Oil Price Investment Trends
The price of oil is down almost 25%. Gasoline prices at the pump are down almost $1. Make no mistake, though, the returns on your investment portfolio over the next 10-15 years will be determined by energy investments. Invest wisely and prosper; don’t, and risk peril.
Don’t be fooled by short-term trends in the price of oil and other energy-related commodities. Don’t be influenced by the talking heads on the evening news or cable television who say that there is a speculative commodities bubble and that the price is set to fall. Although the price of oil will continue to fluctuate widely, the overall trend is clearly up.
» Source: Senior Journal
Recently, Chevron announced a major new oil discovery in the Gulf of Mexico. It was front-page news all across the nation. It was the lead story on the evening news. Reportedly, this discovery will increase America’s oil reserves by 50%! The days of $70 per barrel oil must be coming to an end, right?
Wrong.
If the estimates prove true, the new discovery won’t impact oil imports for at least 5 to 7 years. Moreover, the discovery may not be all it’s cracked up to be. Chevron didn’t discover one big pool of oil that just has to be tapped and pumped out.
The Lower Tertiary basin, where the test well was located is about 80 miles wide, 300 miles long and is 175 miles offshore. Geologists also believe that the oil in this zone will be located in smaller pockets, not in a large pool.
Even as these pockets are discovered, getting at the oil will not be easy. The discovery at the test well known as Jack No. 2 was at a depth of 28,000 feet and in water that was 7,000 feet deep.
The equipment needed to access these deposits is very expensive. If the oil only exists in smaller pockets, it will require more wells, more equipment and more money. By the way, this is also an area of the Gulf of Mexico prone to Category 4 and 5 hurricanes.
The worldwide demand for oil continues to increase far faster than its discovery and production. Many speculate that the slowing US and World economy will reduce the demand and result in lower prices. I disagree for three reasons.
Two reasons that I believe the price of oil will continue to go up are China and India. These are two countries where the majority of the population has lived at third-world standards. This is changing, and quickly.
Supposedly, China is taking steps to throttle its growth. It’s not working. Cities across the nation have begun to taste the prosperity associated with courting multi-national corporations. If anything, they are doing so more aggressively.
The result is that China’s economy grew 11.3 percent in the latest quarter—it’s fastest pace in more than a decade. China is currently the world’s second largest importer of oil. Their oil imports grew 15.6 percent in the first half of 2006. The U.S. economy would have to practically be in a depression to offset that level of growth.
The third reason is that when the demand for something is high and the supplies are limited, the price goes up. Some think that executives at big oil companies like BP and ExxonMobil dictate the price of oil. Those who believe that obviously have no idea how the world economy works. That’s like saying that a farmer in Iowa controls the price of wheat.
Moreover, OPEC isn’t about to let the price of oil decline much further. They announced yesterday the need for ‘oil-price stability’. What they mean is that if the price of oil continues to decline then they will reduce their output.
My clients have been profiting from energy-related investments that pay dividends of 8% or more. They’ve seen their energy holdings increase the overall value of their portfolio while broad diversification has minimized the volatility. It’s not easy, but you can do the same.
This all doesn’t mean that you should over-load your portfolio with energy-related investments. It does mean that their level in your portfolio must be addressed based on your needs, time-frame and ability to accept fluctuations in value. Choose wisely and that 800 lb. gorilla will be your best friend.
