The world supply of oil is flattening out.  Readers may not know this, but the United States today still produce enough oil to satisfy approximately 40% of total domestic demand.  The United States also had 22.7 billion barrels of proved oil reserves as of January 1, 2004, eleventh highest in the world. According to the Energy Information Administration (EIA), the United States produced around 7.9 million barrels per day during 2003.  This is down sharply from the 10.6 million barrels averaged in 1985.  The peak of domestic oil supply occurred sometime during the 1970s.  Today, total domestic production is at 50-year lows - and still falling.
While Saudi Arabia (the world's top exporter and contains 25% of the world's reported reserves) has claimed that there are and will be no supply problems for the next few decades, they have not been transparent with their reserves data.  According to Simmons & Company International, five to seven key fields in Saudi Arabia produce 90% to 95% of its total oil output - all but two fields are extremely old - with the last major find reported in 1968.  The last publicized reserves data was in 1975 - when Saudi Aramco was still managed by Exxon, Mobil, Chevron and Texaco.  In that report, the world's best experts determined that all the key fields at that time contained 108 billion barrels of oil in recoverable reserves.  If this holds true, then the peak of supply in Saudi Arabia will come soon.  Moreover, if the  report is correct, then there is really no "plan B" (unlike during the 1970s when the center of power shifted from the Texas Railroad Commission to OPEC due to the peaking of supply in the United States) - crude oil prices will soar.
The "last frontier" for the production of oil (namely the North Sea, Siberia, and Alaska) is now aging.  Most companies are now struggling in order to even maintain their current production levels.
World oil demand continues to grow.  Oil demand in the early 1990s stayed relatively flat (at around 66 to 68 million barrels per day) but over the next ten years to today, world oil demand increased 14 million barrels per day.  Today, total world oil demand is greater than 82 million barrels per day.  The energy "experts" who in the early 1990s predicted a flattening of oil demand growth and who wrote off demand growth in developing countries were dead wrong.
No new refineries have been built in the United States for the past two decades, even as refineries have been closing every year during that same time period.  Refining capacity from 1981 to the mid 1990s also dropped drastically (this author estimates a drop of approximately 6 million barrels per day in refining capacity during that time period).  Since 1994, however, an expansion in refining capacity at existing refineries has contributed to an increase in refining capacity from 15.0 million barrels per day to 16.7 million barrels per day (as of today).  Despite this expansion, however, domestic refining capacity is still stretched to the limit, as utilization at U.S. refineries is now averaging nearly 90% -- leaving no cushion room if something unforeseen happens.

There are currently three factors at work which should contribute to a continued increase in the world oil price - the maturing of supply, growing demand, and the lack of a cushion in refining capacity and low inventories.  The "culprit" has usually been labeled as China, but it is interesting to note that the United States has had virtually no domestic energy policy (in terms of conservation and encouraging the development of alternative fuels) for the last twenty-something years.  China demand, however, has soared over the last few years.  It is now the second biggest oil consumer, having just surpassed Japan for the title.  Demand for oil in China has more than doubled over the last 10 years (to today's 6 million barrels per day), and this amazing increase is projected to continue, especially given the fact that oil demand in China is still a lowly 2 barrels per person per year (compared to 25 barrels per person here in the United States).  Furthermore, it is interesting to note that the number of cars in China only totaled 700,000 as late as 1993 and 1.8 million as late as 2001.  Today, the number of cars in China totaled more than 7 million - and this number could potentially have been much higher if not for the Chinese government intervention in limiting the number of cars that could be sold and driven each year.  Now the most scary part: Current oil demand in India is only 0.7 barrels per person per year - given this fact, oil demand in India could potentially explode over the next decade - barring a huge worldwide economic recession or depression.
I believe my readers should be made aware of the current energy supply/demand situation.  Given the above, what is the best course of action for the average American?  How about the best course of action if you were the head of a motor company like GM or an airline pilot employed by a legacy airline like Delta?  How about the best course of action for a mutual fund manager or a commodity fund manager?  Since there are no easy solutions, there should be no easy answers either.  In the short-run (three to five years), Americans will have to pay up if we want to drive gas-guzzling SUVs, and legacy airlines like Delta will have to continue to cut costs by probably further slashing labor costs as their first priority.  A further improvement in extraction technology should help, but the serious development of alternative fuels will have to start now.  I also believe that the next serious decline will be induced by a combination of an "oil shock" and a rise in interest rates.  Readers may recall the relative strength chart that I developed in my August 15th commentary showing the AMEX Oil Index vs. the S&P 500 and the huge potential inverse heads and shoulders pattern in that chart.  For now, the relative strength line should bounce around the neckline (the line drawn on that chart) - possibly even for a few years - but once the relative strength line convincingly breaks above the neckline, crude oil prices could rise to $80 or even $100 a barrel.  I sure hope that my readers would not be taken by surprise if gas prices at the pump soars to $4.00 a gallon five to six years from now.
Finally, I want to pose to my readers the following question: Have you taken the time out to learn more about your psychological makeup and how it has affected your investment or trading decisions?  What type of person are you when it comes to the market?  Are you a so-called buy-and-holder, a swing trader, or a day trader?  An independent thinker, a contrarian, a momentum investor or merely a follower?  I am asking you these questions because of my following considerations:

This author believes that we are currently in a secular bear market in domestic common stocks.  While I believe that this current rally still have more room to go, I believe that a cyclical bear market will emerge in due time - this upcoming cyclical bear market may even take us back or below the lows that we hit during October 2002.  If this is true, then a buy-and-hold portfolio would definitely not work - unless you were in natural resources or precious metals mining stocks.
When this cyclical bull market tops out, all your friends, relatives, and the popular media will be telling you to buy more or to hold your common stocks.  The bears and all bearish thoughts will be ostracized and frowned upon.  This has happened in every bull market in everything in all human history.  If you are in cash now, would you be able to remain in cash when the top finally comes or will you be unable to resist and buy in because you are afraid of "the train leaving the station without you," so to speak?
Most people are inherently not good day traders or even swing traders.  To be good in even the latter, you need a huge amount of dedication and discipline.

Investing or trading has always been dominated by emotions and always will be.  My thinking in starting www.marketthoughts.com has always been that that if I can get my readers to buy in now, it will be a much easier decision for them to sell and hold cash once the DJIA reaches 11,000 or 12,000 or so - as opposed to being in cash and staying out for the rest of this secular bear market.  99% of Americans are just not disciplined or dedicated enough to stay in cash during a secular bear market - not to mention staying in cash during the entirety of a secular bear market and buying and holding common stocks during the entirety of a subsequent secular bull market. The average human psyche is just not capable of doing this.  Because of this, I sincerely believe that success in the stock market (for most people) during the next five to ten years would involve catching the swings at the right or near-right times.  For readers who just cannot resist, I am also going to continue to recommend some common stocks at opportune times, but in no way should my readers take my recommendations as gospel and in no way should my readers put all their eggs in one basket.  If you are a person who can stay in cash for the next ten years and wait until the Dow Industrials has a P/E below 10 and a dividend yield of over 5%, then more power to you - you are either already rich who have no need to make money in the market anyway or you are a very disciplined and independent-thinking person.  Most Americans just cannot do that - but I am here to help.