Occasionally we will be featuring articles from other authors to bring in a variety of perspectives and ideas. This post comes from David Bakke. David Bakke is a personal finance contributor for the financial website, MoneyCrashers.com.
You might believe that now is one of the worst times to invest in oil. The price of a barrel is higher than $100, and gas prices are rising to all-time highs. Still, a few important indicators suggest that now may indeed be an excellent time to invest. Plus, as we try to save money on gas, investing in oil can be an effective way to offset the rising costs. A number of factors indicate that investing in oil might be a prudent decision to make.
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Why Invest in Oil?
Do the Math
The world currently produces the same amount of oil it consumes. What this means is that with every hiccup in production, such as a natural disaster or a pipeline breakage, the price of oil rises. Although the demand for oil in the United States has slowed, it is rising steadily in many other countries. And while new supplies of oil are becoming increasingly difficult to find, oil will remain a valuable commodity, even in today’s current global economic climate. According to the U. S. Energy Information Administration, the demand for oil is likely to increase by 3.3% in China, 2.4% in India, and 1.7% in Brazil over the next few decades. To top it all off, oil-based companies in the S&P 500 are projected to earn 41% more than what they earned last year.
Global Risk Is Here to Stay
Much of the world’s oil supplies come from countries such as Iran, Iraq, Nigeria, Saudi Arabia, and Venezuela. Should civil war, infrastructure issues, or basically anything else affect the oil supply, the results could be extreme, and these oil-rich countries already carry a high risk of destabilizing events. But the risk exists globally as well. For example, just a few years ago, a hurricane hit off the coast of Texas. This resulted in a short-term absence of gasoline in the Atlanta area, which I experienced first-hand while waiting in line for an hour at two o’clock in the morning just to fill up.
How to Invest in Oil
Investing in oil is risky, there is no doubt about it – especially if you engage in oil futures trading. You need look no further than incidents like the BP oil spill to confirm the inherent risk. To mitigate these risks, however, you can invest in mutual funds that include oil producers and distributors (among other energy investments) in their portfolios. You might consider, for example, the Vanguard Energy Fund or the Guinness Atkinson Global Energy Fund. With a mutual fund, you don’t put all of your eggs in one basket, so to speak, and can thereby protect yourself from some future calamity. Additionally, you can invest in oil equipment and services companies, such as Halliburton (NYSE: HAL). This strategy may also allow you to "hedge your bets."
Oil, like gold, may be experiencing a "bubble" right now. Or, perhaps, sky-high gas prices are here to stay. To determine what will happen in the short-term may be near impossible. But it’s undeniable that worldwide demand is likely to increase, and reserves are becoming harder to find. With that said, a long-term view to oil investing may be prudent, even if prices relax somewhat over the short-term.
What are your thoughts on investing in oil? Is it worth the risk, or too precarious?