Many believe that buying equities, stocks, oil well drilling project shares and bonds in companies that work in finding and producing oil plus the companies that are researching and expecting to produce alternatives are the investments positioned for great future growth. That’s a near sure thing as energy use is going to be volatile over a range at the top of the price and volume spectrums. Oil, the popular benchmark got to about 88 million barrels a day of use and has only slowed to fewer than 84 million barrels daily of late.

That just puts more “cushion” between demand and production. Oil has moved from $147 when nearing completely using output to less than $60 with only a 3-5% drop in demand. The volatility points out the risk and Monday’s bloodbath for investors who took positions against falling oil prices in futures options by short sellers who made a killing by selling oil high and buying it back low. There is big money here, and no matter what makes the press, stories, blogs and other writers’ comments; speculation played a big role in the oil price run up. It also played a big role in the oil price decline. One can make big money in the oil and related commodity markets, with big risks.

Behind that is the service companies that supply producers. From steel to computer software and construction and engineering, services and supplies are every bit as important, they’re just not so volatile. The International Energy Agency is saying the world will need more than $26 trillion dollars of investment by 2030 to just keep up with a growth rate of only 1.3%. The major difference is that these investments are investments. What you get is a share of the business.

Much to major media reporters surprise, big oil and refiners are doing just fine, both at $147 and $60 oil. A good thing, by far the biggest holders owning these companies are investors saving for their retirement. What you can see is the same will apply to wind, solar and other energy fields that find markets that are certain to be served. One great boon to alternative energy is state mandates requiring alternatives to have a known share over time. But the risk isn’t gone, customers will fill those needs mandated or not, by the lowest cost provider.

In an analysis these equity types are huge opportunities. Except for huge demand destruction in double digits over long periods, the demand volatility should be minimal compared to energy commodity price volitility. The rule might be that the hardware and productivity of energy is a safer investment than the energy commodity itself.

Backing all of this are those service companies. From the retailer of energy to the discovery and production energy companies and all the businesses that supply them are looking good for decades to come. The only possible investor danger is huge demand destruction. But as the past few weeks have shown clearly, energy is a dynamic market, as prices move the investment potentials move too. An alternative investment should have a benchmark such as the barrel of oil equivalent priced to measure the competitive breakeven point below which the investment can’t work.

With these thoughts in mind, the idea that energy demand will increase again and expand over a larger part of the world’s population, investors should be salivating. Some investment opportunities are below ½ the highs of a few months ago even as the Dow Industrials are only off a third or so. Even if a recession becomes a depression, energy use will be with us, priced in a volatile spread over the economic value of a unit of work. There is every reason to believe that inflation will resume to negate out the governments spending and borrowing to cover its mistakes and bailouts, rescues and stimulus programs. That inflation has a good chance of finding its way into stock prices.

While investors could be eager to seize today’s opportunities, traders in commodities could be panicked. The preponderance of trades in energy commodities has been in oil and corn, both sinking to “dreadful” lows. If not for a credit crises, financial meltdown and other descriptions of the drop in values from homes to equities, energy commodities would have had to reset closer to economic value of their worth. A barrel of oil or a bushel of corn can only do so much work, leaving intense pressure to conserve when over priced. That lesson, fresh in almost everyone’s mind, provides many opportunities for improvements in efficiency. With the daily costs reduced, some money is freed up to invest in more efficiency.

All that said, the bargainers perspective takes a role. Are equities as low as they’ll go? But here is another view. Is the equity price at a low such that the price to earnings ratio is highly attractive? Many companies are there now.

On the other hand are the energy commodities as cheap as they can get? Oil was under $15 less than ten years ago. Corn was supported by taxpayers just 3 years ago. Natural gas is just might go into a supply bubble. Things are very different from a few months ago.

So what would an economic value be in a barrel of oil? Watching sites that think about similar things like what oil companies consider an oil price to be to assure that investments pay back are thinking from $45 to $50. Or prices over that are suspect and below unlikely, or very short lived if they occur.

So it might very well be with oil trading in the mid to upper $50s this week, we’re within a few percentage points of optimal investing.

Price volatility makes things interesting on the up side. Traders and speculators can make and lose fortunes in just weeks. But right now, I’m thinking investing from services to production to efficiency across the whole field of energy is just about as good as we could see. Barring a huge screw up by the new U.S. Administration, the economic bottom in energy is about now, although prices could go lower for a while, making it worthwhile to get busy checking where some equity money could be parked.


1 Comment so far

  1. Where to Make The Big Money In Energy | Cost Fuel on November 18, 2008 9:51 AM

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