Read This Before Another Huge Oil Shock

Some roller-coaster! After spiking some 50% in late 2010, oil now sits just around $100 a barrel. Let me explain what the heck's going on and what surprising opportunities it reveals for investors.

(Not) intended for public consumption
In the short term, energy prices -- just like stocks and other financial instruments -- fluctuate wildly with the mind-set of speculators and economic data. Nine out of every 10 traders currently betting on (and pushing up) oil prices are on Wall Street. The CFTC, which regulates commodities trading, is prosecuting traders for an alleged 2008 scheme to manipulate energy prices by hoarding oil, making a "[expletive deleted]load of money," and then dumping it during the "inevitable puking," according to emails the CTFC obtained. Colorful!

But let's even leave Mr. Market aside for a moment. The long-term fundamentals for energy seem strong for two reasons: supply and demand.

Supply vulnerabilities are well known. The world derives a lot of its oil from regions like the Middle East and North Africa, which, as you may have heard, are not the most politically stable regions on the planet. This matters more than you might think. My colleague Dan Dzombak points out that it often takes an oil-producing nation one to two decades to fully regain its footing after a major supply disruption, noting ominously that "if any of the three [Saudi Arabia, Iraq, or Iran] were to be affected, particularly Saudi Arabia, oil prices would skyrocket for years."

Meanwhile, global consumption is booming, driven by emerging economies. China has been particularly voracious; oil consumption has grown about fivefold over the past three decades, and the country is now the world's largest energy consumer. It's expected to surpass all of Europe as the world's second-largest oil consumer within a decade, despite the country's major efforts to improve energy conservation and efficiency.

What are the United States' plans for meeting our energy challenge, and what opportunities do they present for investors? At an economic summit last week, I had the chance to hear from the White House's Deputy Energy Advisor Heather Zichal. She described a goal to reduce oil imports by 30% by 2025 by expanding oil and gas production, improving energy efficiency, and promoting natural gas, biofuel, and other "clean" fuels.

The U.S. imports around $350 billion of oil each year, so even a motion in that direction would represent a major opportunity for investors.

The inside scoop
Here's one tidbit that really caught my ear:

Before the 2009 recovery act, the U.S. produced 2% of the world's advanced batteries. We're now aiming for 40% [by 2015].

The Department of Energy is providing loans, grants, and matching funds for advanced battery research and 30 manufacturing plants. Ford (NYSE: F  ) , General Motors, Johnson Controls, and A123 (Nasdaq: AONE  ) are among the most recognizable names taking advantage of the program, which will help automakers meet tougher fuel-efficiency standards. Hey, why should foreign producers like Advanced Battery Technologies (Nasdaq: ABAT  ) and China BAK Battery (Nasdaq: CBAK  ) get all the glory?

It makes sense to consider upstream winners, too. Toyota claims that a different design is possible, but for now hybrids require rare earths that can only be mined at sites with long lead times -- potentially good news for the small field of producers like Molycorp (NYSE: MCP  ) .

Zichal also noted a need to expand domestic oil and gas production. ExxonMobil recently announced one of the largest discoveries in a decade, a find that also serves to highlight oil's increasing scarcity; it's under 7,000 feet of the Gulf of Mexico and represents the equivalent of 35 days of energy at best.

Natural gas is more geographically dispersed, and new "fracking" technology -- despite environmental concerns -- has allowed companies like Chesapeake Energy (NYSE: CHK  ) to boost production in regions like the Marcellus shale in Pennsylvania and New York and the Haynesville shale in Louisiana and Texas.

Other countries such as Germany and China are shifting to natural gas from nuclear and oil. This has the potential to spur further production and exports as companies like Cheniere Energy (AMEX: LNG  ) open new terminals.

A recent report from the International Energy Agency suggests that worldwide natural gas consumption will jump 50% over the coming quarter-century, a trend that my colleague Jim Royal believes could usher in a golden age for these stocks.

The increasing scarcity of oil supplies, political instability in oil producing regions, and booming global demand for energy will mean some long-term winners among energy producers and new technologies.

With situations like this in mind, The Motley Fool has created a new special oil report titled "3 Stocks for $100 Oil," which you can download today, absolutely free. In this report, Fool analysts cover three outstanding oil companies, including the stock Fool analyst David Lee Smith calls the "energy king." To get instant access to the names of the three oil stocks, click here -- it's free.

Ilan Moscovitz doesn't own shares of any company mentioned. The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy and Ford Motor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (19) | Recommend This Article (71)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 13, 2011, at 6:04 PM, Kakabeka wrote:

    blah blah blah

    Oil will be at 89 before it goes over 100 again....

  • Report this Comment On June 13, 2011, at 6:10 PM, LAVol wrote:

    "despite environmental concerns"

    It's amazing that environmentalists are concerned about using water for fracking but not about using water to produce ethanol--not to mention increasing the cost of grain and the corrosive effects of the fuel. It takes over 4 gallons of water to produce one gallon of ethanol. On a BTU basis, thats more than 1000X more water than used to produce gas or oil when fracking techniques are used.

    There are chemicals added to water to facilitate the fracking process. Those chemicals have NEVER been detected in drinking water adjacent to the oil and gas reservoirs were fracking has been used. All indications are that drinking water contamination blamed on fracking is actually the result of improperly drilled wells by wildcatters--not by the major drillers.

  • Report this Comment On June 13, 2011, at 6:20 PM, davidm8797 wrote:

    LAVol; spectacular post... don't mind if I quote you do you?

  • Report this Comment On June 13, 2011, at 6:57 PM, Kloris wrote:

    Germany is not switching to nuclear. They just voted to close all nuclear plants.

  • Report this Comment On June 13, 2011, at 10:17 PM, TMFDiogenes wrote:

    "Other countries such as Germany and China are shifting to natural gas from nuclear and oil. "

  • Report this Comment On June 13, 2011, at 11:38 PM, Chontichajim wrote:

    Germany stated policy is to replace nuclear with renewable energy sources. Does not mean they may not increase natural gas use at least for a time, but we should not state this as if it was a German policy.

    Alaska can't even give away their natural gas due to pipeline/transport cost. Says something about supply and demand for natural gas. (I am long on a Gernan utility and one company with both oil & gas).

  • Report this Comment On June 14, 2011, at 12:51 AM, 2beewise wrote:

    Re; LAVol 6, 13, 2011, at 6:10 PM,

    "despite environmental concerns"

    As a wildlife biologist with a bit of background in geology;

    I grant you there have been no 'reported' incidences of fracking chemicals showing up in well (drinking) water....YET. (I take no solace in that 'fact' at all.) To date, I personally have seen no complaints from environmentalists about the amount of water used for fracking. What I have seen is a great deal of concern for the virtually guaranteed migration of fracking chemicals into both private and municipal water resources. In most areas ground water is "flowing" slowly through the aquifer in one direction or another.

    I would like to take comfort in the record thus far. I can't. I'd like to take comfort in the idea that only the small wildcatters are the ones who will ultimately contaminate fresh water resources. If we learned nothing else from BP, we learned that the worst environmental disasters are dropped on us by the biggest and greediest of the petroleum industries. (I also take no comfort in the fact that congress has imposed new "restrictions and safety measures" for deep-water drilling. As one independent oil industry monitor has put it; the new regulations are the equivalent of rearranging the deck chairs on the Titanic. It mattere not how perfectly the facilities and equipement designs are and how the conscientious the operators are and how competent and honest the government inspectors are (witness the nuclear industry) there WILL be "failures", serious failures and the majority will driven by greed from the top. I was watching when Rachel Carson was doing her research 50 yr. ago, long before she wrote "Silent Spring". Today DDT exists in the fat of every single human on Earth and even in penguins, seals and whales at the South Pole.....and it ain't no vitamin. There is a limit to how many insults Planet Earth can endure. We are pushing our luck hard and fast.

  • Report this Comment On June 14, 2011, at 5:19 AM, 60Chevy wrote:

    2beewise, Thank you.

    As another example,

    The fracking of Natural Gas reminds me of the dumping of PCB's in the Hudson River by the General Electric Company. It was perfectly legal when they did it. There was no evidence that it posed a threat to anyone, at that time. GE tried to deny it for decades. GE lost. GE has been fined millions of dollars. The cleanup continues to this day. And GE continues to pay and pay and pay.

    The Natural Gas industry was given a HUGE gift when fracking was exempted from the Clean Water Act. That exemption could be yanked out from under them at any time.

    The only reason we have not found any serious problems with fracking is because we are not looking. To find PCB's in a river is easy. To find the fracking chemicals thousands of feet into the Earth takes special equipment that ordinary folks don’t have access to. If we wait for the chemicals to show up in my kitchen sink, it will be too late. Way too late.

    The chemicals could move into my drinking water supply. OR my drinking water supply could move into the chemicsls. OR BOTH. GOOD POINT!

    When gasoline gets to about $6 a gallon in the US, the popularity of CNG powered cars will soar. Pakistan already has hundreds of thousands of them. My brother has one in California, a Honda GX, a production product commonly available. When we have millions of CNG powered cars on the road in the US, the fracking frenzy will truly run wild.

    We need to get our heads out of the sand, and put the proper regulations in place now. Water sample wells should be required around each of the production well sites. And a reporting system set up similar to the CEMS [Continuous Emissions Monitoring] system at a power plant.

    I have worked in power generation for years. In the old days, generating plants could choose to exceed their limits and pay the fine, or shut down and fix the problem. In every case, the choice was made to pay the fine and keep generating power [and fix the problem in the next scheduled outage.] It was a matter of simple arithmetic; the price for the power exceeded the fine. Then the EPA put a few guys in jail, and let them sit in there for a few years. And the choice to pay the fine and keep running went away overnight.

  • Report this Comment On June 17, 2011, at 12:50 PM, PositiveMojo wrote:

    The price of oil has little to do with "real" supply and demand. Most people do not recognize that the world economy has changed over the past 10 years. The price of any commodity is determined by two factors: the flow of money and cross border alliances.

    The flow of money is the fastest growing and the greatest destabilizer of commodity prices. Prior to 2000, investments in commodities were limited to a relatively small number of investors and the transaction process took a much longer time. There was more time to react to changes in price and less opportunity for speculators to walk away with instantaneous profits or the ability to impact the market without being exposed.

    Today, the number of investors in commodities like gold, oil, etc has increased exponentially and online trading happens almost instantaneously. There are no governmental policies in place for these higher volume and faster transactions. The speculators cause a destabilization in pricing.

    The barriers to trading across borders has also been eliminated by electronic trading. Speculators can now reach into foreign exchanges and immediately have information at their finger tips and can react right away. This is a new economic model that begs for the development of policies that will minimize instability.

    The second factor that impacts commodities is cross border alliances. Contracts between countries for the mining of natural resources in exchange for whatever they value have a tremendous influence on price. In the past 10 years we have seen demand rise in China and India for oil. The contracts for oil exploration and the companies involved will directly impact which country will recieve the oil - thereby influencing price.

    If "real" supply and demand were the primary factor in determining oil price it would be much more stable than it is.

  • Report this Comment On June 17, 2011, at 1:46 PM, McPinto wrote:

    Fracking is not the answer, I'll tell you that... Please view this segment to become a little more informed of the possible consequences of it:

    http://rt.com/usa/news/fracking-pennsylvania-water/

    The fact that it is a growing practice is very disconcerting. If you want the truth about hydraulic fracturing, take the time to watch "Gasland".

    http://www.yorkblog.com/flipside/2011/03/see-fracking-docume...

    Don't be a fool!

  • Report this Comment On June 17, 2011, at 3:23 PM, effinayright wrote:

    "gasland" is a worthless piece of propaganda. Its maker knew that "burning water" had been reported decades ago in the areas over gas fields . curiously, he decided to leave that important fact out.

    As for "greedy" oil companies: is this The Motley Fool website? You know, where people discuss business opportunities? Or is it Daily Kos? How can oil companies be "greedy" when their ROI is so middling?

  • Report this Comment On June 17, 2011, at 6:30 PM, ganawayd wrote:

    Where does APCO or Exxon fit in this picture?

  • Report this Comment On June 17, 2011, at 11:49 PM, trophypond wrote:

    2beewise, thanks for telling it like it is. People are so easily manipulated by media "news" and governmant propaganda. There are still lots of people who believe we're in an economic recovery.

  • Report this Comment On June 18, 2011, at 7:14 AM, W1sM0m wrote:

    Many of these companies are currently operating with a short term 'sound bite'. mentality. The blame is shared between investors who want up front profits every quarter, and self-serving directors in league with crony CEOs who agree to ridiculously high salaries and bonuses based on those quick profits instead instead of focusing on long term growth and development.

    Long term sustainability is always a key issue.

    Any company that invests more resources and focus in serving top management and lobbying than in it's r & d and the maintenance of it's production facilities is badly run.

  • Report this Comment On June 18, 2011, at 12:30 PM, SpaceVegetable wrote:

    @effinayright is correct. Companies have one mandate: make money for shareholders. Period. I'm so tired of seeing the word "greedy" being thrown at every business that has the audacity to make a profit (or at individuals whose hard work or investing prowess has allowed them to make money).

  • Report this Comment On June 18, 2011, at 12:31 PM, SpaceVegetable wrote:

    One more thing... this country should be doing everything possible to develop any and all sources of energy, green, clean, or otherwise. Anything that lets us send less money to people who hate us is a good thing.

  • Report this Comment On June 19, 2011, at 2:54 PM, Beehead wrote:

    Doubt oil or energy prices will come down because the vast majority of the money we spend on these sort of things ends up in government pockets. Can't see the price of batteries being filled up with taxes either

  • Report this Comment On June 19, 2011, at 3:19 PM, grouchyoldman wrote:

    Unless Saudi goes off line, everything will be cool for the next few months.

    Since the 1970's, when I first entered the oil business, OPEC has kept prices high but not high enough to trigger massive conservation or encourage a major move away from oil and gasoline. As long as Saudi is in the mix, you will probably see this type of pricing persist.

    Keep checking Al Jereza for news about Saudi protests - yes protests like a women's driving protest (how did they leran to drive in the first place?) - which do not get reported by our American media.

    Of course, if Saudi goes off line, prices just won't spike - there will be no gasoline since we import a significant amount of it ready refined from . . . yep, The mddle east.

  • Report this Comment On June 27, 2011, at 5:29 PM, Canuck2010 wrote:

    The United States imports more oil from Canada than Saudi, so while there would be significantly curtailed gasoline supplies, there wouldn't be zero supply.

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