Book Review: The Oil Factor - A Must Read

Over the last 20 years, author Stephen Leeb has created quite the reputation for himself, as an innovating predecessor of changing economic paradigms. His previous books include a 1986 (Getting in on the Ground Floor) novel foretelling the great technology bull market of the 1990s as well as a staunch warning of the impending technology collapse in his 1999 book, Defying the Market.

In his 2004 book, The Oil Factor, Leeb returned to the limelight with an unprecedented prediction of soaring energy prices. Three years later, we now appreciate the full maturation of his predictions. While these projections were not all that startling, the true gravity of the situation is. At the time, a simple analysis of demand side economics would have revealed the pressures on energy prices as wealthy Americans adopted the use of sports utility vehicles and the emerging economies of China, India and Russia required a greater energy intensity. Given the low prices at the time, simple deduction would conclude an increase in energy prices.

While the issues of rising energy prices seems rudimentary from the vantage point of a neophyte, the ramifications are not so basic. The book does an astounding job of factually revealing current supply and demand dynamics, while demonstrating the future consequences for investors.

Of the various chapters in the book, chapter 2 "Our Amazing Oil Indicator," remains one of the most intriguing and useful. Since all economies demand energy for economic output, Leeb and his associates devised a method for comparing and contrasting rising oil prices with S&P performance. First, they evaluated oil prices from 1973 to 2003. Finally, they notated S&P 500 index performance during the same time frame. In Leeb's words:

The results were staggering. When oil rose by 100 percent or more over a twelve-month period, stocks during the next eighteen months experienced an average maximum monthly decline of 27 percent.

The basic premise here is, as oil moves higher the market moves lower.

The question is, with oil prices up significantly, how come the market is reaching new highs? I have my speculations such as strength in the energy, and natural resource sector as well as the resilience of the American consumer. While more thought needs to be put into this, one word does come to mind - unsustainable.

In conclusion, The Oil Factor is a must read for every investor wanting to protect their investments in the emerging world of scarce and expensive energy.

Comments

[fran]

leeb's 2006 book--the coming economic collapse--is also worth a read. his insight and recommendations made me very good $ return in 2006/2007.

[WalterMorton]

This is another foray in predicting what will happen after we reach world "peak oil" production, estimated variously by experts as somewhere between 2004-2030. I have read Leeb's previous book "The Coming Economic Collapse" and in that work Leeb does his modeling off the energy crunch of the 1970's. In the earlier book, Leeb suggests investors can profit by avoiding energy-intensive industries (i.e. airlines, autos, chemicals) and investing in: 1) Gold 2) Oil and Oil Shares 3) Real Estate 4) China/India. I personally do not think that any investor would do well to blindly go into those 4 areas this time around. Gold no longer seems the sure hedge against inflation it has been for decades. Real estate is certainly unwise, at least in the USA, as we are in some late phase of a bubble with record defaults in some markets. China and India, while offering legitimate high growth, are politically unstable and contain substantial risk. China and India are great for any investor with high tolerance for risk. This leaves the prudent investor with the option of -- in a coming energy crisis -- investing in energy explorers, producers, providers. And to be sure, some of these companies will do very well in a crunch and see their profits soar, while others may find themselves under political pressure, restricted supply, or unable to meet demand. I have spent a lot of time on my portfolio, in analysis of what energy companies will be "winners" in the coming energy crunch, and I invite other readers to share their ideas about that in this forum.

[markj]

Ken Fisher's recent book (The Most Important Three Questions...) presented charts indicating a positive correlation between historic oil prices and overall stock prices (such as S&P 500) -- his analytical results contrast with Leeb's as outlined above here (not sure why at this writing).