Oil Investing Today

by Wes Bridel on August 25, 2010

in Stewardship

Oil is the most contested resource in the world.  World production has not been growing at nearly the rate that world consumption has been.  We’ve been discussing aspects of energy investing.

As we’ve stated previously, the world is consuming more and more oil all the time while new supplies are not able to keep up.  While politicians love to talk about alternative energy, the fact that we rely on oil as our main source of energy cannot possibly change anytime soon.  It is easier to imagine a world where economic activity drops severely and far less energy is used in total, than it is that our entire system of technology will magically shift to another source within a decade.

We feel like there are four main factors to consider in oil investing:

1)      If China, India, Brazil and other countries continue to rapidly grow and see peasants become middle class energy consuming individuals, the competition for limited oil resources will become fiercer and the price will have to rise to find equilibrium.  This is very bullish for the price of oil and oil companies.

2)      On the bearish side, we have the belief that the economy is going to turn decisively downward.  The less economic growth, the lower the price of oil and therefore oil companies.

3)      Finally, we believe war is coming to the Middle East soon (and probably often).  This should give a short term spike to oil prices which could increase the value of oil companies.  (Although it could hurt companies specifically operating in that area.)  This could also increase the value of oil which comes from more stable jurisdictions (such as Canada).

4)      As the realities of the BP Oil disaster (and others like it) set in, politicians change laws which can negatively impact oil companies.  This can be bearish for some although potentially bullish for other companies depending on the laws and the way each company operates.

Based on what we’ve written above, it seems ideal to us to wait and watch the stock market fall and buy oil or oil companies which operate in safe jurisdictions the day before war breaks out in the Middle East.  So if you know the answer to that question, please let us know!

We’re going to layout to mind sets for approaching investing in this area.  Both of these mindsets are based upon the theory that even though the world economy is going to slow in the short to medium term, the middle class population growth and therefore growth of oil consumption around the world will be a stronger trend.  Thus the increasing demand of new consumers will outweigh the shrinking demand of a slowing economy.  If you believe differently than this, then this premise doesn’t apply to you.  For instance, if you believe that the world economy will turn so bad that there will not be new middle class consumers in the emerging markets of the world, then perhaps oil prices will stay low for a considerably long time.  Or if you believe that the economy will start improving soon, then perhaps there will be no crash, and today’s price is the best you will see.

Finally, if you believe that the US Dollar will drastically lose value then investing in oil or a company that sells lost of oil could be a very smart thing to do because oil is a globally consumed product and if the US Dollar drops, the price of oil will shoot upwards in Dollars.  In this case, owning oil or oil companies could be a very important protective allocation for you.

With those assumptions made…

If you believe that war in the Middle East is a bigger factor than a declining economy, than you might want to invest in oil &/or oil related companies now.

If you think the market decline is the significant factor to consider, than you might want to wait to invest until you can receive a better price.

In the next post in this series, we’ll look into how government actions, disasters, and wars effect oil and oil companies as well as the interesting opportunity in Canada.  If you have any thoughts or questions on this or other topics, please let us know.

Oil is the most contested resource in the world. World production has not been growing at nearly the rate that world consumption has been. We’ve been discussing asset management in a crazy economy.

As we’ve stated previously, the world is consuming more and more oil all the time while new supplies are not able to keep up. While politicians love to talk about alternative energy, the fact that we rely on oil as our main source of energy cannot possibly change anytime soon. It is easier to imagine a world where economic activity drops severely and far less energy is used in total, than it is that our entire system of technology will magically shift to another source within a decade.

We feel like there are four main factors to consider in oil investing:

1) If China, India, Brazil and other countries continue to rapidly grow and see peasants become middle class energy consuming individuals, the competition for limited oil resources will become fiercer and the price will have to rise to find equilibrium. This is very bullish for the price of oil and oil companies.

2) On the bearish side, we have the belief that the economy is going to turn decisively downward. The less economic growth, the lower the price of oil and therefore oil companies.

3) Finally, we believe war is coming to the Middle East soon (and probably often). This should give a short term spike to oil prices which could increase the value of oil companies. (Although it could hurt companies specifically operating in that area.) This could also increase the value of oil which comes from more stable jurisdictions (such as Canada).

4) As the realities of the BP Oil disaster (and others like it) set in, politicians change laws which can negatively impact oil companies. This can be bearish for some although potentially bullish for other companies depending on the laws and the way each company operates.

Based on what we’ve written above, it seems ideal to us to wait and watch the stock market fall and buy oil or oil companies which operate in safe jurisdictions the day before war breaks out in the Middle East. So if you know the answer to that question, please let us know!

We’re going to layout to mind sets for approaching investing in this area. Both of these mindsets are based upon the theory that even though the world economy is going to slow in the short to medium term, the middle class population growth and therefore growth of oil consumption around the world will be a stronger trend. Thus the increasing demand of new consumers will outweigh the shrinking demand of a slowing economy. If you believe differently than this, then this premise doesn’t apply to you. For instance, if you believe that the world economy will turn so bad that there will not be new middle class consumers in the emerging markets of the world, then perhaps oil prices will stay low for a considerably long time. Or if you believe that the economy will start improving soon, then perhaps there will be no crash, and today’s price is the best you will see.

Finally, if you believe that the US Dollar will drastically lose value then investing in oil or a company that sells lost of oil could be a very smart thing to do because oil is a globally consumed product and if the US Dollar drops, the price of oil will shoot upwards in Dollars. In this case, owning oil or oil companies could be a very important protective allocation for you.

With those assumptions made…

If you believe that war in the Middle East is a bigger factor than a declining economy, than you might want to invest in oil &/or oil related companies now.

If you think the market decline is the significant factor to consider, than you might want to wait to invest until you can receive a better price.

In the next post in this series, we’ll look into how government actions, disasters, and wars effect oil and oil companies as well as the interesting opportunity in Canada. If you have any thoughts or questions on this or other topics, please let us know.

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