SC6 Economics Lesson #2: Oil Jumps $25 In a Day From the Financial Crisis. Here's Why.

OK Students, Class Is In Session Again.....

In case you missed it today, the price of a barrel of oil jumped a record $25 a barrel IN ONE DAY today, before settling at at $120 a barrel, up $16 from the opening price. The reasons may be some of the strangest you've ever heard of, so we'll try to briefly explain them today, and to calm your fears that the sky isn't falling... I said I'll try, but I may not succeed.

The main cause of oil prices today had nothing to with supply, but with the impending financial package to make the banks liquid again. I know, "Mike , WTF ??" Okay, follow me here closely. Oil is tied to the strength of the dollar. Why? Because it's a tangible item, not just a piece of paper like a bond or stock. When the Federal Government has to spend $700 Billion to pay off the banks' debt, they will end up borrowing it from China, Japan and Europe. This makes the dollar weaker compared to other currencies, and it's value drops. Therefore investors will shift their buying from paper items to tangible items. It's not just oil - gold went up $44 today too....

There were other factors as well. Today was the last day of the October oil supplies, so to get the oil for October, buyers paid a premium. November, for example, was selling only at $108 a barrel. I'd wait the extra day and save some cash....

So, are we heading back to $4 a gallon gas prices again. I don't think so. Supplies of oil are fine, and the only reason we are paying what we are for gas right now is the damage to the refineries that turn oil into gas from Hurricanes Ike and Gustav. That should be going back down in another week or two. otherwise, we'd be paying about $3 gallon again. With the current market boo-boo, I'd think it'll drop to maybe $3.25 by October. But hey, I'm not an expert - I just have a piece of paper on my wall.....

There is no doubt that the impending package from the Treasury Department is scaring the shit out of some investors, particularly those who view the value of the dollar as the be all and end all of economic security. Maybe they're right, but we are treading through Virgin Territory here. Time will tell. What do you guys think??

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