Saturday, May 27, 2006

Big Oil Continued....

After my rant about artificially low gas prices and why I thought investing in oil several years ago was such a great idea, you might be curious where I think oil prices will go and if they'd make a good investment today. Or maybe not, in which case you can stop reading right now and save yourself wasted time. =)

Oil is cyclical. It always has been and always will be. Prices go up, and they'll come down again. I can't predict when they'll come down, and they might very well continue to go up for years to come before they start coming back down. Remember that Internet bubble? I have no doubt this is an oil bubble, and at some point, it will pop. With oil at historically high prices today and raking in record profits, I'd bet that when the bubble does pop, it'll probably fall well below the rate it's at today. The people who made money on Internet stocks are those who got in early. The people who lost their shirts were the ones who got in late. When it comes to investing, that's always the case. If you want a safe bet, oil isn't it. You might get lucky, you might not. Just depends on if you can resell that stock to a bigger fool than yourself which is always a dangerous game to play. Kind of like musical chairs--someone's going to be the last man standing, and you never know who that might be until after the music stops.

I'd also like to educate people--oil gets all the headlines, but all these so-called oil companies would probably be better called energy companies. They're in the business of providing energy, not necessarily oil. Oil, historically, has been cheap and plentiful, so it's not surprising that makes up a large part of their business, but when that last drop of oil is extracted from Mother Earth, rest assured, these companies will not go out of business. They'll be working on solar power, or wind power, or tidal power, or other fossil fuels such as coal. All of which pale in comparison to oil.

I read one article that the governor of Montana wants to start converting coal into fuel. This was very interesting to me--I had no idea that coal could be turned into fuel for cars. Apparently the technology has been around for about a hundred years now, but it's never been economical to convert coal into fuel since it costs about $3.00 to create a gallon of fuel. Now that gas prices are up there, it's actually becoming economical to do this. And, according to this article, there's enough coal in Montana to supply the entire country's energy needs for the next 75 years. Including the coal in West Virginia, Pennsylvania, Kentucky, and the rest of the country, we've really got enormous amounts of untapped energy in this country.

Then there's nuclear power. Yes, the N-word. This country has access to enormous quantities of radioactive materials for use in nuclear power to last thousands and thousands of years. The catch, of course, is what to do with the leftover materials. But I can tell you something--as oil prices go up, a lot of people who are very opposed to nuclear power will suddenly find it preferable to $5/gallon in gasoline. As an added benefit, it doesn't contribute to global warming either. As Mr. Burns from The Simpsons might suggest, better to cause an environmental catastrophe in a small part of the world instead of doing it for the entire world. I'm not suggesting that nuclear power is a good thing, but I don't think it's any worse than oil. Just different, with different problems.

Add to all that coal and nuclear power the energy from the sun which could be very effective in desert areas with lots of sun, energy from tides which could be very effective along coastal areas, wind harnessed from locations known to be particularly windy, and, well, there's a lot of alternative energy sources out there.

Despite what I said earlier in this post--high energy prices may be here to stay, but that's not to suggest oil companies will continue profiting greatly from it. Exploration costs will increase as oil becomes more scarce, and it'll cost more to extract each drop of oil from the earth. They may resort to converting coal into fuel with the resulting higher costs invovled. When all is said and done, high energy prices might be here to stay, but large profits are not. As such, I wouldn't invest in any energy companies. They're cyclical, and when it comes to investing in them, you don't want to end up as the last man standing.

Nope, the time to busy was when oil was trading at $10/barrel and people were running around saying idiotic things like "cheap oil is here to stay." If history is any guide (and it is), that was a sign that oil companies were struggling, profits were hurting bad, and they only direction they had left to go was UP. Today? I wouldn't bet on it.

Imagine a world that runs out of oil, though. That's still a long, long way off, so we have plenty of time to develop alternative energy sources during this time, but without the complications that oil brings to the Middle East or even countries such as Venezuela, maybe a lasting peace can finally be hashed out. The area really is fucked up bad--far beyond just our reliance on their oil--but let's face it, oil isn't helping matters either. Imagine a day when the United States will provide for it's own energy needs through renewable resources (wind, water, solar, etc.) and non-renewable resources (coal and nuclear, though not as preferable to those renewable resources). That would be a great day, indeed. And it'll happen as soon as there's no more oil to be extracted from anywhere around the world.

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