Profit from Peak Oil's Bumpy Plateau

As we enter the new year, it's time for everyone to come out of the woodwork and make their predictions for 2011.  In the past two weeks, there's been a cacophony of expert opinions predicting higher oil prices this coming year.  JPMorgan Chase and Bank of America Merrill Lynch both predict $100/bbl oil.  The ex-CEO of Shell predicts $5 gasoline.  These predictions are backed up on Wall Street with oil futures recently shifting from contango to backwardation - signaling tight physical supplies of oil.  Many experts are stating that we've passed the peak of world oil production at least two years ago and that 2011 could become a repeat of 2008 for oil prices as we trudge through the "Bumpy Plateau".

If the US economy maintains its brisk recovery in 2011 and the Chinese economy continues to increase its oil consumption at a record pace, the quickly-rising demand for oil will run straight into the wall of peak oil production in 2011, causing the price of oil to spike well above $100/bbl, and leading to a demand-destruction-induced double-dip recession.

The world economy can handle slow, steady increases in the price of oil, but fast spikes in the price of oil can have devastating consequences on the economy.  As I mentioned in my demand destruction post, there's a possibility that this post-peak-oil enviornment will lead to a series of oil price spikes followed by market crashes.  As these spikes and crashes hit, the world oil production swings along with the price of oil, masking the true worldwide oil peak - this is referred to as the "Bumpy Plateau".   As an investor, you should be looking to protect yourself and profit from these oil price spikes and market crashes during the bumpy plateau period.

The Peak Oil Bumpy Plateau

The way to profit from oil price spikes and market crashes during the "bumpy plateau" is as follows:
Step 1: Hold the Peak Oil Proof Portfolio now.
Step 2: "Sell High": As the oil shock "alarm bells" go off, short the market, sell your holdings, put the proceeds into crash-resistant holdings.
Step 3: "Buy Low": Use limit orders to buy the Peak Oil Proof Portfolio and high growth stocks at their lows following the market crash.

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Step 1: Hold the Peak Oil Proof Portfolio now.

The Peak Oil Proof Portfolio is designed to diversify your holdings across asset classes, industries and countries that are best positioned to profit from a post-peak-oil world.

The Peak Oil Proof Portfolio has been beating the S&P500 for the past few months, showing the strength of these holdings.  This portfolio will allow you to profit from the current market and will limit the damage to your portfolio of a market crash should you fail to get the timing right.

Step 2: "Sell High": As the oil shock "alarm bells" go off, short the market, sell your holdings, and put the proceeds into crash-resistant holdings.

This is the difficult step, as it requires you to keep an eye on the market and to move quickly when an oil spike occurs.

One way to look out for a oil price spike is to analyze the current price as a ratio of the S&P500 to Oil.  In a price spike, this ratio typically goes "out of whack" as the price of oil moves much faster than the market.  As I mentioned in the demand destruction post, if the S&P500/Oil ratio goes below 12, the oil price spike is nearing the limit that the market can handle, which usually leads to a market crash.  Using a ratio of 12 is conservative, and it won't maximize your profits.  In the last two oil shocks the ratio actually dipped below 10 for a few days - so a more aggressive ratio (such as 10) can be used to try to maximize your profits if you're willing to take a bigger risk and keep an eye on the ratio minute-to-minute.

If you look at most recent oil shocks, you can see that the price peaks were signaled by sharp changes the price of oil right before the price spike caused a market crash.

• 1990 Oil Shock:
• Throughout July 1990, oil prices were around $20/bbl - an S&P500/Oil ratio of 15-20
• Iraq invaded Kuwait on August 2nd; oil prices doubled to around $40/bbl over the following 2 months - an S&P500/Oil ratio of less than 10 as oil exceeded $35/bbl
• The price spike pushed the US economy into a recession in October of 1990, causing the stock market to crash over 20% and pushing the price of oil back down to $20/bbl by the end of the year
• 2000's Energy Crisis:
• Starting in 2003, oil prices steadily rose from an average of $30/bbl to a top of $147/bbl in 2008.
• Throughout most of this increase in oil prices, the change was slow enough that stock market increased along with the oil prices to keep the S&P500/Oil ratio around 15-20
• In the early summer of 2008, the price of oil spiked and the S&P500/Oil ratio dropped below 10.  Shortly after this signal in mid-July, the oil hit an all time high of $147/bbl, the market crashed in October and the world entered the "Great Recession".
• By the end of the year, oil prices had fallen down to $30/bbl - back to a 15-20 S&P500/Oil ratio.

In 1990, you could have shorted an oil ETF (if they had existed) at a price of $35/bbl (when the S&P500/Oil ratio dropped below 10) and then bought the ETF 3 months later at $20/bbl to cover your short, for a return of 75%.

Similarly, in 2008, you could have shorted an oil ETF at a price of $125/bbl (when the S&P500/Oil ratio dropped below 10) and then bought the ETF 6 months later at $30/bbl to cover your short, for a return of over 300%.

So once you see the S&P500/Oil ratio drop below 12, you should start selling your stocks, and putting the majority of the proceeds into stable currencies and stores of value.  Some examples of "stable" holdings are:

• US Dollars - in your account as cash
• Gold - GLD
• Swiss Francs - FXF

Then, you should take some of your proceeds (as much as you're comfortable gambling with) and short the market.  Some examples of ETFs you can short are:

• The Market - SPY
• A Consumer Discretionary ETF - XLY
• A Financial Stocks ETF - XLF
• Real Estate - IYR

For your short positions, you can put in "buy to cover" limit orders to close out your positions and take profits as the market crashes.  Using a series of limit orders will allow you to gradually close out your order without having to stare at a computer screen all day.  For example, if you start shorting SPY with $15,000 while SPY is at a price of $150, you'd short 100 shares of SPY, then you'd put the following orders in:

• Close out 20% of your holding if SPY falls 20%: Place a "buy to cover" order for a 20 shares at a limit of $120
• Close out 40% of your holding if SPY falls 30%: Place a "buy to cover" order for a 40 shares at a limit of $105
• Close out 40% of your holding if SPY falls 40%: Place a "buy to cover" order for a 40 shares at a limit of $90

Step 3: "Buy Low": Use limit orders to buy the Peak Oil Proof Portfolio and high growth stocks at their lows following the market crash.

In much the same way that you should use limit orders to cover your short positions as the market crashes, you should use limit orders to buy stocks at discount prices.

For example, you can use limit orders to purchase VDE, one of the ETFs I recommend in the Peak Oil Proof Portfolio, at a discount following a market crash.  If VDE's high was $120 before the crash and you want to own $60,000 of it, during the crash, you can put in some limit orders to purchase it at cheap prices:

• Buy 20% if it falls 20%: Place a buy order for a 125 shares at a limit of $96
• Buy 40% if it falls 30%: Place a buy order for a 285 shares at a limit of $84
• Buy 40% if it falls 40%: Place a buy order for a 333 shares at a limit of $72

Of course these limit prices are just an example and you'll need to adjust the prices and quantities based on how much you want to invest, how how far you think the market will crash and what balance you want to strike between buying low and risking not being able to buy at all.  This should be repeated for all of the ETFs in the Peak Oil Proof Portfolio.

A market crash also gives you the opportunity to purchase some "high growth" ETFs while they're temporarily inexpensive.  Some examples of ETFs that you might want to snatch up are:

• China Small Cap - HAO
• India - EPI
• Emerging Markets - EEM
• Gulf States - GAF

With oil prices low from demand destruction, these high growth stocks could easily out-perform the Peak Oil Proof Portfolio as investors pile back in to stocks once the market begins to recover again.  These high growth stocks can be held until oil prices begin to climb again, at which point they can be sold and the proceeds can be invested into the Peak Oil Proof Portfolio, which, due to its commodity-heavy holdings, should outperform the market as oil prices reach their highs again.

Peak Oil vs. Global Warming

"Peak Oil" and "Global Warming" are often discussed together as two of the most difficult energy challenges that our society faces over the coming decades.  Both challenges have the potential to lead us to catastrophic societal outcomes if we fail to address them properly.  The "worst case scenario" for each challenge reads like an apocalyptic movie plot - for peak oil, we could see resource wars, economic collapse and worldwide starvation; for global warming, there could be "climate wars", harsher storms, desertification, and sea level rise.  Both have the potential to kill millions of the poorest people who are currently living on the margins of our global society.

As we enter a post-peak oil world, we will begin to switch to alternative energy sources to compensate for the shortfall in oil production from the aggregate depletion of worldwide conventional oil fields.  The forms of alternative energy we use will be largely dependent on whether or not we place restrictions on carbon dioxide emissions.

Peak Oil means we'll either emit far less CO₂ or far more - it all depends on whether we tax it.

If we don't place any restrictions on carbon dioxide emissions, the liquid fuel alternatives we will choose to make up for our post-peak-oil production shortfall will be completely based on the return on investment that can be achieved from these alternatives.  Companies will invest in the sources of alternative liquid fuels which will be the most profitable.  Alternatives with the highest energy return on energy invested (EROEI) will receive the investment up to their upper limit of scalability.  The "waterfall of investment" will occur in the following order, based on EROEI:

1. Increased traditional land drilling for conventional oil in politically unstable regions
1. EROEI: between 20:1 and 40:1
2. Scale is limited by political turmoil and field peaks; Iraq has the potential to increase production from 3 mbpd to 12 mbpd (nearly 15% of world oil demand!)
3. Water Intensity: 0-60 gal/MMBTU
4. Carbon Intensity: 25 g C eq. per MJ of fuel
2. Increased use of enhanced oil recovery methods in existing fields
1. Water injection, gas injection, hydraulic fracturing, pumpjacks, etc.
2. EROEI - between 1:1 and 20:1
3. Scale is limited by water & gas availability; enhanced oil recovery technology often only prolongs a fields peak and causes a more rapid decline thereafter
4. Water Intensity: 40-100 gal/MMBTU 
5. Carbon Intensity: 25-30 g C eq. per MJ of fuel 
3. More deepwater offshore drilling of conventional oil
1. EROEI = 10:1
2. Scale is limited by the number of new fields found.  Brazil's Tupi field, the largest oil discovery of the preceding 20 years, has a maximum possible daily production of 1 mbpd (4% of world demand)
4. Arctic land and offshore drilling of conventional oil
1. EROEI = 10:1
2. Scale is limited due to harsh climate - limited drilling period and difficult transportation; ANWR maximum possible daily production is 780,000 barrels per day (<1% of world demand)
5. Canadian Tar Sands
1. EROEI = 7.2:1 
2. Scale is politically limited by water usage and water pollution; Canada currently produces 1 million barrels per day; maximum possible daily production is 3.6 mbpd (4% of world demand)
3. Water Intensity: 15-35 gal/MMBTU
4. Carbon Intensity: 30-35 g C eq. per MJ of fuel 
6. Natural Gas-to-Liquids
1. EROEI = Between 3:1 and 10:1
2. Scale is limited by the expense of infrastructure and availability of natural gas; Shell's Pearl GTL plant cost $19 Billion and can only produce a maximum of 140,000 barrels per day (1/10th of 1% of the world's oil demand)
3. Water Intensity: 20-90 gal/MMBTU
4. Carbon Intensity: 30 g C eq. per MJ of fuel
7. Coal Liquefaction
1. EROEI = 6:1
2. Water Intensity: 40-70 gal/MMBTU  
3. Carbon Intensity: 40-50 g C eq. per MJ of fuel 
8. In-situ shale oil production
1. EROEI = Between 2.5:1 and 6.9:1
2. Water Intensity: 10-40 gal/MMBTU 
   
3. Carbon Intensity: 30-70 g C eq. per MJ of fuel

The problem is, as you can see above, each source of alternative liquid fuels has a higher carbon intensity than our current conventional oil production does.  Meaning that not only will our worldwide carbon emissions increase as the world's energy demands increase, but they will increase at an increasing rate as we move to more carbon-intensive alternatives.

If the government does place restrictions on carbon dioxide emissions, our energy investments will look completely different.  Oil from tar sands, coal-to-liquids, natural-gas-to-liquids will become even more expensive than they currently are - rendering them less competitive against renewable liquid fuel alternatives such as biofuels.  Biofuels, however, are themselves quite energy intensive - requiring natural-gas-based fertilizers and pesticides, diesel-fueled tractors and trucks and high-energy bio-refineries to convert crops into fuel.  Biofuels are also limited in scale - if we wanted to get all of our current US fuel demand from biofuels, we'd have to stop eating food and devote every single acre of cropland in America to biofuel production.

In a high-carbon-price environment, therefore, cellulosic ethanol may offer the greatest hope for renewable liquid fuels.  Cellulosic ethanol wouldn't compete with our food supply and is far less carbon-intense than gasoline derived from traditional oil.  It is, however, still a long way off from commercialization.

Wind and solar power are not direct substitutes for oil as they provide electricity, not liquid transportation fuel.  In a high-carbon-price environment, peak oil and carbon taxes would combine to greatly increase the price of traditional gasoline.  Carbon taxes would also make electricity more expensive in the US, since we get most of our power from coal.  With carbon taxes, however, these coal power plants would not need to compete as vigorously with coal liquefaction and the price of electricity would likely not increase as much as the price of gasoline.  Carbon taxes may make unconventional oil (such as oil derived from tar sands) so expensive that transportation methods would begin to shift from fossil-fuel-based modes to electrified modes.  Freight transportation would shift from truck to train - possibly with more electrified rail.  Personal transportation would shift from traditional automobiles and SUVs to plug-in-hybrids and electric cars.  Air travel would become dramatically more expensive - increasing the incentive to build more high-speed rail in the US.

Coal power plants would pass on the cost of the carbon tax to their customers and natural gas power plants would become more cost competitive against coal since natural gas releases about half the CO2 per megawatt hour that coal does.  Carbon sequestration at coal power plants may slow this shift away from coal.  More wind power would come online as these projects become more cost competitive against natural gas, but more natural gas plants would likely need to be built to provide the necessary increase in base load capacity to offset the wind power's intermittency and lack of dispatchability.  Depending on the price of carbon, nuclear power may replace these natural gas plants for increased base-load capacity.  More pumped water storage would be needed as more wind power comes online - to help smooth out intermittency.

The path we follow (traditional transportation infrastructure w/ carbon-intensive unconventional oil vs. electrification of transportation w/ renewable energy) will largely depend on the societal and political choices made by a number of disparate groups.  Our society could begin to demand less carbon-intensive forms of energy.  On an individual basis, we can choose to go down this path by buying carbon credits, paying a premium to our utilities for renewable energy and switching our personal modes of transportation to those which emit less carbon - such as hybrids, electric vehicles and mass transportation.  This "bottom-up" change is already happening, with early-adopters buying hybrids and electric cars and installing solar panels on their houses.  But it is a slow and economically inefficient way to move the world towards a less carbon-intensive and peak-oil-proof world.  Due to the complex and uncertain nature of peak oil and global warming, it may take a very long time before mainstream society "gets it" and begins taking personal steps in this direction.  Also, due to the economic pain of taking these steps, this "tipping point" of societal opinions and behaviors may not occur until well after the negative consequences of peak oil and/or global warming are upon us.

One interesting "bottom-up" approach is General Electric's announced intention to purchase 25,00 electric vehicles by 2015.  As the world's second largest manufacturer of wind turbines, GE certainly has some skin in the game when it comes to the imposition of a carbon tax, and the announcement is likely designed to help encourage further adoption of these electric cars, moving the electrification of personal transportation further into mainstream society.  At the same time, GE's CEO Jeff Immelt has been actively lobbying in Washington for a carbon cap-and-trade scheme.  If more companies take steps like these, it may sway public opinion enough for politicians to implement climate change legislation.

A government-imposed carbon tax would quickly move us in the direction of sustainable transportation, but such a tax can only happen with the political will of the majority of Americans behind it.  In the current political environment it seems impossible that a carbon tax could be implemented.  A carbon tax would have the net effect of immediately raising fossil fuel prices.  When even the FED chairman admits that we're teetering on the edge of a double-dip recession, saying "We’re not very far from the level where the economy is not self-sustaining", all politicians are wary of implementing measures which would put additional burdens on the economy.

In a post-peak-oil environment (which, according to the International Energy Agency's 2010 World Energy Outlook, we entered in 2006), a carbon tax may be even more politically impossible.  As American citizens have to live with higher and higher oil prices, and in the absence of any catastrophic events linked with global warming, they may demand that the government not impose any carbon taxation.  We've seen this before during the 2008 presidential campaign with people shouting "drill, baby, drill" as the price of oil skyrocketed to all-time highs.  As political polls show, the immediate economic concerns of the average voter always trump their long-term environmental concerns - particularly during a recession or when gas prices are high and rising.

So while the solutions to both problems overlap in the realm of renewable energy (wind, solar, biofuels, etc.), the movement towards these alternatives will only happen with a tax on carbon.  In the absence of a tax, we will transition to more carbon-intensive oil alternatives as we enter a post-peak-oil world.

As an investor, you should be setting yourself up to profit from this transition.  The largest international oil companies (IOCs) will win in either case - since they're all currently investing in unconventional oil as well as renewable energy alternatives.  For example, Exxon (XOM) is investing in algae-based biofuels, Shell (RDS) is investing in tar sands and gas-to-liquids, and Chevron (CVX) is investing in geothermal energy.  In order for the IOCs to pursue more deepwater offshore drilling, enhanced oil recovery, gas-to-liquids and other unconventional oil plays, they will require the assistance of oil equipment and supply companies such as Schlumberger (SLB) and Halliburton (HAL).

The best way to invest in this sector of companies, as I recommended in the Peak Oil Proof Portfolio, is to diversify your holdings through an ETF, such as VDE.  I also recommend in the portfolio that you hold coal (KOL) and a renewable energy ETF (PBD).  In a post-peak-oil world without any carbon taxation, the price of coal will increase significantly.  With a carbon tax, renewable energy companies will grow significantly.  Either way, as an investor, you will come out ahead.

Demand Destruction from Peak Oil

Demand Destruction is a term used to describe a series of economic actions that occur when oil prices become too high for the global economy to absorb them.  In this environment, the economy goes into a recession and the price of oil correspondingly crashes.

Oil's primary use is as a transportation fuel - 81% of the world's oil is refined into liquid transportation fuels (46% for gasoline, 9% for jet fuel and 26% for diesel and other liquid transportation fuels).  The remaining 19% of the world's crude oil production goes into heating oil, electricity generation, plastics, synthetic rubber, asphalt and tar, wax, lubricants, adhesives, solvents, explosives, paints, sealants, corrosion inhibitors, cosmetics, fragrances, pharmaceuticals, fertilizer, pesticides, food flavorings, food additives and other industrial and commercial products.

As oil prices increase, the input prices for the variety of goods listed above (including food) increases.  These increased input prices, along with the increased transportation cost for these goods from higher fuel prices are normally passed on to the consumer.  This increase in consumer goods prices is pure oil-price-induced inflation.  While consumers must stomach these increased consumer goods prices, they must also pay more of their budget for gasoline.  As the price of gasoline goes up, consumers will use less gasoline (which is what most economists are referring to when they talk about demand destruction in oil), but at the same time, the consumer will also be using more of their disposable income on gasoline, which leaves less money to spend on consumer goods (which are now more expensive due to oil-induced inflation).  This creates a secondary (and more significant) oil demand destruction as the economy shrinks from lower consumer spending.

One way to visualize demand destruction is to look at the average American consumer.  The average American consumer lives on a tight budget.  As the price of gasoline increases, the consumer begins to drive less.  They will likely still drive to work every day (what we could consider their "base level" of oil demand), but they may cut back on their other driving - such as going out to eat during the week or driving to see family on the weekends.  They might postpone that family vacation to Hawaii.  All of these actions decrease their overall oil consumption.  If the consumer is on a particularly tight budget, they may start carpooling or taking the bus to work - further reducing their oil demand.  Meanwhile, the price of everything they purchase, from groceries to prescription drugs, has increased - cutting in to their discretionary consumer spending budget and further reducing their overall spending on non-essential travel and non-essential purchases.

Because 75% of Americans live paycheck-to-paycheck (the vast majority of whom are also being squeezed by significant credit card debt) and 70% of the US economy is dependent on consumer spending, when you aggregate the drop in consumer demand from one person across all the consumers in an economy, the economy goes into a recession.

Globally, we can aggregate the effect on consumer spending across the world economy.  The UK, Germany and many other developed countries are very similar to the US in that their economies are extremely dependent on consumer spending.  In China, consumer spending only accounts for 40% of the country's economy, but because it is a large exporter of consumer goods to developed economies, China's economy is extremely dependent on consumer spending in the developed world.

Research has shown that the primary way in which oil price shocks affect the economy is through a reduction in consumer spending.  At a certain price of oil, consumer spending falls off sharply; the world economies reach a "tipping point" and enter a recession.

Of course this is a very simplistic way to look at the world economy, and obviously there are many other factors at play.  There is evidence that the world's developed economies have become less dependent on oil over the last few decades.  As a result, oil price spikes may not have as damaging an effect on the world economies as they have had in the past.  There remains a great deal of uncertainty over how oil price spikes effect the macro economy, but one way to look at the problem is as follows:

As the world economy grows, the short-run demand curve for oil shifts to the right.  Normally the short-run oil supply curve would shift to the right as OPEC increases production and previously-uneconomical oil fields come back online in the rest of the world.  But in a post-peak-oil world, OPEC's ability to increase production is limited and this short-run demand curve cannot move any further to the right.

As you can see, in a peak-oil world, short-run quantity supplied hits a wall and the price of oil keeps increasing.  This is the economic mechanism that causes a "price spike".

When the price of oil become too high, the economies of the world can't afford the additional oil cost; the world economy goes into a recession and the short-run demand curve for oil shifts back to the left.  Since oil production is inelastic in the short-run, the price of oil plummets.  This is the core of "demand destruction".

As the oil price drops due to lower oil demand, the low oil price helps the economy slowly recover.  This economic recovery brings more demand for oil and the cycle continues.

This cycle of oil price spikes, recession and oil demand destruction is referred to as the "bumpy plateau".  This mechanism may hide the true peak of world oil production for a number of years as oil price spikes and recessions cause the daily world oil production rate to vary significantly as we get close to and pass the point of world peak oil.

(Source: Colin Campbell – Association for the Study of Peak Oil)

In the long run, as the worldwide oil production rate moves down the far side of Hubbert's Peak, the supply curve will shift to the left at the global aggregate depletion rate, further increasing prices.  In the long-run, high oil prices should help encourage increased investment in additional oil drilling as well as increased investment in oil alternatives such as shale oil and tar sands projects.  However, due to the rapid nature of price movements and demand destruction, the market sends mixed price signals, hindering the investments needed to shift the long-run demand curve to the right.

In the long run, people will trade their SUVs for hybrids or move closer to work and companies will increase the fuel efficiency of their operations, and purchase more fuel efficient trucks and airplanes, etc.  All of these efficiency improvements that would shift the long-run demand curve to the left, however, take a long time to implement and are particularly difficult to justify when the price of oil plummets along with the economy due to demand destruction.  The average consumer will be feeling financial pain during the recessions and when they see that the price of oil has plummeted (due to demand destruction) they may not see the need (or be able to) trade in their vehicle for a more fuel efficient model.  The average consumer "trade cycle" for cars is 52 months, far longer than the duration of a typical price spike and demand destruction cycle, meaning our society will be slow to increase vehicle fuel efficiency.  Indeed, even now with oil prices rising nearly 15% over the last 6 months, sales of SUVs and pickup trucks are outpacing sales of cars in America by the widest margin in 5 years.  Consumers simply don't understand the price signals.

These mixed price signals and economic volatility also make financial modeling difficult for firms.  This, combined with the difficulty in justifying capital expenditures during a recession, means the implementation of efficiency projects in firms (which would help them become more resilient to future price spikes) may be slow.  This will further reduce the ability of our society to shift the long-run demand curve to the left.

For oil companies, these periods of low oil prices due to demand destruction also make it difficult to finance new oil projects which would help offset the global depletion rate.  This prevents the long-run supply curve from shifting to the right against the leftward shift caused by the global aggregate oil depletion rate, the net result of which is increasing oil prices.

Large-scale shifts in transportation infrastructure (high-speed rail, electric cars, renewable electricity generation, etc.) will likely only be possible with extreme government involvement.  Given the history of partisan government gridlock during recessions (as we are seeing now), these fundamental infrastructure changes may take a significantly long time to implement, thereby prolonging the bumpy plateau.

The last oil price spike we had was in 2008, when crude oil reached an all-time high of $147 per barrel.  It would appear then, that $150/bbl is the upper limit in price of what economies can afford without tipping into a recession. This price, however, is based 2008 dollars and because the US government has injected trillions of dollars into the economy through bailouts and quantitative easing since then, it isn't known what the trigger will be in dollar terms the next time around.

A better way to find the demand-destruction-inducing price of oil is to look at oil prices as a ratio to other commodities or indices.

After analyzing 25 years of data, I found the following ratios:

Gold/Oil Ratio ($/troy ounce : $/bbl)
Average over 25 years - 16:1
Ratio when Oil hit $147/bbl (July '08) - 6.5:1
Ratio when Oil crashed to $30/bbl (Dec '08) - 27:1
Ratio when Oil hit at multi-decade low in 1998 - 27:1
Ratio today - 16:1

S&P500/Oil Ratio (Index in $ : $/bbl)
Average over 25 years - 29:1
Ratio when Oil hit $147/bbl (July '08) - 8.5:1
Ratio when Oil crashed to $30/bbl (Dec '08) - 29:1
Ratio when Oil hit at multi-decade low in 1998 - 107:1
Ratio today - 14:1

After running the data through a statistical trading model, I found the optimal trading triggers, based on these ratios.

If the S&P/Oil ratio goes below 12, oil is about to become so expensive that it will "break the system", in this case, Sell Oil, Short the S&P 500.

When the economy crashes, if the Gold/Oil ratio goes above 20, oil is too cheap compared to gold, in that case, Buy Oil.

We're currently seeing an upward swing in commodities prices.  You should be holding oil and other commodities at this point.  The best trigger to keep an eye on for the next few months is the S&P/Oil ratio - if oil prices begin to spike and this ratio drops below 12, Sell Oil, Short the S&P 500.