In case you couldn't tell from the gasoline prices in your
area, oil prices have been on the move. The chart below pretty
much says it all.
As you can see, benchmark West Texas Intermediate Crude has
seen substantial price action. For the record, prices have staged
an impressive 120% bounce off the lows from January 2009.
There are compelling reasons to believe these elevated prices
might stick around for a while. That could act as an economic
drag, siphoning money from consumers and sparking inflationary
price hikes for goods and services.
The United States alone consumes 18.9 million barrels of oil
every day, rain or shine. And China's appetite grows more
ravenous by the minute, with daily consumption doubling from 5.5
million barrels in 2003 to nearly 9.8 million in 2011.
Aside from a brief downturn during the recession, global oil
consumption is moving inexorably higher.
As you can see, worldwide oil consumption passed its
pre-recession 2007 peak in 2010 and continues to rise. It is
reach 90.2 million barrels per day this year. Meanwhile,
the world's oil companies will only produce 90 million barrels
In other words, demand will outstrip supply by 200,000 barrels
per day, or about 73 million barrels for the year.
We can barely feed our appetite today. And we're getting
hungrier. Per-capita consumption in China and India is still less
than one-tenth that of the United States. But they're catching up
fast. In fact, 18 million new cars hit the road in China last
year, compared with 14.5 million in the United States. That's
stretching supplies even thinner.
Meanwhile, most production grounds have been in a steady
decline for decades. Future oil exploration activity will be
focused in deep offshore basins, which are expensive to tap
(meaning drilling and production will halt if prices retreat and
recovery becomes uneconomical).
And if all that weren't enough, the Federal Reserve's
quantitative easing and other dollar debasement policies have
given a huge boost to oil and other dollar-denominated
In short, there are plenty of factors underpinning high crude
prices. And I think they are headed even higher.
But even if oil stabilizes at this level, we could still see
blowout profits for many companies --
enough to buy back shares, raise dividends, and plow
surplus cash into expansion projects to support future
There will be many beneficiaries:
offshore drillers, equipment and service providers, even the
alternative energy sector
(which always attracts interest when high oil prices become
But most of the wealth will go to the companies pulling the
stuff out of the ground. Still, you can't just invest
Some companies may have already locked in most of their
production at lower prices through hedging. Those companies won't
feel the full impact of the tailwind. And integrated giants like
Exxon Mobil (
won't yield the greatest returns either, because high oil prices
typically crimp refining profits.
Instead, look for smaller companies with no distractions and a
nimble earnings needle. Small energy producers are by far the
easiest way to make money on energy stocks. If oil eventually
shoots higher, as I think it will, you'll be glad you did.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.