Tags: Oil | Mixed | Messages

Sorting out Oil’s Mixed Messages

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Friday, 18 Nov 2011 08:34 AM Current | Bio | Archive

Investing is an easy concept. But in practice, it’s difficult. With a few guidelines, however, investors can lower the chances of losing out big.

One such guideline: there are some things that people just need.

Yes, it’s that simple. Invest in what people need (at the right time and for the right price, of course) and you can’t go wrong. You’ll beat inflation, get access to substantial (and growing) cash flows, and own real, tangible businesses and assets.

But there’s a better reason. When you invest in things people need, you’re also buying a hedge on economic uncertainty. It doesn’t matter what latest investment fad hits markets. By investing in people’s needs, you can avoid speculations. It would have kept you out of companies with a limited product and lifespan.

One of the greatest needs is energy. That’s been reflected in rising oil prices, which recently spiked back above $100 per barrel. Unfortunately… that’s a mixed message.

The good news is that rising oil prices indicate a strengthening economy. Demand for oil is up, which means energy use is up, so people can travel, as well as power homes, factories, and offices.

The bad news is that rising oil prices are a drag on the economy.

Think about it this way: What’s the difference between paying $3.50 for a gallon of gas and $3.75? Not much, but it adds up.

In fact, every $1 rise in oil is estimated to cost $200 billion annually on the economy. That extra quarter per gallon, magnified by the millions of gallons Americans consume daily, can no longer be spent on other things.

That’s a key economic concept: Everything happens at the margin. It’s why people buy something for $4.99 when an even five bucks seems too expensive. So oil’s sharp rise from the mid $80s to nearly $100 per barrel may be a lagging sign of economic strength, but it points to weaker growth (or possibly decline) in the future.

Rising oil prices are a tax, that disproportionally hits lower-income groups, who typically have lower savings and propensity to spend.

As an investor, you can wait for a pullback in oil, or try to short in the futures market.

Or you can buy shares of some top-shelf oil companies and collect dividends. Herein lies an additional advantage: Most major oil companies are expanding their reserves by buying natural gas. It’s plentiful, and recent major oil discoveries have been substantially smaller than past discoveries.

Not only is the oil market sending a mixed message about the economy, energy companies are too. The future may yet lie beyond oil and with other sources.

Either way, energy isn’t going away. Stick with what people need.

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Investing is an easy concept. But in practice, it s difficult. With a few guidelines, however, investors can lower the chances of losing out big. One such guideline: there are some things that people just need. Yes, it s that simple. Invest in what people need (at the...
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2011-34-18
Friday, 18 Nov 2011 08:34 AM
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