Oil… The Global Currency of Choice

Recent calls by the Chinese government and other nations for a single global currency send shivers down the spines of dollar bulls at futures exchanges in New York and Chicago. The greenback has always been considered the world’s reserve currency, namely because the U.S. economy is so much larger than any other economy. Japan’s economy is now the third largest, being surpassed by China, and California by itself ranks number six in the world, just to put things in perspective.

I think you get the picture when I say that converting to a world currency with visions of Li Kegiang, Vladimir Putin or George Soros (he’d like to think so) on the currency seems like an idea from outer space, but I’ve got this feeling, like a pit in my stomach, that the powers-that-be within the United Nations will keep pushing for this egalitarian worldview, where corrupt wealthy nations subsidize poorer nations, without accountability for their actions.

Well, with that nightmare of a thought, along with the prospect of inflation spiking a year or two out because of the skyrocketing debt and explosion in the money supply, there is good reason to believe the dollar will lose considerable value. Whether the United Nations is aware of it or not, we already have a world currency. It’s called crude oil, and it is where more emphasis is being placed by currency traders every day.

Think about it. Crude oil is a depleting asset in a world that consumes more than a million barrels per day. Most of the oil deposits in the world are in geopolitical hotbeds where events can destabilize world trade overnight. Emerging markets, though in a current slowdown, are in the long run industrializing, pushing up net demand. And oil is seen as an excellent hedge against inflation.

Many would argue that gold is a better inflation hedge, and it may well be — up to a point — but gold is much less important in its application to how the world functions. We can do without most of the gold production in the world. In fact, most of the gold that has ever been mined since the beginning of time is still here in some form today, whereas oil gets burned up as a daily necessity to fuel the global economy.

Crude oil far outweighs all other commodities in terms of priority as to what currency traders view as a viable alternative asset to own as a geopolitical hedge. The leaders of most industrialized nations are in a race to see who can devalue their currency the fastest so as to hopefully jumpstart exports. So when the U.S. dollar, the Japanese yen, the euro, the Chinese yuan, the Aussie dollar, the Russian ruble, the Brazilian real and the English pound sterling are all trending lower, oil is the contra-play on crumbling currencies and is why I believe oil prices will eventually recover.

The world is awash in crude inventory at the present, with each weekly inventory report showing no signs of a major drawdown — at least not yet. At first glance, one would think that crude prices should hold the $40 per barrel price level, especially when taking into account the steady deterioration of global currencies.

Wars are fought over the stuff, and until other fuels can replace it, more wars will be fought over it. Iran, Nigeria, Iraq, Russia, Mexico and Venezuela are examples of oil-producing nations where a lot can go wrong in a hurry for the oil markets, sending prices skyward. Imagine two or three situations arising simultaneously, and you can see why I view crude oil as the global currency of choice and why investors need to put together a shortlist of blue-chip oil stocks that have been crushed in the recent sell-off in the energy sector, where the best names are now sporting dividend yields of 5-7%.

If anyone thinks for a minute that, when the last American solider leaves the Iraqi oil fields, it doesn’t become a full-blown violent free-for-all is either in denial, naïve or just ignorant. It’s the Middle East, for crying out loud, and when the United States pulls out, you can expect that all the rats and roaches, like ISIS, will again destabilize the region.

Black gold, Texas tea — it’s where we want a portion of our high-yield assets working hard for us, but at the right price and at the right time. I believe the price of crude will easily top $60 per barrel again in the next couple of years, due to a number of inherent risks. And we will see oil assets rise sharply in value when the price spikes again. For the shortlist I was noting above, I would include British Petroleum (BP), yielding 7.2%; Chevron (CVX), yielding 5.32%; and Royal Dutch Shell Class B (RDS.B), with a yield of 7.15%.

In case you missed it, I encourage you to read my e-letter column from last week which explains covered calls. I also invite you to comment in the space provided below.