Why You Should Buy Oil

Rob Gifford's China Road is a must-read for anyone -- investor or otherwise -- looking for a better 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 eight 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 $14 billion bid by China National Petroleum to acquire the Argentinean operations of Repsol YPF (NYSE: REP  ) . It also includes significant asset acquisitions in Africa, such as Marathon Oil's (NYSE: MRO  ) recent $1.3 billion deal with CNOOC and Sinopec, as well as acquisitions in Singapore and Malaysia.

It's worth noting here that China National, 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 Apache (NYSE: APA  ) , Devon Energy (NYSE: DVN  ) , and Hess (NYSE: HES  ) 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 recently traveled to China to meet with some particularly promising small companies. If you're interested in hearing what we found, you can get our five top picks from the trip by clicking here to join Global Gains free for 30 days.

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.

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This article was first published on June 26, 2009. It has been updated.

Tim Hanson is co-advisor of Motley Fool Global Gains. He survived 16 hours on a plane despite the fact that the best movie offered was Confessions of a Shopaholic (seriously, United?). He does not own shares of any company mentioned. CNOOC is a Motley Fool Global Gains recommendation. The Fool's disclosure policy laughs in the face of jetlag.


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  • Report this Comment On July 28, 2009, at 3:44 PM, radicall wrote:

    I support the thesis about being energy hedged, but articles like this really bother me - asking the consumer to buy oil is about the most foolish thing I have heard, especially in times of Contango.

    How I tell people is - I think we all need to hedge ourselves when it comes to things we will need for the next 40 years - Oil (gasoline), natural gas and coal (electricity), water, any other natural resources that are a component of things we use in daily lives.

    So while I agree that it is important to have more money in our pockets when the price oil goes higher - buying oil is not the way to play it. Having exposure to energy companies and energy service names is a much better way.

    Most individuals buy oil through ETFs like USO. oil proces have doubled since january, but USO is still hanging out in the same range for the most part - the oil service names have jumped 50-70% during the same time.

    If you are in your early to mid 30's - rolling over an oil contract futures contract for next 30 years - accounting for contango will cost you say (just as an example) 200 bucks a barrel in contango, plus 65 bucks for the original price of oil. If oil is less than 265 in 30 years you lose money.

    I like oil, coal stocks as a short/intermediate term trade - thinking of being hedged for 30 years out - think lithium for batteries, Uranium for nuclear power plants (instead of fossil fuls),

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