Oil Prices

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Oil Prices: 2 Ways to Hedge Against Global Oil Demand

by David Fessler, Advisory Panelist, Investment U
Friday, September 12, 2008: Issue #854

Hurricane Ike is bearing down on the oil fields in the Gulf of Mexico, the Saudi’s are cutting back on production, there’s been little reduction in demand from Asian countries… and yet oil is in retreat.

Why doesn’t supply and demand seem to apply to oil? Well – as we’ve been witnessing the past few weeks – it does. Oil prices are now on the verge of breaking through the $100 barrier.

In response, the stocks of companies who are even remotely connected to its production and distribution have gotten punished – down by 50% or more in some cases – in just a few months time. And by the same garbled logic, alternative energy stocks are being hammered as well.

Now, before you pedal that bike you just bought down to the car dealer to trade it in for a big SUV, let’s look at why the long-term demand for oil will remain strong.

The Recent Drop In Oil Prices Due To Demand Destruction

Demand destruction – primarily in this country – is responsible for most of the drop in recent oil prices. In the first quarter of 2008, trucking industry analyst Donald Broughton estimates that 42,000 trucks, over 2% of the nation’s fleet, came off the nation’s highways. With nearly 1,000 trucking companies filing for bankruptcy, the demand for diesel fuel has been slashed.

But there’s nothing to suggest that this drop is anything more than temporary…

Many of those trucks that have been repossessed have been sold overseas to Eastern Europe and Russia, permanently removing them from the U.S. fleet. When the economy does eventually pick up, we’ll be faced with even higher transportation costs than we have now.

Data from the U.S. Census Bureau suggests that we’ll be a nation of 439 million by 2050. That’s an increase of 44% from last year’s estimate of 303 million. (World figures are increasing at similar rates.)

As countries join the global economy and create infrastructure, there’s one thing everyone wants as soon as they can afford it – a car. And millions of new cars around the world will lead to skyrocketing oil prices as demand increases while supplies shrink.

The Bottom Line – Oil Prices Are Headed Higher

The bottom line is that long term, oil prices are headed higher, strictly on supply and demand fundamentals. Global demand destruction – if it occurs at all – will be a short-lived phenomenon.

Frankly, there are few viable, short-term solutions to significantly squelch the long-term demand for oil. And it could get ugly; countries with large oil reserves keeping more of it for themselves. They’ll ask more for it from those of us who want it. And want it, we do…

With only 4% of the world’s population, the United States is currently burning up 25% of the world’s oil supply. Nearly 70% of it must be imported. We’re competing with China, Russia and a host of other emerging nations whose demand for oil is rapidly increasing.

There are two ways for the United States to hedge against increasing world oil demand – and by extension higher prices.

First, we need a stronger dollar to keep our buying power strong. Second, the world needs an all-out effort to develop cheap, alternative fuels so we all use less oil. The world needs inexpensive energy to fuel the global economic growth engine.

Well the dollar is certainly heading in the right direction. The U.S. Dollar Index is up over 10% since mid-July. A strong dollar helps to drive oil and other commodities lower, as speculative investors – who bought crude as a hedge against inflation – reverse course and start dumping it to cut their losses.

And T. Boone Pickens has a plan that seems to be resonating with the American public: Use wind power to free up cheap natural gas for automobiles and trucks instead of oil. You can learn about it the Pickens Plan here. He believes that in the relatively short span of 10 years, we can reduce our foreign oil purchases by one-third.

The best way to invest depends on what kind of “investor” you are. Short-term traders who are dabbling in crude futures and certain oil stocks are experiencing what it’s like to take a trip to Vegas… but without the fun.

Following the T. Boone Pickens’ Energy Plan

If we take the long-term view, or we want to follow along with T. Boone Pickens’ clean energy plan, we have a number of choices. Here are a few:

Clean Energy Fuels Corp (Nasdaq: CLNE) provides natural gas as an alternative fuel, primarily for commercial vehicle fleets here and in Canada. It will be a big player in any nationwide build-out of natural gas filling stations, or modifications to the 170,000 gas stations already out there.
Vestas Wind Systems (OTC: VWSYF) is the largest manufacturer of wind turbines in the world. Its U.S. business is booming and while it already employs 1,220 people here, it expects that number to increase to over 4,000 by the end of 2010.

Expect both of these companies (and many other alternative energy suppliers) to soar when Congress finally gets its act together and approves long-term legislation in support of renewables.

Global demand for oil and energy is only increasing. While the short-term prices are down, the long-term trend is up. And it’ll be extremely profitable for investors prepared for it.

Good investing,

David

P.S. By the way, Alex Green’s new book “The Gone Fishin’ Portfolio” reached #2 in the nation on Amazon yesterday. In fact, the high demand temporarily cleaned out Amazon’s inventory! But don’t worry. The publisher, Wiley & Sons, has rushed them more copies, you can still take advantage of the 45% discount for top selling books through the link above.

Today’s Investment U Crib Sheet

T. Boone Pickens’ plan to wean the country from its foreign oil dependence is based off of clean wind power in the American heartlands. Here are four companies that are building our wind power capacity, and why America is the Saudi Arabia of wind in Investment U Issue #837, The T. Boone Pickens Way: How To Supercharge Your Portfolio.
Nearly 100 years after Cornelius Vanderbilt created one of the world’s largest fortunes with an initial investment of $100, transportation companies are still creating vast sums of money. Read on to find out five companies thriving with the high price for oil in Investment U Issue #846, Transportation Stocks: Follow the Great Industrialists To Incredible Wealth.
Last week David showed us the two best places for your money and how to profit from the “Paradigm Shift” away from fossil fuels that’s driving billions of investment dollars in Investment U Issue #850, The Infrastructure & Energy Sectors: The 2 Best Places to Put Your Money for the Next 20 Years.