Oil: The Global Currency of Choice

I think you get the picture when I say that converting to a world currency with the visions of Chirac, Chavez, Putin and Soros seems like an idea from outer space.

But I’ve got this feeling in the pit of my stomach that the powers-that-be will keep pushing for this egalitarian world view. They want a situation where wealthy nations subsidize poorer, hugely corrupt countries without accountability for their actions. It would be like America dragging around a huge bag of rocks — a permanent drag on our economy.

Still, the possibility of a single global currency along with the prospect of inflation spiking a year or two out because of the skyrocketing debt and explosion in the money supply creates a good reason for the dollar to lose considerable value.

With the devaluation of the dollar inevitable in the short term, investors are hedging now against the threat of inflation — by investing in crude oil.

Oil, Not Gold, Is the Best Hedge Against Inflation

Many would argue that gold is a better inflation hedge than crude oil, and it may well be up to a point. But gold is much less important in its application to how the world functions.

We can do without most of the gold production in the world. In fact, most of the gold that has ever been mined since the beginning of time is still here in some form today, whereas oil is burned up as a daily necessity to fuel the global economy. (Learn more: 5 Reasons NOT to Invest in Gold)

Just think about it. Crude oil is a depleting asset in a world that consumes over a million barrels per day. Most of the oil deposits in the world are in geopolitical hotbeds where serious events there can destabilize world trading overnight. Emerging markets are industrializing and pushing up net demand, and oil is seen as an excellent hedge against inflation.

Considering these trends, more emphasis is being placed on crude oil every day by currency traders. Crude oil far outweighs all other commodities in terms of priority as to what currency traders view as a viable alternative asset to own that will protect against devaluation. Because of this, crude oil is already our world currency.

In fact, the leaders of most industrialized nations are in a race to see who can devalue their currency the fastest so as to hopefully jump-start exports. And when the U.S. dollar, the Japanese yen, the euro, the Chinese yuan, the Aussie dollar, the Russian ruble, the Brazilian real and the English pound sterling are all trending lower, oil is the contra-play on crumbling currencies.

This is why I believe oil prices are trading firmly above $50 per barrel in the face of historically high inventory levels.

NEXT: Top Oil Stock to Buy Now

The world is awash in crude inventory at the present with each weekly inventory report showing no signs of a major drawdown, yet crude prices keep ticking higher. At first glance, one would think that crude prices should retest $35 to $40 per barrel. But if one looks at the deterioration of global currencies, it makes perfect sense why traders and investors are betting on higher crude oil prices.

Why Crude Oil Is Our World Currency

Wars are fought over crude oil, and until other fuels can replace it, more wars will be fought over it. And if there are crises in Iran, Nigeria, Iraq, Russia, Mexico and Venezuela — all oil-producing nations — a lot can go wrong in a hurry for the oil markets, sending prices skyward.

So I believe the price of crude will easily top $100 per barrel again in the next couple of years, and I think we will see oil assets also double in value when the price spikes again.

Considering all of this, you can see why I view crude oil as the global currency of choice. And as the global economy rebounds late this year or next year, demand for energy will rise again, sending prices of crude and natural gas higher.

Because energy assets are cheap by historical standards, consider upping your exposure to this best-in-class inflation hedge by picking up this top oil stock: British Petroleum (BP).

Top Oil Stock to Buy Now: British Petroleum

With a market cap of $154 billion, British Petroleum (BP) is easily one of the 800-pound gorillas in the energy sector, operating as a fully integrated oil company. Even with oil prices trading at around $70 per barrel, BP’s return on equity is still an impressive 22%, and the payout ratio related to it is at 49%, meaning the dividend that is sporting a 6.60% yield is more than covered by two times.

I like buying big oil companies when they are trading with a Price Earnings multiple of 6X because that tells me the stock is cheap on a valuation basis. And with the shares down 35% from its 52-week high of $77, we can lock in close to a 7% dividend yield and own one of the premier global energy companies while oil prices are nearly 50% off their highs.

First-quarter 2009 results show the company earning 83 cents per share versus estimates of 59 cents, beating forecasts by 24 cents, or 40%. That’s a serious upside surprise for a company the size of British Pete. And earnings are expected to mushroom by 56% next year for BP. Nine analysts who cover BP estimate earnings of $3.50 per share in 2009 and then jumping to $5.49 for 2010 as revenues are expected to rebound 26% to $292 billion in 2010.

Whether it’s a play on a weakening currency or an investment in a booming business, Bryan Perry’s top Cash Machine holdings are set to deliver consistent, reliable and impressive yields in even the worst of times. Click here for details on how join Cash Machine risk-free for 90 days.