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.
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