My little brother dropped in to visit last weekend. It was his first trip to Northern Nevada, so I gave him the full Monty. To balance out the downtown Reno blackjack-and-greasy spoon experience, we had Sunday brunch at the Lone Eagle Grill.

The Lone Eagle is a chalet-inspired lodge and restaurant on the north shore of Lake Tahoe. (I used to be a two-minute drive from the place; now it’s about 25 minutes.) Everything in the Lone Eagle is pine and cedar and crystal, with giant stone fireplaces and exposed wooden beams in the 20-foot high ceilings. One might call it rustic opulence.

On this day, Lake Tahoe was particularly gorgeous, in full view from the floor-to-ceiling windows on our right. The boats were out, sails unfurled; the water was a deep serene blue as far as the eye could see. An outline of the distant Sierra Nevadas completed the picture, the last of the winter snow pack still visible above the tree line.

An inspired scene such as this (complete with lobster, champagne and tiramisu) invites many thoughts. One wouldn’t, however, expect to be pondering the price of oil in such a place.

And yet that was the topic du jour for a well-to-do foursome seated near our table. All looked comfortably retired, with the casual air of Tahoe locals. With my brother off roaming in search of the dessert table, I couldn’t help overhearing their banter.

“It’s just crazy to think of oil over $100,” one snowy-haired gentleman said. “It will be interesting to see what happens when it goes to $150.”

“Yes,” the woman across from him agreed. “And my gosh, just think of what’s happening in the Middle East. With the presidential election coming up, there’s no telling what could happen next.”

They went on in that vein for another minute or two, which I found fascinating. Not so much for the content of the conversation, but rather the time, the place and the participants.

It’s long been the case that “normal” people don’t talk about this kind of thing. Big-picture thinking has always been something of a quirky pursuit. When someone brought up the gold standard in the poker room a few weeks ago, I thought it was a one-off… But if two data points make a trend, perhaps the public is waking up.

I had some further thoughts on the implications of $100 oil — what it means, where to look for profit, and so on — but Adam Lass beat me to the punch in his excellent piece below.

Adam does a great job pointing out the folly of the pundits who rejoice in oil’s short-term pullback (a topic we touched on recently, but which benefits from further exploration). Better still, Adam lays out the case for why $100 oil “changes everything.” Take a look.

Warm Regards,

JL

$100 Oil Still Changes Everything

by Adam Lass, Senior Editor, WaveStrength Options Weekly

“Oil is falling, oil is falling!”

So what?

Oh, it’s true enough by and of itself. Over the past few trading sessions, we have indeed seen crude oil futures fall some $11 off the all-time high of $135.09 a barrel set a fortnight back.

It’s almost comical how the all the Wall Street analysts and their talking-head stooges are tripping over each other to point out this new record low. Why, this is the lowest price since May 15!

Don’t Celebrate Just Yet…

But don’t break out that bottle of cold duck you’ve had stashed in the back of the company fridge just yet. Because in this case, “down” is definitely a relative concept. And the reasons for even this modest drop may be nothing to cheer about.

Two years back, if a pundit wanted to throw out a real bomb, he or she would predict $100 oil. Everyone would gasp at the sheer audacity or mere stupidity of such a claim. Didn’t they know that the price supply and price demand curves would prevent that from ever happening?

You see, there are several things that are supposed to happen when oil prices climb. First of all, the supply of oil magically increases.

Marginal Oil Goes Mainstream

In reality, it isn’t quite that simple. Much trumpeted “alternative” oil sources aren’t quite as magical as commonly assumed. Different crude oil sources have radically different prices associated with extracting them and making use of them.

When a fresh field is so ripe that the oil simply oozes up out of the ground, the cost to deliver to market is pretty darned cheap. Work that field’s reserves down for 20 years or so, and now you must (at great cost) pump in water and steam in order to get half of what you used to scoop up with a child’s sand bucket. And when those easy to find reserves are clapped out, you must look farther and farther afield to find ever more expensive fresh supplies.

Modern geophysical science can guide us to more raw oil then ever before. So after a fashion, the supply appears theoretically elastic (at least within our lifetimes). Marginal crude that would have been unprofitable to fetch out when the cost of crude was a mere $50 a barrel, becomes intriguing at $65 and damned attractive at $75.

The moment diesel fuel crested $3/gallon trucking simply could not compete. This trend will only accelerate now that diesel prices have passed the $4 mark.

It’s no shock that mega-investors like Buffett and Soros are reinventing themselves as modern-day rail barons. You should, too:

• Buy CSX (CSX: NYSE)
• Sell Con-Way Frt. (CNW: NYSE)

Adam Lass

Senior Editor, WaveStrength Options Weekly

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Source: Trucking Dies & Railroads Fly When Diesel Fuel Crests $3.00