Commodities

As of June 2013, natural gas was trading at $3.85 a million British thermal units; roughly double the price of its lowest trading price in April 2012. At a price of just under $4, oil trades for 23 times that of natural gas against an energy-equivalent ratio of just six. Phrased another way, if oil trades at $90 a barrel, the equivalent amount of energy from natural gas would be trading at $15 (not $4), the 1-to-6 ratio. Using this ratio alone, natural gas is a great bargain.

In the very early 1970s, gold was trading for $35 an ounce; in January 1980, it reached what was then an all-time high of $850 per ounce. During the 1980s, the price of gold plummeted, falling 52% (vs. a 222% gain in the S&P 500). In the 1990s, gold dropped another 29% (vs. a 314% gain in the S&P). By August 2011, gold was selling for $1,900 an ounce (vs. $270 in January 2000).

From 1913 to the present, despite multiple “global energy revolutions,” the price of gas at the pump (net of taxes) has ranged between $2 and $4 a gallon in 2006 dollars. As of May 2013, the U.S. national average was $3.0 ($$3.04 in 2006 dollars).

According to The Wall Street Journal (May 2013), “Four dollars appears to be a fair approximation of the price at which consumers curtail their usage, $2 a gallon is a price at which producers pare back production and postpone the hunt for new reserves.”

The U.S. has been the world’s largest oil consumer for decades. The table below shows recent world consumption.

Oil Consumption Per Day [millions of barrels]

According to energy economist Philip Verleger, “The U.S. is going to be the low-cost industrialized country for energy” (October 2012). Since 2008, U.S. oil production has increased by 20%. Natural gas prices peaked at $12 per million BTUs during the middle of 2008 and was $3.50 by the middle of October 2012. The U.S. government estimates that natural gas prices will stay below $5 for another decade. Natural gas now represents 31% of the total U.S. electric power generation (vs. 37% for coal).

During January 2012, the number of milk contracts averaged 110,200 a day, a 32% increase from a year ago. Virtually all of the major restaurants, food companies, and dairy processors are using these milk futures contracts. Futures for Class III milk (used to make other products such as cheese), which does not meet the same standards as milk used for drinking, increased 30% for 2011, outperforming all of the commodities on the S&P GSCI Index.