Why You Should Buy Oil

Rob Gifford's China Road is a must-read for anyone -- investor or otherwise -- who is looking to increase his understanding of our world's emerging economic superpower. And while myriad investment ideas dot the book, the most significant can be divined from this passage:

So much in China now depends on oil. Its importance resonates silently down through every stratum of society. The Communist Party must keep the economy growing; otherwise the unemployed and underemployed could cause social unrest. To keep the economy growing, the Party must build new factories and create new jobs. (Some economists have calculated that 24 million new jobs must be created every year in order to do this.) To fuel the factories and the construction, China must have more oil. And to achieve that goal it is searching for oil within its own borders and going out into the world, making deals in Africa, and Central Asia, and Southeast Asia.

And when Mr. Gifford asks a former oil worker if China has enough oil, the worker responds cryptically, "Not yet."

Some startling statistics
The fact is, China needs -- and is going to need -- a lot of oil. (And that's before we account for the Sichuan Tengzhong Heavy Industrial Machinery Co.'s recent purchase of Hummer.) Indeed, according to BP's Statistical Review of World Energy 2009, though global oil consumption was down 0.6% in 2008, oil consumption in China increased 3.3% to nearly 8 million barrels per day.

And while that already accounts for nearly 10% of global oil consumption, China looks like it has a long way to go. That's because while it has four times the population of the United States, it today consumes less than half the amount of oil. Should China someday consume the same amount of oil per capita as the United States, we are going to see skyrocketing prices and a significant global supply squeeze.

Unlike the United States, China has anticipated this
This is why China is engaged in an aggressive global grab for natural resources. These efforts include greatly increased investment in resource-rich Latin America, including a massive $10 billion investment in Petrobras (NYSE: PBR  ) to aid that Brazilian state-owned company's exploration activities, as well as a joint venture between PetroChina (NYSE: PTR  ) and Hugo Chavez's PDVSA (yes, China is that desperate). It also includes significant asset acquisitions in Africa, such as CNOOC's (NYSE: CEO  ) 2006 investments in Nigeria and expected purchase this year of assets offshore Ghana. Finally, we even have plans by Beijing-based Sinopec (NYSE: SNP  ) to commence drilling in previously disputed waters off Vietnam, as well as that company's major announcement just this week that it will acquire Addax, a major producer in Africa and the Middle East, for more than $7 billion.

It's worth noting here that PetroChina, CNOOC, and Sinopec are all state-owned companies in China, which means the open markets may never see the fruits of their investment. And while we here in the United States were threatening to tax the likes of ExxonMobil (NYSE: XOM  ) , ConocoPhillips (NYSE: COP  ) , and Chevron (NYSE: CVX  ) to high heaven while energy prices were high, the Chinese government was putting its energy companies in a position to help secure the country's economic future.

What this means for investors
There are two obvious takeaways here. The first is that if you're willing to stomach some volatility, going long on oil and related energy companies for the long term at current prices is probably a pretty good play. (That's particularly true if you believe alternative energy technologies will be slow to commercialize.)

The second is that if any emerging market will suffer from a lack of energy supplies, it won't be China. When you add to that fact China's infrastructure advantages over other emerging markets, its relatively strong balance sheet, immense human resources, and growing reputation as a financial center, you get what looks to be the world's most promising emerging market.

That is a bold, but reasonable claim
That potential is one of the reasons our Motley Fool Global Gains team is heading back to China in July to meet with some particularly promising small companies. If you're interested in hearing what we find, you can sign up to receive all of our free real-time reports from the field simply by providing your email address in the box below.

But even if you don't check back with us next week, I think if you check back in 20 years, you'll find that a "long energy, long China" investment strategy will have worked out quite well.

Tim Hanson is co-advisor of Motley Fool Global Gains, and while he's looking forward to the trip, he's not looking forward to 16 hours on a plane. He does not own shares of any company mentioned. Petroleo Brasileiro is a Motley Fool Income Investor selection. CNOOC is a Motley Fool Global Gainsrecommendation. The Fool's disclosure policy laughs in the face of jetlag.


Read/Post Comments (12) | Recommend This Article (95)

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 26, 2009, at 5:21 PM, bw1962 wrote:

    Look into GMTI. Look at the latest P.R. This little compant just patented a way to foil oil!

  • Report this Comment On June 26, 2009, at 5:47 PM, plange01 wrote:

    once oil falls into back near its yearly lows in a few weeks it will be a better time to buy.for the next year or so its not going to move much....as the current depression in the US sets in oil use will continue to drop

  • Report this Comment On June 26, 2009, at 10:51 PM, jbrt wrote:

    oil is a real volatile one , take your dramamine before buying or keep a bucket nearby

  • Report this Comment On June 27, 2009, at 7:43 AM, lebaresq wrote:

    No need to seek out exotic small companies. CNOOC, Sinopec, PetroChina, PetroBras are all creditable investment choices. With mainland China picks, your status is equivalent to limited partner, minority interest trading publicly. Communist government as majority owner doesn't tolerate management compensation excesses but company profits last year were inhibited through government-imposed retail price controls.

  • Report this Comment On June 27, 2009, at 8:22 AM, Dannysea wrote:

    Statistically oil will rise. Even if US goes 80% non-oil, (30-years?,) the rate of emerging markets, including China, during same period as mentioned, oil usage will be 8-12 times greater than what we industrialized countries will have replaced with passive energy. Remember our and Europe's pollution standards are not emerging countries standards.

    Add that into who the big investor for the future (China right now) will be dictating policy. Not those countries who have gone green and do not own and control the oil.

    America is becoming a joke with it's socialism love affair, and lack of focus of capital growth. We even want to penalize anything that shows promise of good growth and companies (stock owned by Americans) with capital expansion.

  • Report this Comment On June 27, 2009, at 8:50 PM, MartinLois wrote:

    On Friday March 20, the U.S. Environmental Protection Agency handed you the opportunity to make one of the first big fortunes of the 21st Century.

    It made an announcement that will dramatically change the way energy is produced in this country. Early investors have an unprecedented opportunity to grab gains as high as 661%.

    http://top5stocks.blogspot.com

  • Report this Comment On June 28, 2009, at 10:42 AM, plange01 wrote:

    with the US and much of the world now over 6 months into a depression .oil consumption is falling.hedge(trash fund) speculation is all that is driving up prices just like last year.after huge losses these trash companys no longer have the money to affect prices like befor and oil will soon reatreat bacl to the $35-$45 level...

  • Report this Comment On June 28, 2009, at 6:54 PM, tonester2k wrote:

    Quite frankly, if the Chinese really needed oil, they are getting to the point where they could just take it. We tend to forget they are not of the same ilk as the "free" world - you know, the whole communist thing?

    And there is one whole s**t load of 'em....

  • Report this Comment On June 28, 2009, at 9:23 PM, Sleddawg63 wrote:

    Oil will hit $147+ again. The "green" initiative can never take hold unless gas is $4++++.

    The Obama admin. will make sure if it! Just a matter of w-h-e-n.

  • Report this Comment On July 05, 2009, at 5:46 PM, ricovonsuave wrote:

    You're perhaps not far off tonester2k, but the thing is that they won't "just take it" when it's cheaper and more diplomatically astute to buy contracts or start a joint venture than to, er, let's say try to invade and police the middle east for example..?

    Don't forget that China is buying up commodities at the moment in an effort to divest their US$ reserves into things like longer term futures contracts etc; even if commodities are a bit 'expensive' now considering the rest of the economic climate, the upside is pretty damn big, security of supply is important to them and it's a LOT better than holding onto depreciating US dollars. Printing money causes inflation, funnily enough...

  • Report this Comment On July 06, 2009, at 10:55 AM, ChannelDunlap wrote:

    What a stupid comment Tonester. What about "the whole communist thing" exactly makes them more inclined to "just take it"? Isn't the US part of the "free world", and we seem to be just fine "taking it" right now. I'm so sick of Communism and Socialism being so vilified. It's a different economic model. Period. You may not like it, or you may not understand it, and that's fine. But that doesn't make them the aspiring evil overlords of the universe.

  • Report this Comment On July 07, 2009, at 11:47 AM, kayakmastr wrote:

    Not too many look at the numbers. If they did, they would see that only solar and nuclear energy can replace fossil fuels like natural gas, coal, and oil. Other sources will only cause the growth curve to flatten a bit. Note that some companies produce both natural gas and petroleum. Renewable bio-fuels require farmland, which is limited and also needs to be used to grow food, so don't expect a huge impact there. I see CCJ as recommended by TMF Pro as a great play along with the fossil fuel producers at current prices. I don't see that the challenges (cost, efficiency, storage) associated with solar energy will be resolved within ten years.

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