Dear Paul,

My clients keep asking me if oil and gasoline prices are going to continue to rise.  Will they ever go back down?

In the long run, oil and gas prices will continue to go up and Americans must prepare themselves to spend a higher percentage of their household budgets in the future on gasoline, heating oil and food (more about food in another issue of this newsletter).

Oil and gas prices are being driven by two LONG-TERM INVESTING TRENDS.

LONG-TERM INVESTING TREND #1:  THE DROPPING DOLLAR

Oil is an international commodity, like gold, that is always priced throughout the world in U.S. dollars.  When the dollar falls against other currencies, guess what happens to the price of oil?  It goes up!

Because of the conflicts in the Middle East there is what is called a “Terrorist Premium” caused by geo-political risk that is estimated to have raised the price of oil by about 10% to 15%.  But about 50% of the recent rise in oil prices over the past 5 years can be directly attributed to our dropping U.S. dollar.

A DROPPING DOLLAR HAS SOME BENEFITS

Most Americans do not feel the consequences of a lower U.S. dollar other than in higher prices for gasoline, heating oil and food prices.  It also discourages Americans from taking European vacations and drinking French wine rather than California wine-but that is not necessarily a bad thing.

Almost all Asian countries tie their currencies to the U.S. dollar.  Because of that, almost every thing you buy at Wal-Mart, from computers to clothes is cheaper now than it was 5 years ago.

Also, many American jobs are tied to a lower U.S. dollar.  Almost 50% of U.S. manufacturing profits come from overseas sales, according to STANDARD AND POORS, and a lower dollar makes us more competitive than our European competitors.

Lastly, it helps our TRADE DEFICIT with China.  Because the Chinese currency, called the “yuan,” is both tied to the U.S. dollar and is overvalued, because of their trade deficit with the U.S.  Labor unions and Democrats in Congress have been pushing the U.S. government to encourage China to re-value its currency.  The Chinese have refused, knowing it would make all Chinese goods more expensive than some of their

Asian neighbors.

Since the Chinese government will not re-value their currency upward, the U.S. government is doing it for them, by letting the dollar drop.  The Chinese like this better, because it affects all Asian countries equally and doesn’t individually force them into a competitive disadvantage with their neighbors.

LONG-TERM INVESTMENT TREND #2: SUPPLY & DEMAND

China is now the fastest growing car market in the world, quickly being followed by India.  These two countries combined have 2.3 billion people.

Both China and India have embarked on massive super highway building projects.  China now has 52,000 miles of super highways-most of them built in the last 4 years.

We started building our American super highway system during the 1950ís. 

Many economists, credit the super highway system for kicking off our post World War II economic expansion.  The U.S. super highway system brought economic development to the ENTIRE United States-not just to the East Coast and West Coast.

The same will happen in China and India.  In the future, every one of those highway exits will have their Wal-Marts, McDonalds and real estate developments, just like we do here in the U.S -and consequently a lot of jobs will be created for Chinese and Indian workers.

When the American super highway system was created, Americans couldn’t resist the “lure of the road.”  We created songs about traveling down “ROUTE 66” and the VENTURA HIGHWAY.”

Movies and Country Music celebrated the ”American road trip.” The same is true in

China and India.  With a rising Middle Class they are buying record numbers of cars and taking to the road on their new super highways.  I can hear the song now, “THE SHANG-

HAI TO BEIJING HIGHWAY BLUES.”

THE GROWTH IN ASIAN AUTO SALES

Ten years ago, major Chinese roads were clogged with bicycle traffic.  There were very few cars.  Today, all major Chinese cities are plagued with “Los Angeles-like traffic jams,” because there are too many cars.

Ten years ago, China exported oil.  Today it uses all the oil it produces and it has now become the largest importer of oil in the world after the United States.

HERE ARE THE STUNNING STATISTICS:  (SOURCE: ABC NEWS)

• For every 1000 Americans of driving age, there are 1023 cars.  That is 1.023 cars per person in the U.S.

• For every 1000 people in France of driving age, there are 702 cars.  That is 0.7 cars per person in France.

• For every 1000 people in Japan of driving age, there are 608 cars.  That is 0.6 cars per person in Japan.

• For every 1000 people in India of driving age, there are 11 cars.  That is 0.01 cars per person in India.

• For every 1000 people in China of driving age, there are 9 cars.  That is 0.009 cars per person in China.

Given that both China and India are the fastest growing auto markets in the world and with a combined 2.3 billion population, if they ever catch up with the U.S. (and they eventually will), we are looking at BILLIONS OF NEW CAR SALES over the next two decades.

Since Europe and America combined only have a little over 600 million in population,

China and India have almost 6 times our population.  If they ever buy cars like we do here in the U.S we could be looking at gasoline prices 6 times higher that they are today over the next two decades.

Just think of it-GASOLINE AT $18 A GALLON-and that’s not factoring in inflation!

SUMMARY

At FOXHALL CAPITAL, we invest in and follow MAJOR LONG-TERM INVESTMENT TRENDS THROUGHOUT THE WORLD.  In almost all of our FOXHALL CAPITAL client portfolios, we maintain a significant percentage in oil and energy funds.  We also indirectly invest in Asia’s growing consumer market in automobiles.  Our investment goal is to try to make up for some of your higher gas bills at the pump by investing in the industries and companies that are benefiting from higher oil prices.

Until next week…

-Paul Dietrich

dietrich@foxhallcapital.com

800-416-2053