I am going a little afield from the usual menu of faith-based entries with this post, but I am also an aspiring finance geek and wanted to put some thoughts together on the recent trend in oil prices. But don’t worry, one of my core Christian convictions remains that we cannot show respect to our creator while systematically disrespecting his creation (especially when it’s done in the name of short-sighted economic gains at the expense of just about everyone, especially the poor and defenseless). Yes, gasoline is “less-expensive,” these days, but if you were driving in the mid to late 90’s, then you know it still isn’t “cheap.” And when we figure in the externalized costs of oil (like health problems and environmental destruction), it is still way waaay too costly.
Anyway, I just read a friend’s blog this morning that discussed the ramifications of the drop in oil prices for personal finances. It was well done, and you can find it here: What Falling Oil Prices and a Rising Dollar Mean for You. But it got me thinking about investments in oil as a money maker or a portfolio holding. Unfortunately, if you own any mass-market exchange traded fund (ETF) or mutual fund that focuses on large-cap companies or the S&P 500, you absolutely have money invested in the oil industry, like it or not. It is what it is, and there’s nothing you can do about it if you prefer index funds (like me). That being said, there are ETFs and mutual funds that are specifically dedicated to the oil sector (as well as individual stocks if you like extra exposure). The question, therefore, is: “Is now a good time to buy in to oil-dedicated investments?”
As much as it pains me to say this (no really, I may have to punch myself in the face here), right now might be a decent time to invest in oil (in general) if you are a short-term or even medium-term investor. Oil securities, ETFs and mutual funds have generally taken a beating in the last 6 months, and I don’t think this is going to last. There’s just no way. Short term, I’d say less than 2 years. Mid-term? Maybe 3-7. And when prices spike again, it could be the perfect model of buying low and selling high, if you buy-in now. But investor beware, so-called “market timing” is notoriously difficult, and I am not recommending any such thing. In fact, the prevailing wisdom of benefiting from investing in stocks, bonds, ETFs and mutual funds is to buy and hold, holding forever if possible (thanks, Mr. Buffet). With that in mind, Now is definitely NOT the time to take a long-term approach to investing in gas and oil or any of their subsidiary businesses. Ah, maybe I can sleep tonight after all.
Whether it’s investing or budgeting for sub-$2 gallons of gas, I think it is a huge mistake to get too excited or make long-term financial plans that depend on lower oil prices year over year. What I mean is that the current trend is likely a fluke in the steady rise in demand for and shrinking supply of oil. At least easy-access oil, that is. At best, this will cause oil securities to stagnate concerning capital appreciation and dividends too, and maybe even continue to fall. And please, for the love of God, don’t go buy a Chevy Suburban or Ford Expedition thinking that gas prices won’t ruin your day in the future. They will.
Over the mid-term, the less expensive oil hiccup will simply not continue. Oil companies all over the world have a vested interest in higher oil prices. Combined with free-market mechanics, this necessitates that less-profitable drilling and refining will be shutdown, which will entail reduced supply. On the other side, demand will inevitably increase, especially with the growing middle classes in China and India (and all of them want cars). This will cause oil securities to rise in capital appreciation and perhaps dividends too.
Falling production with increasing demand = higher prices, and this is exactly what Saudi Arabia (the cornerstone of OPEC) wants AND why they have decided to increase short term oil production. It’s a brilliant market play on the part of the Arab Kingdom because (as I said) this will drive a lot of the smaller and more challenging oil fields to become unprofitable and shutdown (think dirty tar sands oil & every smalltime operation in West Texas and North Dakota). Once those players are out of business, and OPEC chops its supply (and they will, mark my words) that organization can do whatever it likes with prices and the rest of the world will just have to say “Thank you, may I have another?!”
That being said, over the longer-term, the entire oil business is in deep trouble (and it should be, given the environmental and geo-political consequences of long term oil addiction). Eventually we are going to wake up and realize that fossil fuels (and all the petrol dictatorships who hate the USA that depend on them) are not a good thing for our nation or for the world at large to keep financing. When we finally accept the poisonous nature of our addiction to fossil fuels, and when we finally build-out a renewable, clean energy economy that eschews dirty fuels, long-term investments in the fossil-fuel industry are going down in a major way. Hasten the day.
But it’s not just an environmental thing. As hinted at above, moving away from oil means that nations like Venezuela, Iran, and Russia get put in a serious financial pinch. These nations aren’t exactly a list of America’s biggest fans, and each of them are presently facing serious financial crises and domestic turmoil for no other reason that falling oil prices have gutted their economies (think military and social spending). I suggest that Putin’s recent land-grabs are motivated by the desire to distract as much as they are to commandeer much-needed, non-oil resources, but that is a separate topic, I suppose. Nevertheless, the fact is that moving away from oil means that we can put hostile nations (many of which use oil revenues to finance terrorism) out of business, and that is a wonderful thing. It also represents a serious set of motivators for clean, renewable energy sources like solar, wind, geothermal, etc. Even if we prefer to deny science / climate change, the fact is that moving away from oil can protect more than the planet.
When we take the longview, it seems that the heyday of oil is over, perhaps in its twilight or at the very lest, well past noon, and thus not a good option for the buy and hold investor. Divesting from fossil fuels now = investing in a healthy and peaceful future.
And I think that’s something Jesus could dig.
Thanks for reading me.