As global oil prices surge above $100, consumers are once again reminded of the fact that oil prices are subject to the whims of geopolitics, weather, and growing demand. And unfortunately little is still being done to eliminate dependence on fossil fuels.
Pain Is a Good Teacher
The recent run up in crude oil is reminiscent of the surge crude took back in 2008 up to $147 a bbl. Back then as crude broke through the key $100 mark and surged to the record high, consumers and the government went into panic mode.
Suddenly alternative energy stocks were hot again, talk of hybrid cars was all the rage, drilling off shore became a national emergency, and people even talked about car-pooling.
Unfortunately as soon as crude prices dropped, all that went out the window.
Crude prices dropped from $147 and fell to around $38, essentially nailing the coffin shut on many good energy solutions that had been gaining momentum.
As equity got pulled out of alternative energy companies like solar, geo thermal, coal, wind turbines, etc. may of those companies went bankrupt.
Prices for crude didn’t stay low for long and here only a couple of years later we are seeing crude rallying above $100 again.
So is pain at the pump the only solution. My question is, why does it always have to get to that point?
Fear Factors
While the global recession and credit crunch have severely impacted global demand for energy, it's only temporary. The problems that propelled oil prices to $147 haven't gone away, in fact there worse now.
Traders are seasick from the oil markets lately; the volatility has been so extreme. Aside from the obvious macro-factors, the weak dollar is absolutely the biggest culprit in high commodity prices. The Fed’s ongoing decimation of the greenback has undermined any stability in pricing and this in turn has led to unrest all over the Middle East and soaring prices in much of the World.
So what were the major factors that drove oil to record levels the last two years? There are many.
Global demand is among the biggest. Pent-up demand is exploding in growth areas like China and India. Once that global manufacturing engine begins firing again, you can count on energy prices ramping up quickly. If we are seeing over $100 a barrel crude while the global economy is still in crisis, what will prices be like when economies are functioning full speed again? $300 may seem cheap.
There's been almost no progress in alternatives since 2008. The global investment engine has ground to a halt. After all when the markets crashed and oil prices dropped, the last place investors wanted to put their money was in the alternative energy space. Every sector from uranium miners and clean-coal technology to bio-fuels and oil drillers saw investment and share prices dry up. But here we are again, back at $100, so what’s different?
The Middle East Powder Keg
OPEC has been of little help during the unrest in the Middle East. We already are seeing supplies start to taper off. Eventually, demand will catch up with supply and we'll be right back in the same boat of higher prices.
The realities are chilling. The largest oil field in Mexico Cantarell is still in major decline and when it does run out civil unrest in that nation could explode. These types of chokepoints, both political and physical, still exist with several major oil exporting nations.
Another key factor, that will lead to $300 oil is that the building of new refineries and pipelines has all but been non existent.
Buying Alternatives on the Cheap
With oil prices rapidly creeping back up, and consumers feeling the pinch, alternative energy stocks may all get a boost soon. Solar companies, wind technology, natural gas stocks, and even rare earth stocks that have all kinds of “green energy” end users for key rare earth elements. Don’t discount opportunities to buy traditional energy plays at these levels too, fossil fuels are not going anywhere soon.
Look at major oil companies that have pulled back significantly, equipment makers and drillers that will be key in exploring in remote regions and deep water for more supply.
Unfortunately for consumers, when it comes to energy, a lot of pain is on the horizon. However investors can essentially hedge themselves from the coming storm by investing in the incredible opportunities oil is affording us at $100, yet again. After all, this may be the last time we see prices at or below the $100 mark for any sustained amount of time.
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