Oil Is Not A Bubble

Lately I’ve been looking at the markets and the investment landscape and I’ll admit, I’m a cynic. Of course I was born a cynic and will probably die a cynic. That very cynicism though has kept me out of trouble with investing.

The sub-prime meltdown inspired confidence in the greed of banks and their willingness to hedge their shareholder’s money with high risk investments. Tech companies for the most part have been real losers (except iCall of course ;-)… we see companies like Ford dropping sales by 25%+ in a single month, the dollar is week to the point that just by being an american and keeping your money in cash you are essentially losing money every month. 

All I can do is really just sigh about it, take care of my family, keep my own businesses in order and wonder what the long term outcome of this entire mess will be.. or is that all I can do?

Never one to find a lack of opportunity in the chaos I have plugged money into United States Oil Fund and Fidelity Select Energy Service. I’m not claiming to be a prophet here, but my returns in the past 2 years on money that I have directly invested have been upwards of 40%… and I always make it by investing in (what seem to me) to be obvious winners. At 60 AAPL was a steal.. at 80 people talked about it being overvalued.. they all *knew* there was an iPhone coming, they *knew* what it would do, but they failed to see the forest through the trees and now AAPL is trading at what, 180? 190? I don’t know, I sold at 140.

Before I explain my reason for investing in oil directly through USO, let me explain why I am in FSESX. FSESX is a simple mutual fund, it holds about 50 companies in the energy sector, but it’s real key is that it holds drilling companies, refining companies and the like. These companies are pretty much agnostic when it comes to the price of oil, they still refine, they still drill, they still distribute, they still make money. If oil prices increase demand doesn’t go down in the same economic vacuum that many items do… they stay busy regardless, if oil goes down the demand increases and they see more business… and if new drilling opportunities present themselves (which they must… there are known huge reserves that are not legally drillable right now), the FSESX portfolio overall should see some nice returns. Call it hedging my bets. Currently about 25% of my energy investing is in fidelity fsesx.

So Oil… USO.. why will it continue to climb? Why is this current $143 per barrel “cheap”?

  1. Relative to the adjusted dollar, the price of oil and a gallon of unleaded gasoline is about the same now as it was in the 70’s gas crisis. This means that it is one of the few non discretionary purchases that has actually stayed even with inflation. 
  2. It’s non-discretionary… what are you going to do? Quit your job? Sell your S.U.V. and start driving an electric car? Build wind turbines on top of your house? Buy carbon credits? No. You’re going to take your medicine whether you like it or not, fill up your car and pay your electric bill. If you’re rich, the gas pump doesn’t affect your wallet, if you’re not rich you can’t afford to quit your job and you likely can’t afford to just buy another car unless you sell your existing one… guess what, dealer’s dont want S.U.V.’s now… you’ll get half of what you paid for it a year ago on something like a Hummer or a Suburban.
  3. Worldwide demand is growing. China among others wants their fair share of the western lifestyle which includes lots of gadgets, lots of meat and lots of cars.. this all requires petroleum, china’s economy is strong, and the Yuan is outpacing the dollar by huge margins.
  4. This is a LIMITED resource, in philosophy they say that in order to prove a hypothesis as valid, the philosophy has to be taken to it’s end… so if oil is limited, we know that *eventually* all oil will run out.
So oil is cheap, you have to buy it, more people want it than can have it, and the supplies will continue to diminish. By that logic, my belief is that in 10 years we will view current oil prices as being ridiculously cheap.