, for instance, when Goldman reported its financial results for the second quarter, the investment bank’s trading results helped it record all-time-record profits of $3.44 billion – a good 50% above what experts had been forecasting for what had been expected to be a “blowout” quarter for Goldman.

The stunning profit results once again reminded observers that Goldman Sachs alumnae seem to have a “knack” for landing in positions of high influence.
Former U.S. Treasury Secretary Henry M. “Hank” Paulson Jr., who held that position under former U.S. President George W. Bush – where he was widely viewed as the mastermind behind many of the bank bailout programs conceived last fall – was once the chairman and CEO of Goldman Sachs.

While he was serving as Treasury secretary, Paulson’s office calendar says he called Goldman Sachs Chairman Lloyd C. Blankfein roughly 24 times the week that the federal government opted to bailout out busted insurance giant American International Group Inc. (NYSE: AIG). Remember, had AIG been allowed to collapse, Goldman would have been left holding the biggest of all bags, because of the oversized bets they’d made on AIG’s financial insurance.  Paulson, it seems, would have none of that.

The “Six Degrees of Goldman Sachs” doesn’t end there, either, as the many connections show. Geithner, the current Treasury secretary, was mentored by Goldman alumnus John Thain [the last chairman and CEO of Merrill Lynch before it merged with Bank of America Corp. (NYSE: BAC)].  Plus, Geithner just chose Mark Patterson, formerly a lobbyist for Goldman, as his top aide.

And don’t forget about Gary Gensler, the newly installed head of the CFTC whose resume includes a 20-year stint at Goldman Sachs. But interestingly – perhaps even ironically – Gensler’s new job pits him directly against Goldman, as the CFTC looks to rein in what some consider to excessive speculation.

During hearings held in July and August, attended by representatives from both Goldman Sachs and JPMorgan Chase & Co. (NYSE: JPM), Gensler commented that the CFTC “must seriously consider setting strict position limits in the energy market.” He also indicated that his staff had been instructed to determine “every authority available to the agency” to guard the interests of the public as well as the markets.

What Goldman Should Get

In its defense, Goldman has argued that setting position limits on trading commodities is likely to prove harmful, as restricting access could affect liquidity.  (Highly liquid markets, or “deep” markets with large volume, are considered to be more fairly priced).

Steven Strongin, a managing director at Goldman, recently told a Senate hearing committee that “attempts to regulate volatility have rarely – if ever – succeeded.  Yet they often have unintended and significant consequences.”

Although commodities trading accounts for a considerable part of Goldman’s revenue – some estimates place it at about 8% to 9% – making it a target for would-be reformers, Strongin’s cautionary words should serve as a warning to back off for one simple reason.

He’s right.

Because of the exemption granted to the trading houses, institutional investors have been better able to provide commodity diversification to their portfolios, thereby minimizing some asset and inflation risks.
United States Oil Fund LP (NYSE: USO) and the United States Natural Gas Fund LP (NYSE: UNG) – two ETFs that are among the largest such products in the world.

Though very popular, such exchange-traded funds (ETFs) as the United States Oil Fund LP (NYSE: USO) and the United States Natural Gas Fund LP (NYSE: UNG) could also be affected.  They currently boast large volumes in the 12 million and 40 million units traded/day, respectively. That means that a limitation on futures positions – let alone an outright prohibition – would work against the best interests of individual investors.

Even producers and refiners of petroleum products could end up being squeezed, as well. These oil-sector players sometimes hedge risks by calling on the large commodities traders who can provide them with custom trades on demand.  The dealer then turns around and wisely hedges its own risk.  Now, doubt is being cast on the ability to perform these transactions.
So we know that Goldman, along with JPMorgan Chase) and others – as the largest owners of derivatives – have a lot to defend.
But there’s actually an even-bigger-picture view that argues against regulation – of any kind.

Who Needs Rules?

Government oversight, intervention, and insurance schemes usually lead to problems – often really big problems.

A simple example should be enough to make my point.

Just think back to what happened last year to mortgage giants Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE).  It doesn’t take an accounting degree to figure out that, by having their loans government guaranteed, management had no incentive to follow cautious lending practices.

After all, why should they?  When a base salary is certain, a bonus is tied to sales or growth, and there are no consequences for bad results, why not take on more risk and just shoot for the moon?  If you hit it out of the park, your bonus swells.  If you strike out – even so badly that you even make “Mighty Casey” look like Henry Aaron – and you lose really badly and your company loses big, even to the point of bankruptcy or outright collapse, you still get your base salary.

Where’s the incentive to manage your risks?

In the case of a bank, there’s no incentive to be careful with depositor assets when the Federal Deposit Insurance Corp. (FDIC) is your bottomless backstop.

Clearly, the government does not always know better.

And that brings us back to Goldman Sachs.

Goldman Sachs: Unplugged, Unfettered, Unregulated

In the debate about regulating the commodities markets, I come down on the side of Goldman, reasoning that a free market – left unfettered – knows best, since the forces of supply and demand will ultimately price things fairly.

Inside an economic system as highly developed as that of the United States, everything operates at a level of complexity that no single person – let alone a government bureaucracy – can operate, or even fine tune. And as soon as anyone begins to tinker with it, there are always going to be unintended consequences.  Which leads us back to the question of regulation.

According to Prof. Kent Moors, a noted global oil consultant, only a small portion of a commodity’s price, at any given point in time, can be attributed to speculators.  He believes that speculators they are necessary to provide liquidity and that, in the end, the benefits speculators provide cancel out any of the negatives often ascribed to their marketplace activities.

If regulations with real “teeth” – in this case, position limits on energy futures – are actually put in place, U.S. financial leaders will end up playing the economic equivalent of Whac-A-Mole – an unwinnable game, and a dangerous one, at that.

While the final result is difficult – if not impossible – to picture, here’s my best guess: The financially lucrative, economically prestigious and strategically important commodities-trading business won’t fold up and disappear – it will just move to another country, where it’s better treated, and even nurtured.
Perhaps it will end up in Asia, as has been the case with so many other important businesses during the past couple of decades.  And that, once again, will end up costing America jobs – these jobs high-paying and prestigious – at the worst possible juncture.

According to commodities guru Jim Rogers – who is frequently quoted here in Money Morning – “the three commodity exchanges in China are booming.  Dalian trades more soybean contracts than Chicago does already, and that’s with a blocked currency [and] a closed market.  Can you imagine what’s going to happen if and when they open that market up to foreigners?  It’s going to explode.”

So as you think about “big bad trading firms” such as Goldman Sachs, and commodities speculators, remember the necessary role they play.  And realize that restrictive regulations will end up being bad for consumers, investors, and the same free markets we should be defending.

Source: How Over-Regulating Goldman Sachs Will Lead to Higher Oil and Commodity Prices