This from Investment U:

When I started driving, gasoline still contained lead and regular was selling for 29 cents a gallon. My father remembers 10 cents a gallon.

While it’s highly unlikely we’ll ever see those prices again, you could see gasoline below $1 a gallon, and it just might hit $0.75 a gallon. It might not be in time for Christmas, but the Easter Bunny might leave it in your Easter Basket.

That’s not just wishful thinking on my part: The International Energy Agency’s (IEA) most recent monthly forecast (released just yesterday) indicates year-over-year global oil demand will shrink in 2008 for the first time in the last 25 years.

Why? Developed nations are skidding into recession and emerging nations have hit the brake pedal on economic growth. And when the United States – by far the largest oil user in the world – cuts back, the ripple effect is devastating to producers.

Oil-laden tankers are backed up at U.S. oil unloading terminals, waiting to unload. At the same time, the nation’s most recent oil inventory report shows that storage tanks are brimming with crude oil, gasoline and heating oil. But that doesn’t mean there’s no money to be made here. In fact there are a number of opportunities to profit in oil right now.

Global Oil Demand – OPEC Cuts Production

OPEC is scrambling to cut production of oil. Chances are good that they won’t cut far enough or fast enough. Supply destruction will continue to lag demand destruction for the foreseeable future. And that sets the stage for a continued softening of pump prices as well as heating oil.

And then, of course, there will be the cheaters: You can expect rogues like Venezuela and Iran to continue to pump and sell as much oil as they can possibly suck out of the ground, since there is little production accounting oversight on the part of OPEC. It was a big problem the last time we had an oil crisis back in the 1970s.

How low could it go? Merrill Lynch is on record predicting $25 a barrel. It has a fairly good chance to go even lower, before supply cuts catch up with global demand slowdown, which is still occurring.

How long will it stay low? It’s hard to say, but any increase in global economic growth would provide a boost in demand and a subsequent rise in the price of oil. Current economic forecasts, while mixed, don’t show much of an increase until the latter half of 2009 – or even early 2010.

For now, though, demand is still falling, with October alone registering a steep 8.3% decline in crude prices. Simple math says that if crude prices are cut in half from here, so, too, could the price at the pump. Car dealers with rows of gas guzzling SUVs on their lots would be jumping for joy.

But just like $147 a barrel was artificially high, so, too, would be $20 a barrel on the low side. As prices begin to stabilize in late 2009 or early 2010, oil will likely return to a trading range of $80 to $100 a barrel. It would begin to slowly rise from there as the global economy climbs out of recession and economic growth rekindles.

2 Places to Put Your Gas-Savings Cash

Naturally, there are a few ways to put your growing mound of gas-saving cash to work:

• Shares of Autonation, Inc. (NYSE:AN), one of the largest car dealer networks in the country, are off 50% from their 52-week highs. Any sustained reduction in the price of gasoline will likely have a positive impact on car sales, particularly in the hard-to-move segments of the market like low-mileage SUVs, vans and pickups.
• A more direct way to play this would be to pick up a few shares of Valero Energy Corp. (NYSE:VLO) that’s been bouncing along in a tight trading range of $15 to $20 a share since mid-October. Its profits are tied directly to the spread between the price of crude oil and the price of refined products (known as the crack spread). A widening spread bodes well for refiners like Valero.

While I’m not sure I’d be running out to buy a big SUV anytime soon, it’ll certainly be easier on the wallet when pulling up to the pump. But don’t get too comfortable with cheap gasoline. Prices will eventually revert to their natural mean. And in the case of oil, it will eventually be higher.

Source: Global Oil Demand: Are You Ready for Gasoline Under a Buck a Gallon?

The book sold more than 100,000 copies in hardback. Some three decades later, a dear reader sent me a copy of the 1971 paperback when I ran The Daily Reckoning’s desk here in London.

“You guys…you’re just saying the same as Harry Browne did 30 years ago! What’s new?” he wrote in an e-mail. And on first reading, Harry Browne’s book confirmed the jibe.

On rereading it on the train between Waterloo and Hammersmith this week, the cold fact stands out colder still.

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“In the short run,” wrote Browne — variously an investment adviser, newsletter tipster, and U.S. presidential candidate for the Libertarian Party — “inflation seems to be producing a ‘boom.’ Prosperity appears to hit the economy when the government pumps new inflationary money into circulation…

“The so-called gains from inflation are always spectacular, while the losses are generally hidden from view… But the truth was that nothing had actually changed. We still had the same amount of resources to work with; we still had the same general level of technical competence. Inflation deceived us into redistributing our resources temporarily toward more glamorous industries.”

What’s wrong with that? Demand for granite countertops grew some 15% per year — worldwide — between 2000-2006, according to Dimension Stone Advocate News. More glamorous still, demand for marble rose by 12% annually.

Come September 2007, research from the Freedonia Group (costing $4,500 for the full report) said sales of kitchen and bathroom countertops in the United States alone would rise to 540 million square feet by 2011. That would fetch some $14 billion for “natural and engineered stone” manufacturers in Italy, Spain, China, and Brazil.

OK, so nobody’s food got any tastier simply because they chopped onions on new marble plinths. And we all ate fewer meals at home anyway. By August ‘06, consumers in Britain were spending more on dining out than they spent on eating at home; across the Atlantic, the restaurant and fast-food business employs 13 million staff — one in 12 of the work force!

But what’s not to love about a little glamour each day?

“Let’s take a hypothetical engineer,” wrote Harry Browne back in 1970, “working in an aerospace company… One day, his boss calls him into his office to tell him some good news. ‘Bumstead,’ he says, ‘the company has just received a new government contract. That means we can now give you a raise. Your take-home pay is going up by $100 per month.’

“[Bumstead] rushes home, tells his wife, and they spend all of four minutes deciding what to do with the raise. They rush out and buy a swimming pool, probably by obligating themselves for the $100 per month the new raise is bringing him.”

Here in the 21st century — where $100 hardly buys a tankful of gas in the U.S., let alone here in the U.K. — the total number of swimming pools for U.S. homeowners now stands around 8.6 million, by one industry estimate. The pool maintenance and equipment market, having grown by 8% per year since 2002, approached annual sales of $3 billion in 2006.

“There’s only one problem,” as Browne noted. “Prices are rushing upward to meet the increased paper money supply caused by inflation — the same inflation that deceived Bumstead into thinking he’d received a raise.”

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Make 10 Times Your Money as the Dollar Falls

There are two classic hedges to play that move up every time the dollar falls. The dollar has been losing value rapidly this decade, and Washington seems bent on taking it further down.

That means that we can expect even more inflation in the coming months and years. But these two plays could be the key to financial survival. Click here to find out what plays to make…

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That’s why, just as in 1970, Reuters reported, “April Personal Spending up as Expected.” The Commerce Department said U.S. consumers spent 0.2% more last month than they did in March. But after adjusting for higher prices, real consumer spending was unchanged — despite the impending arrival of economic stimulus checks, set to total $106.7 billion for 2008.

Q: What are your thoughts on the drillers? – J.D.

A: That’s a pretty broad question, because there are several different kinds of drillers. However, high oil prices are good for all of them…

Natural gas, for example, is the commodity of the minute. The price of natural gas rose 113% since its low of $5.25 in September 2007. That’s important because 79% of the rigs drilling in the U.S. are looking for natural gas, not oil.

High natural gas prices mean strong demand for drill rigs. More demand means higher day-rates for the rigs. That means it’s a great time to own drillers. But is it a great time to buy?

It is… if you can find ones that aren’t making new highs already. Helmerich & Payne (HP), to pick one natural gas driller, is hitting all-time highs right now. You’re paying 15 times earnings and taking on the risk of the natural gas price falling.

I wouldn’t buy HP right now. But I do think there are other opportunities. I’m researching a couple for my S&A Oil Report subscribers right now.

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Q: What do you think of all the protests against high gas prices? – R.T.

A: In my introductory biology class at Penn State, my professor told us a story…

Some years ago, in central Pennsylvania, there was an abundance of rain, and the clover grew thick. Lots of clover meant the rabbits had plenty to eat. Happy rabbits did what rabbits do… and pretty soon, the place was overrun with rabbits.

Lots of rabbits meant the foxes had plenty to eat. They got fat and sleek. They also made lots of baby foxes. But after a while, those rabbits ate all the extra clover. That meant they weren’t making more rabbits quite as fast as before. Fewer bunnies meant more hungry foxes.

Eventually some of those foxes starved.

In terms of oil, we’ve run out of clover – big, easy-to-find, easy-to-pump deposits. So refining companies (the rabbits in our story) are hurting. There is too much competition for too few resources. Now the airlines, truckers, and SUV drivers (our foxes) are getting hungry.

The world’s demand for fuel is catching up with an industry that really hasn’t changed much since the 1970s. Oil and gas prices must respond to market forces (and go up) to make us change. The protests are simply the whimpers of starving foxes.

Note: I got loads of responses to my request for more gold funds…

The big one you mentioned was the Central Fund of Canada (CEF). This $1.5 billion fund holds gold and silver bullion. Currently, shares trade nearly 9% above the value of the fund’s assets. That means you’re paying $90 more than you need to on every $1,000 you invest in the stock.

That’s fairly unusual among gold funds. The largest of them all, GLD, trades at a 0.42% premium to its assets. IAU trades at a 0.16% discount to its net asset value. If you are just trying to buy gold, find a fund that is liquid and trades close to its net asset value.

Another mixed fund is the Gabelli Global Gold, Natural Resources, and Income trust (GGN). The fund focuses on global natural resource and mining stocks. So it isn’t a pure play on gold. This fund’s largest holding is actually Petrobras, the Brazilian oil company. It’s trading at nearly an 8.5% discount to the value of its assets and it uses creative financial strategies (selling covered calls) to generate a 5.8% yield.

Finally, you’ve got Deutsche Bank’s Double Short (DZZ) and Double Long (DGP) Exchange Traded Notes. These two funds use gold futures and treasury notes to return twice the fall or twice the rise of gold, respectively. These funds are extremely risky, since they double the performance of the metal. You shouldn’t ever invest more money than you can afford to lose into this type of fund.

Good investing,

Matt

P.S. If you’ve got a question about commodities or commodity producers, shoot me an e-mail. (Bear in mind, I can’t give out personalized investment advice.) I answer reader questions every Wednesday in Growth Stock Wire.

Source: The Commodity Investor Q&A Wednesday, June 4, 2008