Riding the oil bull

In the summer of 2004 when oil prices were under $40 for barrel I remember some lunatics were forecasting a 80$/barrel oil. It was a hard thing to believe for most since there wasn’t anything to justify such a huge rise. Fast forward two years and see the public opinion do a 60 degree turn (not a huge fan of overstatements) on one of the most important issues humanity has to face. Today oil price is at 73 dollars per barrel and everyone is talking about it. Or at least gas prices at the pump.

You hear people toting that there’s no real reason for the price to be this high except for speculation and I suspect quite a lot of people buy this horsecrap. By the same logic, every asset out there is overpriced. Stocks aren’t at their “real price”, neither is real estate. Of course future price hikes are reflected in todays price.

Now, whether or not energy is overpriced is up for discussion. The point I’m trying to drive across here is simply that using the $40 or any other such figures as comparison is not going to fly. That was before the peak oil hype when prices were more in line with present day supply and demand.

As stated earlier, gold is not a very traditional investment and it might be hard to grasp what’s behind the price of gold. People have very different reasons for valuing gold.

A lot of the people rooting for gold have strong political agendas. They might see the current credit system as unfair and temporary and hold gold as something sacred. You see gold bugs arguing that dollar and other fiat currencies will eventually become worthless while while we go back to a gold based economy. The transition back to a gold standard seems very unrealistic and the implications would be devastating. You can read more about this at Gold Isn’t Money, Yet by Gary North.

The same article points out that the number of economists supporting the return to a gold standard is marginal at best. So these people you hear talking about the gold standard don’t have too much support from the academic community. Anyhow it’s not just nut jobs (or visionaries) that invest in gold. It’s become a legitimate and quite a popular investment, which is good considering the liquidity. In some countries the taxation has been fixed to make purchasing physical gold easier.

The most common use for gold is as a hedge. Stocks down, gold up and so on. All kinds of political instability, crises, two towers exploding in manhattan, volcanoes erupting, aliens invading –> gold shoots up. Even something as mundane as inflation drives the price of gold up. About the relation between oil prices and inflation I could write more later. For now I’ll leave the subject with a quote that’s not even too pessimistic (for example, Stephen & Donna Leeb predict double digit inflation in The Oil Factor.):
“Our analysis indicates that a crude price increase to $100 would boost U.S. inflation rates above 6 percent.”

Investing in gold is a strange concept to most investors. Stocks make sense, bonds too, even commodity futures are easy to comprehend. Gold is a whole different animal. It’s used in industry but that has practically nothing to do with why the price of gold goes up or down.

Gold has already shot up big the past few years but still many believe it is only the beginning. Everyone is expecting a gold spike similar to the previous one in the early 80’s. Adjusted for inflation, gold was at it’s highest point at 3200$ per ounce in todays dollars. And since everyone is using that number as a point for comparison, investors won’t be thinking about selling until we hit it. If we really end up topping that, there would still be at least a 450% price rise on the way.

It may or may not happen but in any case gold investments have huge upside potential and are an interesting field to say the least. Price rises in physical gold can give a huge, huge leverage for those holding gold futures on a margin or gold company stocks.

I’m struggling to find quality forums for discussion on peak oil. There are some quite good out there but most of the time it’s just different people going through the old stuff over and over again.

On one side there’s people going saying the basic “yes oil is not about to run out, cheap oil is” and so on.
On the other there’s people pointing out that actually there is still a lot of oil left out there. They might even point out a “huge” untapped field in Alaska or somewhere. Arguing about individual fields and whether or not they’d make a difference is not worth your while. Even the figures for current “proven” reserves are subject for discussion. They’re given by people with incentives to lie and have been changed many times for economic reasons.

There’s also the “yeah they said that in the 1890’s and in the 70’s too” -argument, which is of course not too valid at all.

The alternative energy discussion is equally boring; People suggesting different technologies and someone shooting them down as not economically viable. That no alternative energy out there is not effective enough for large scale use seems to be what most people think. The two important things to realize here is that the more expensive oil gets and the more money we pump in to research for these technologies, the sooner we can start using them as real alternatives.

Also a lot of people interested in energy politics are people with very strong political stands or even biases. Obviously all their input to the discussion should be taken with a truckload of salt.

The most cost effective technology around for harvesting solar energy is developed by a company called Nanosolar.

Without getting into technical details, their products don’t use much raw material, last long and sound good all around. They are not listed yet but watch out for their IPO since you might get a bargain. Current investors include the google guys and the company is already quite hyped but still definately worth a look.

The availability of cheap oil might very well be the biggest issue we are going to face in our lifetime both as a society and as independent investors. Overlooking the oil angle just because you’re not interested in energy stocks or commodities is financial suicide.

A lot of people might be vary of betting for rising oil prices because it’s basically betting against your own team. Also, if crude oil prices are already at record heights, people assume there’s not much room to go upwards anymore. Since you’re already on this site, it’s fair to assume that you’re interested in investment opportunities related to rising energy prices. If that, however, is not the case, I still wouldn’t recommend investing any money into anything unless you first figure out what their correlation to oil prices are.

Oil prices rising 5%, 10% or 100% is very well possible and if that airline stock you’re thinking about buying is going to get hurt even if prices stay at these levels for a long time, then do yourself a favour and be aware of the risk.

Suncor Energy (SU)
Canadian integrated oil & gas company. Has a big tar sands segment that makes the company interesting, but it’s oil and natural gas operations are also well suited for a high price environment.

“[Suncor] said it will hedge about 7,000 barrels per day at a minimum price of $50 per barrel in 2006 and 2007 and would consider more hedges of up to 30 percent of crude oil production.”

One thing to consider is that the process of extracting oil from tar sands takes a lot of natural gas. The natural gas price is going to soar along with oil prices. It takes 1000 cubic feet of gas to convert a barrel of bitumen into light crude (at todays prices 1000CF of natural gas costs around 14% as much as a barrel of crude)

Distributed Energy Systems (DESC) is on the watchlist.
Among other things, the company manufactures cost effective hydrogen fuel cells and wind turbines. As a rather big company with a broad customer base and working products it is a low risk investment. It doesn’t have the potential most of the speculative investments this blog will focus on do but it is a safe bet.

Hello everyone.
This blog was started to keep track of news in oil investing related matters. It is based on the assumption that the price of oil and energy in general will rise heavily in the near future. Keeping this in mind we try to focus on stocks and other assets that will boom along with oil prices. Feel free to comment on posts. Also don’t hesitate to contact us if you want to contribute.