Nobody knows for sure whether oil will be trading at $50 or $300 six months from now. One thing, though, is certain: Eventually, a lot of investors in energy stocks are going to get burned.
Plenty of people are pointing at current oil prices, claiming that there's an energy bubble. While some play the blame game, others simply see the situation as the market reaching a new equilibrium, with increasing demand from fast-growing economies around the world running up against flat supplies.
But energy price movements by themselves aren't why investors will lose money on energy stocks. The key is this: Investor greed will overcome reason. That shouldn't come as a big surprise. After all, we've seen all this before.
There's been no shortage of society-changing trends in recent decades. Globalization in commerce and communication has eliminated boundaries. From the rise of the computer and the advent of the Internet, technology has progressed in leaps and bounds. It's transformed the world and the way we interact, both in business and in our personal lives.
But that doesn't mean that every single stock that had anything to do with technology has been a successful investment. The graveyard of dot-com delistings is too lengthy to count -- for every Amazon.com
Let the madness begin
The same potential exists today in energy. For instance, recent finds in the Haynesville shale area of Louisiana, the Barnett fields in north Texas, and the Bakken formation in Montana and North Dakota have meant huge prospects for big gas producers like XTO Energy
Many of those big firms will do nicely over the long haul. But you're also starting to see speculative fever in tiny companies that represent little more than a gamble on the success of a particular well. Tiny Pyramid Oil has risen more than 400% over the past three months, while several other small companies, such as Tengasco and Kodiak Oil & Gas, also made eye-popping gains. Everybody wants in on the action while the getting's good.
In the '90s, the only thing a business had to do to get investor interest was to change its name from "Acme" to "iAcme.com." Similarly, as long as a company has some connection to oil or gas exploration and production, then it can count on finding investors willing to jump on the bandwagon and hope for a long, profitable ride.
Industry success, investor failure
We all know that while plenty of Internet startups failed miserably, the Internet itself was a huge success. Similarly, the growth in the energy industry will inevitably succeed in providing a big range of options for consumers. As some businesses focus on getting more from existing production, others look for undiscovered riches. Competition among wind, solar, and nuclear energy will be fierce in those spaces, and many of those players will ultimately go down the drain.
As an investor, you can't just indiscriminately throw money at the energy sector and hope to cash in. Using your judgment is essential if you hope to find the one company out of dozens that will thrive in the new energy world for years to come. If you let greed win out over reason, your portfolio will be the victim.
For more on our current energy crisis, read about: