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.
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.”
Final Thoughts
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?
BP stock has been beaten down, probably way overdone, and is due for a bounce. Once again, a good trading opportunity, but as a long-term investment they are going to be mired in cleanup and court costs and lawsuits for decades, so not a good investment.
Thanks Akash! BP has been an interesting story in terms of investment. It does merit a close watch.
I think that gold is a bubble and oil is not. Whilst gold is a finite resource there are no worries about it running out at the moment and possibly never will be, as it is not ‘used up’ in the same sense that oil is. Also gold is speculated on generally for its inherent value, whilst oil is generally valued for its use.
Whilst oil may not run out any time soon, I think fears that it is going to will keep the price high. But there will always be fluctuations, so I think the best course of action would be to invest in oil companies who also are focusing on renewable energy as well, or new sources of revenue.
As a value investor, I could never figure out the fascination with gold. With oil, I can relate to the peak oil hypothesis and can certainly understand the value that comes from the utility aspect of oil. Still, supply and demand principles hold for gold as well, don’t they.
My worry with gold is that as the largest consumers of the shiny metal, India and China, modernize and decide that there are better investments than gold (jewellery), than the demand will fall off the cliff.
Do have an idea in mind of what you think the peak price of oil might be? I know it’s almost impossible to predict but always interest to hear people’s ideas.
I agree with you on India and China, there are other metals that be on up though, like Zinc due to increased galvanisation of steel.
Thanks for the article
Thanks Mo!