By John Dessauer
Investor's World

       A worry by some is that we could be heading for an oil-induced recession. Already, consumers are changing their habits due to the high cost of gas. Filling a pickup truck or large SUV can cost over $60. That makes a big dent in consumer budgets. Discount retailers, like Costco and Dollar General, say their profits are hurt by cautious shoppers. Many Americans are changing travel plans - to shorter vacations, carpooling and avoiding the big gas guzzlers. The number of people using public transportation is rising in several states.
        In the short run, high oil prices act like a tax on consumers. Since consumers are two-thirds of the economy, high oil is slowing growth. But don't be fooled by the "3.1% real growth" in the opening quarter. In current dollars, growth actually increased, but high oil prices pushed up the deflator and lowered the real growth number. Stable to lower oil will do the opposite this quarter.
        Last month, oil soared to $58 and fell back to $50 before rallying to $55. What if oil shoots to $60, $70 or even $80? Could Goldman Sachs be right when they said we are at the start of an oil spike that could take us to $105 before market forces reach a supply-demand balance? I believe we are seeing a massive bubble in the oil market, one that will deflate soon, bringing oil back to earth at $35 a barrel. I am not alone. My friend Steve Forbes says, "The oil bubble is about to burst. Don't be surprised to see oil at $30 to $35 a barrel within 12 months." Other oil analysts are making similar forecasts. More analysts admit that the oil market now looks bubbly.
        Meanwhile, billions of dollars in pension funds and university endowments have moved into oil-related investments as a long-term bet on costlier oil. Along with hedge fund speculation, this has inflated the oil bubble. Some argue that since the pension and endowment funds are longer-term investors, the oil investors, the oil bubble won't burst. But today's long-term investor can be tomorrow's panic seller. Every conservative fund that bought tech stocks in 1999 said they were long-term investors, but when that bubble burst, they sold their tech stocks.
        I doubt that oil can go much higher, except on a very temporary basis. U.S. consumers are making adjustments, which will make a dent, albeit small, in demand. But Chinese demand has slowed a lot, from 20.8% in 2004 to a current rate of 5.4%. At the same time, OPEC is raising production and will raise it again if prices stay well above $50.
        Mideast terrorist attacks have decline sharply. And Marathon Oil had a successful drilling off the coast of Angola. Here at home, it looks like we will finally drill in ANWR in Alaska to see if oil is there. Even if the doomsayers are right and we don't find any major new oil fields, current trends indicate that market fundamentals won't sustain a much higher oil price this year or next. And what if we find major new oil sources, as in the 1980s?
        The demand forecasts, eve in sophisticated models (such as the Goldman Sachs report), rely on China pushing oil prices higher. I have no idea why intelligent people make that assumption. Disposable per capita personal income in China's richest areas is only about $355 a year, based on first-quarter data. In rural areas, annual income is only $117 per person. The Chinese are very poor. If we are seeing an impact in America, it is obvious the Chinese will feel even more strain.
        It is inevitable that economic growth will slow in China. They are running short of electricity, a basic need. Because of rapid development, there were blackouts from electricity shortages in 24 of China's 27 provinces in 2004. All four of China's biggest cities suffered blackouts last year. It isn't possible to increase electricity-generating capacity quickly. Shortages of electricity tell me China's growth rate will slow. In addition, Beijing wants to cool the economy and seems ready to raise rates again. Last October, Beijing raised a key lending rate to 5.58%. It should rise above 6% this year. Rising interest rates, electricity shortages and Beijing's desire for slower growth tell me China's growth rate will fall from 9.5% to maybe 7%. That alone will bring oil prices down. Lower oil, based on China alone, seems like a very good bet.
       Every time I read forecasts of significantly higher oil prices based on China's growth, I wonder if the analyst has ever been to China in winter. My wife, Marilynn, and I have spent a lot of time in China in winter. We have been in big and small cities, as well as rural villages. We Americans can't stand cold weather. We need heat. But the Chinese can live with cold. They go to work in February in stone-walled factories that have no heat. Inside temperatures can be in the 20s or 30s. They work bundled up with gloves that have finger holes for delicate work. They go to schools that have no heat. Their only heat at home is a coal burning stove or a hand-warmer.
       The Chinese are struggling to improve their economy and raise their standard of living. They are doing a remarkable job but are still poor, with a long way to go. They will make any sacrifice to keep their economy growing. I am sure they will live without heat, endure electricity shortages and go back to riding bicycles, if need be. They will make sure their economy has the energy it needs by making personal sacrifices that few other nations would consider. It is ridiculous to think that Chinese will pay exorbitant prices for oil.
       Editor's Note: John Dessauer's is editor of Investor's World, 9420 Key West Ave., Rockville, MD 20850, 1 year, 12 issues, $249. John Dessauer is America's foremost authority on global investing, using proven value-investing techniques and principles. From 1974 to 1978, he was Citicorp's chief investment officer in Europe, in Zurich. In 1980, he launched Dessaur's Journal (now Investor's World). Mr. Dessauer also speaks at major investment conferences around the world. Visit the web site at www.dessauerinvestorsworld.com.