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The Big Oil Dilemma

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When compared with oil’s all-time high of $147 per barrel last year, the current price in the $68–$70 range could be easily dismissed as insignificant.

I believe that would be a mistake.

I think oil is a big story.

Prices have doubled from their lows around $30 earlier this year, and most of the people I speak with believe the price per barrel will not go significantly lower. They feel that a range of $60 to $80 is probably just about right given current economic conditions.

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The bottom line is that the long-term fundamentals are firmly entrenched.

The world needs oil.

It is one of those raw materials that are essential to the production and delivery of virtually everything. The thirst is only growing stronger as emerging economies grow, especially nations like China with its 1.3 billion people and India with 1.1 billion people.

It’s been very interesting to watch the stock market rise along with oil prices, which brings us to the big dilemma: Higher oil prices indicate increased global economic activity, which is obviously a good sign when you’re looking for a recovery. At some point, however, high oil prices begin to choke growth and become a problem for the stock market.

We haven’t hit that point yet.

At the moment, investors seem comfortable that oil prices are still in an acceptable range. Higher prices also enrich the coffers of some of the economies that have faltered recently, like the Mideast and Russia, which give another leg to the stool in terms of economic recovery and stability.

The two big questions are: Will oil continue to rise? And if so, at what point do higher prices become a problem?

Nobody knows that answer right now, and oil’s journey from $147 to $30 in such a short period of time proves that prices don’t always follow fundamentals. What we do know is that oil will remain central to the global economy for a long time to come, and that means investors will continue to follow prices closely as a strong influence on their investing strategies.

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Questions? Comments? Write toinvestoragenda@cnbc.com

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