How much further can commodities run?

Our calvalcade of Oil continues. I like the approach of the newsletter "Sound Advice" on the commodity boom, as quoted by Peter Brimelow:

"Beyond the mismatch between supply and demand, we think commodities have further to go simply because so many persist in treating ever higher prices as a transient phenomenon.

You’ll remember Alan Greenspan always pooh-poohed the persistence of higher energy prices — until he acknowledged them. Today, 20 years of declining energy prices have convinced most investors that rocketing gold an silver prices are also a transient aberration, and must collapse.

If we are correct that gold, silver (and all commodities) fell to ridiculous levels at the start of the new millennium primarily because the world came to forget inflation, it makes sense to us that as inflation stirs today, commodity prices should jump. We’re not picking any particular price, just noting profitable pessimism."

That thesis — over 20 years of declining energy prices lulling investors into a stupor — seems to be built into the blase attitude regarding recent Oil prices. Yesterday, the price of crude rose to over $74 intraday on
geopolitical tensions and suppliers struggling to keep up with demand. 

We can see support for that "investors are lulled" in the following graph, via Chart of the Day:

20060421

The attitude seems to be "This too will pass." We have had too good for too long, and apparently taken it for granted. Hence, why high oil prices may be looked at as mere transitory phenomenon.

And with oil prices rising, Iran escalating, and Iraq seemingly decaying before our eyes, its no surprise that (despite the big inventory build), gasoline prices are up too. COTD notes "over the last seven weeks, the average US price for a gallon of unleaded has shot up 52 cents per gallon. When adjusted for inflation, gasoline prices are not far off the inflation-adjusted peak of $3.18 that occurred back in 1981."

This won’t matter — until it does.

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UPDATE April 21, 2006 2:26pm

I said this won’t matter until it does. Well, it looks like it just did. Oil at over $75 a barrel, and it tanked the market — Dow went from up $40 to down 25, witht he Nasdaq off more than 26 (1% ).

>

Sources:
Petrobulls’ profitable pessimism
Peter Brimelow
MarketWatch, 3:31 PM ET Apr 20, 2006
http://www.marketwatch.com/News/Story/Story.aspx?
column=Peter+Brimelow&siteid=mktw&dist=

Gasoline prices (inflation-adjusted)
Chart of the Day
Apr 21, 2006
http://www.chartoftheday.com/20060421.htm?A

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