CRUDE OIL TRADED

over $100 per barrel this week, an all-time record high for one of the world's most important commodities. I'm not particularly worried about the effect of this on the global economy. I'll talk about the risks in a moment, but first, there are certain rewards...

Selfishly, with oil at $100, I'm seeing my biggest investment bet pay off big-time. A year ago the title of this column declared that I was "Bullish on Oil." Oil was trading at $55.8 per barrel then so at $100 now, that's a 79% profit in a little under 12 months. Oil stocks have been the best performers in the S&P 500, too with the overall energy sector up 43.8% since then, a stellar performance during a difficult year in the market.

I haven't always been an oil bull. In fact there's one annoyingly persistent reader who regularly sends me emails tweaking me for an April 2005 column called "Hundred Dollar Oil, My Foot." Then oil was at $63.9 per barrel. Oil traded higher, for a while especially when Hurricane Katrina struck later that year. But I'm not embarrassed to have toughed it out, covered my short in January 2007 at $55.8 (with a 13% profit), and gotten positioned for the long side.

The reason I used to be an oil bear is that I didn't believe the scary stories about how the world is running out. I thought that if investors were driving prices higher because of silly notions like "peak oil," then I wanted to take the other side of the bet.

I believe that the supply of oil is, for all practical purposes, inexhaustible. It's just a matter of developing the new technologies required to discover and extract it, and the new technologies allowing the global economy to use it more efficiently. If there is ultimately a physical limit to the amount of the stuff hidden on Planet Earth, I'm confident that long before we hit that limit we'll have moved on to some totally different form of energy.

So why did I become an oil bull? Three reasons. First, a year ago everyone else was giving up on oil. It had fallen from a high of $77 to nearly $50. Suddenly, after years of hearing about "peak oil," I was suddenly hearing about an "oil glut." In my trader's gut, I could tell that the "glut" talk was as silly in its own way as the "peak" talk had been.

Second, I was hearing too many stories about a sudden slowdown in global growth. I didn't believe there was a slowdown coming, and I still don't. While I believe that we'll never run out of oil, I know there can be dislocations in which the demand from a burgeoning economy gets temporarily ahead of the ability of technology to unlock new supplies. With China and India merging into the modern world, that dislocation will last for a while.

Third, I started to get seriously worried about inflation, and about the depreciation of the dollar which is really saying the same thing. Most people think of inflation as "rising prices" but I think of it as "falling value of the dollar." When the Fed is printing too many dollars, the price of everything in the world denominated in dollars appears to go up commodities usually first and most strongly. That includes oil. Most people think that the rising price of oil causes inflation. It's not true. In fact, it's just the opposite. Inflation is what causes rising oil prices.

So how about now? Am I as bullish on oil at $100 as I was at $55.8?

Yes and no. On the negative side, I have to recognize that after the huge price rise it's had, we could be in for a big correction at any moment. But basically my three reasons for being bullish are all still intact.

True, I'm not hearing the kind of pessimism about the oil price that I heard a year ago. Then it was a downright contrarian bet, and now it's not. But that said, most of the investors I talk to are thinking about selling, not buying. And I don't hear much silly talk about "peak oil." So let's put sentiment as a neutral factor.

The global growth argument is still very much intact though the consensus believes, as it did a year ago, wrongly, that an imminent recession in the U.S. will trigger a global slowdown. So that's on the plus side.

And the inflation argument is stronger than ever. I'm confident about that because the price of gold the commodity that is more sensitive to inflation than any other has hit all-time highs this week, confirming the similar move in oil.

And with the Fed telling the world this week, through the minutes of the December FOMC meeting, that it stands ready to keep cutting interest rates, I'm confident that inflation is going to get a lot worse before it gets any better.

So sure there could be a correction here, but I'm still an oil bull.

Isn't that a risk to economic growth? Not really. High oil prices can affect growth when they are the result of a supply shock like the Arab oil embargo of the 1970s. But when high oil prices are themselves the result of growth, how can they be harmful to growth?

Consider this. Since the end of 2001, average per capita annual income in the United States has risen about $7,500. That's the result of solid economic growth. Over the same time, average per capita energy expenses have risen less than $900.

It's true that people today spend a larger percentage of their income on energy than they did in 2001. But so what? Would you like to go back to the way it was then? To save $900 a year in energy expenses, would you give up $7,500 a year in income?

Of course not. You, and everyone else, will just grumble and reach into your pocket and pull out your credit card while you fill 'er up. But you'll grumble all the way to the bank. You're $6,600 per year ahead of the game, and you know it.

The day will come when the Fed will have to address the inflation problems I'm talking about. Then they'll have to raise interest rates, and that will probably trigger a recession it always does. Then there will be a global growth problem, and the oil price will fall. You won't be happy about lower oil prices then, believe me.

But until then, there's not going to be a recession (there's never yet been one that wasn't triggered by high interest rates). So enjoy the growth, and keep on being an oil bull, because with the Fed obsessed with the subprime crisis, rates aren't going up anytime soon. I think the energy sector is going to be the best performer in the S&P 500 again in 2008.

Donald Luskin is chief investment officer of Trend Macrolytics, an economics consulting firm serving institutional investors. You may contact him at don@trendmacro.com.