Oil That Is, Black gold, Texas Tea

The price of oil has such an impact not only on the stock market but the economy as well. Is there enough in the ground to last us till Judgment? Will environmentalists finally let us rip Alaska to shreds and put that black gold where it belongs. Our SUV's? Will terrorists let us drill Iraq in peace so we can help pay for that damn mess? Does Saudi Arabia even have enough oil to last for the next 100 years?

There is a school of thought that feels production is on a decline. Add to that, rising global demand and you have $100 a barrel and inflation. At this point no one really knows how much is in the earth’s tanker. But with China and India’s growing appetite for energy, coupled with the U.S. dependence on black gold, prices won’t be dropping soon. Here’s the scenario:

In the 1950’s geologist M. King Hubbert wrote that an oil field’s production will peak when half of it is extracted from the ground. From that point on, its ability to produce declines. He predicted this event would occur in the 1970’s. Many geologists say he was correct. Production has leveled off and there hasn’t been an increase since. This my friend is known as Hubbert’s Law. Cue scary music.

The odds are slim the world has many large undiscovered oil fields left. If environmentalists give the go ahead to rip up Alaska, the effects on reserves would be minimal.

70% of all oil used in the U.S. comes from other countries. Many people say that percentage is too high. They would be correct.

Can the U.S. pick up the slack? Since 1976 not a single new refinery has been built in the U.S. Why invest in new refinery equipment and tankers when oil producing capacity is down. It’s just not worth the expenditure.

What about Saudi Arabia? There’s oil in those hills. Not as much as they may claim. Saudi Arabia owns 23% of the worlds reserves. That’s estimated at about 262 million barrels. Six giant fields produce the majority of this and the chances are unlikely of finding new ones.

To keep the sands pumping Saudi Arabia must invest in new technologies such as water injection. Investments such as this add to the cost per barrel.

The Middle East as a whole stores about 63% of the world’s reserves. That’s even scarier. We have so many friends there.

Unemployment in Saudi Arabia is about 15-25%. Since oil is so profitable and not labor intensive, the government hasn’t fostered new industries. The population is growing and many young Saudis are entering the workforce. Competition for non-energy related jobs is growing.

There are those who say there is no impending production problem and that the Saudis will be able to produce 15 million barrels a day for the next 50 years. That’s comforting because the world consumes about 85 million barrels a day.

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When energy prices rise faster than general prices, inflation looms. Add to this, out of control government spending, falling real estate values, problems with Americans paying their mortgage and you have a sceneario for Future Shock.

In case of skyrocketing energy prices and inflation here are some ideas:

• Energy : Invest in well run energy companies. The one group of stocks not adversley affected by rising energy prices are these guys. They come out smelling like roses.

If alternative forms of energy become viable, these oilcompanies just might lead the way. Or at least they'll buy other companies that are successful in alternative energy. If some company discovers a way to power a whole city from wind, do you think Exxon would sit by and say "Great idea. Good luck to you!" Of course not. They'd buy it.

Some forms of alternative energy are more promising than others. Only technology and research will determine the best candidates.

If prices go higher, nuclear energy might make a comeback. If so, think plutonium and uranium.

Coal and natural gas are good contenders as alternatives. Some of the issues are coal pollutes and natural gas is difficult to transport.

• Defense stocks : In this day and age certain oil producing countries need protection from the "elements". No, not rain. Suicide bombers. If you know any defense companies with good ties to the U.S. government, you may have a long term winner. Let me know when Blackwater goes public.

• REITs : Real Estate Investment Trusts are comprised of income producing real estate. During periods of inflation, these rents usually rise. Higher rents, higher returns.

• ETFs & Mutual Funds: The leading stocks within the oil industry are not hard to find. Investing in an ETF gives you exposure to a selection of the best. Here's the chart from an ETF called United States Oil (USO). It is based on the spot price of West Texas Intermediate light, sweet crude oil. Futures, fowards, options are all inlcuded:

"...And up through the ground came a bubblin' crude....So they loaded up the truck and moved to Beverly. Hills, that is. Swimmin pools, movie stars."

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