2 Hedges Against Global Oil Demand

Hurricane Ike is bearing down on the oil fields in the Gulf of Mexico, the Saudis are cutting back on production, there's been little reduction in demand from Asian countries… and yet oil is in retreat.

Why doesn't supply and demand seem to apply to oil? Well - as we've been witnessing the past few weeks - it does. Oil prices are now on the verge of breaking through the $100 barrier.

In response, the stocks of companies who are even remotely connected to its production and distribution have gotten punished - down by 50% or more in some cases - in just a few months' time. And by the same garbled logic, alternative energy stocks are being hammered as well.

Now, before you pedal that bike you just bought down to the car dealer to trade it in for a big SUV, let's look at why the long-term demand for oil will remain strong.

The Recent Drop In Oil Prices Due To Demand Destruction

Demand destruction - primarily in this country - is responsible for most of the drop in recent oil prices. In the first quarter of 2008, trucking industry analyst Donald Broughton estimates that 42,000 trucks, over 2% of the nation's fleet, came off the nation's highways. With nearly 1,000 trucking companies filing for bankruptcy, the demand for diesel fuel has been slashed.

But there's nothing to suggest that this drop is anything more than temporary…

Many of those trucks that have been repossessed have been sold overseas to Eastern Europe and Russia, permanently removing them from the U.S. fleet. When the economy does eventually pick up, we'll be faced with even higher transportation costs than we have now.

Data from the U.S. Census Bureau suggests that we'll be a nation of 439 million by 2050. That's an increase of 44% from last year's estimate of 303 million. (World figures are increasing at similar rates.)

As countries join the global economy and create infrastructure, there's one thing everyone wants as soon as they can afford it - a car. And millions of new cars around the world will lead to skyrocketing oil prices as demand increases while supplies shrink.

The Bottom Line - Oil Prices Are Headed Higher

The bottom line is that long term, oil prices are headed higher, strictly on supply and demand fundamentals. Global demand destruction - if it occurs at all - will be a short-lived phenomenon.

Frankly, there are few viable, short-term solutions to significantly squelch the long-term demand for oil. And it could get ugly; countries with large oil reserves keeping more of it for themselves. They'll ask more for it from those of us who want it. And want it, we do…

With only 4% of the world's population, the United States is currently burning up 25% of the world's oil supply. Nearly 70% of it must be imported. We're competing with China, Russia and a host of other emerging nations whose demand for oil is rapidly increasing.

There are two ways for the United States to hedge against increasing world oil demand - and by extension higher prices.

First, we need a stronger dollar to keep our buying power strong. Second, the world needs an all-out effort to develop cheap, alternative fuels so we all use less oil. The world needs inexpensive energy to fuel the global economic growth engine.

Well the dollar is certainly heading in the right direction. The U.S. Dollar Index is up over 10% since mid-July. A strong dollar helps to drive oil and other commodities lower, as speculative investors - who bought crude as a hedge against inflation - reverse course and start dumping it to cut their losses.

And T. Boone Pickens has a plan that seems to be resonating with the American public: Use wind power to free up cheap natural gas for automobiles and trucks instead of oil. You can learn about the Pickens Plan here. He believes that in the relatively short span of 10 years, we can reduce our foreign oil purchases by one-third.

The best way to invest depends on what kind of "investor" you are. Short-term traders who are dabbling in crude futures and certain oil stocks are experiencing what it's like to take a trip to Vegas… but without the fun.

Following the T. Boone Pickens' Energy Plan

If we take the long-term view, or we want to follow along with T. Boone Pickens' clean energy plan, we have a number of choices. Here are a few:

• Clean Energy Fuels Corp (CLNE) provides natural gas as an alternative fuel, primarily for commercial vehicle fleets here and in Canada. It will be a big player in any nationwide build-out of natural gas filling stations, or modifications to the 170,000 gas stations already out there.
  
  
• Vestas Wind Systems (VWSYF.PK) is the largest manufacturer of wind turbines in the world. Its U.S. business is booming and while it already employs 1,220 people here, it expects that number to increase to over 4,000 by the end of 2010.

Expect both of these companies (and many other alternative energy suppliers) to soar when Congress finally gets its act together and approves long-term legislation in support of renewables.

Global demand for oil and energy is only increasing. While the short-term prices are down, the long-term trend is up. And it'll be extremely profitable for investors prepared for it.

Comments

[Augustus:]

The geothermal sources are able to provide base load power withouth the disruptions of the wind or solar sources. Generally it can be done at a lower cost than wind or solar. A better investment for the alt energy buck.

2008 Sep 16 04:06 AM

[john s. gordon:]

lower oil price - it's not demand destruction, it's the speculators & hedgie funds bailing out of their overleveraged positions,
> jack

2008 Sep 16 08:26 AM

[Chris B:]

I think the scale and speed of demand destruction surprised investors this time around. It has happened much faster this time than in the 70's-80's. Maybe we're less stubborn about driving huge cars and quickly switched to Civics and Corollas. Maybe we were extremely wasteful to begin with and cutting consumption was easy. Maybe behavior changed quickly because the hope of low prices returning wasn't there (The OPEC embargo could have ended at any time, but nothing can stop China/India's demand from rising.). Something changed...

Now, imagine what happens someday when petroleum is not the only game in town - when two-car families have a car that runs on gas and an alternative-fuel vehicle they can alternate between depending on energy prices. Road trip decisions could be made on the basis of "what's cheapest this week, gasoline/diesel/electr...

2008 Sep 16 10:38 AM

[svkoho:]

This article has no author. Some of the facts are wrong as well. The Saudis are not cutting production, at least not yet. Boone's contribution to how to develop a new transportation model is useful but we need a national round table discussion on how to move cargo and carcasses. Boone's plan makes sense to Boone. He puts up wind spinners and has the government build the grid and subsidize the filling stations and we gas up with gas and keep the happy motoring dream alive. Where will the money come from? The government is functionally insolvent. How many of the public can or will pay for the 4K retrofit of their cars? How many of the service stations will pay the 500 K to 1000K per station? . The oil companies are selling their stations and getting out of a money losing part of their business. Will a national transportation model coupled with a national energy plan ever happen with the collection of imbeciles we have in this administration? This republican administration will forever be known as the party that destroyed America. They were at the helm.But of course the democrats deserve a huge share of the blame as well. The American people must somehow force and forge an energy policy on its government. Now how can we do that? I'm stuck.

2008 Sep 16 10:57 AM

[ValueInvestor:]

I love how this person says:

"Nearly 70% of it must be imported. We're competing with China, Russia and a host of other emerging nations whose demand for oil is rapidly increasing."

Well, incase you didn't know, Russia is the worlds second biggest exporter of Oil after Saudi Arabia. They export 2/3 of their production. You're not competing with them at all. If you can't even get that right, how can anyone take you seriously?

2008 Sep 16 04:45 PM

[Red Raider:]

Long term oil and nat gas investor, in it for the long term. I support the author's view.
Alternatives remain problematic, and rely on strong financial support from a government that can no longer afford it. e.g. wind at 20% of operating cost, ethanol, etc.
Nat gas for vehicles is proven practical and economic but will require infrastructure build out and help from govt. to get it started.

2008 Sep 16 09:28 PM

[lefty37:]

Red
The nat. gas structure is already there. All we need is an inexpensive "phill" and factory duel fuel, cng & gasolene automobiles.

2008 Sep 17 06:33 AM

[David Fessler:]

I think the point the author was trying to make was that we need a bridge strategy to get us from a petroleum-based existence to something else that's sustainable. Natural gas is one way to get the U.S. started down that path. Besides keeping $700 Billion a year in this country, the job creation in R&D, construction and service industries supporting all of this will be of great value to our anemic economy. T. Boone gets it, I think. Yes, he'll profit from it, but so will a lot of other companies. At least it's a start in the right direction.

2008 Sep 17 09:57 PM

[longtermstocks:]

What about fuel cells!!!

2008 Sep 26 11:22 AM