On the radio program this week, we were pleased to be able to discuss one of our favorite market sectors with a true expert in the field. Ellen R. Wald, Ph.D., is a Professor of Middle Eastern History and Policy at Jacksonville University. She is a prolific writer, publishes an energy newsletter (one that both Adam and Steve read), and is currently writing a book on Saudi Arabia. Since the Saudi oil reserves are among the world’s largest, they are a main player in the world oil market.
Professor Wald’s observations of interest, along with some of our own, include:
- Venezuela’s oil reserves are most probably the largest in the world, likely eclipsing even those of Saudi Arabia. However, their political situation is in such turmoil from years of Socialist leadership, their production is low and their economy is in shambles.
- Brazil is becoming more like Venezuela every day. Their now-deposed leader, Dilma Rousseff, is facing impeachment proceedings for “cooking the books” from the massive offshore oil fields. This is something she was probably certain that she could do, as she was formerly the Oil Minister in Brazil. However, she was caught, production is down, crime is up, and the Olympics are looming, but the venues are not complete. Then there is the Zika Virus, which is casting a scare over potential attendees.
- Gasoline prices fell from about $4.00/gallon a few years ago to about $1.60/gallon a few weeks ago. Now they are rising, with a national average up to $2.228/gallon. The fall was precipitated by fast-rising supplies, much of which was from fracking in the United States. The current price rise is stimulated by falling production and growing demand. My observation: this is perhaps the most perfect example of the law of supply and demand I have ever followed.
- Wald does not believe that we will approach the highest price range any time soon, as producers are more efficient that they were a few years ago, and are able to make money at lower prices. However, following a likely pullback (not to the recent lows), the price of oil should rise a bit further, perhaps hitting the $60/barrel level from today’s $46/barrel. Gasoline prices will follow, and should rise a bit further.
- Saudi Arabia is planning to take public a small part of ARAMCO, the national oil company, in an IPO that is garnering a lot of interest. I was concerned that the lack of transparency of the Saudi government might render this an unsuitable investment. Wald disagreed, and explained that the company was formerly public, is very sophisticated, and has outstanding accounting standards.
- I inquired about energy independence for the USA, or at least in North America. Wald is an advocate, but pointed out some problems that may stand in the way. Much of the problem is political, and the regulatory authorities are forever tightening around producers of hydrocarbons. So-called renewable energy sources are inefficient and expensive, and until we get better at energy storage, there is little hope for “alternatives” to significantly increase their market share. However, Liquefied Natural Gas (LNG) is a very promising source, and should be a major player for the next several years.
- The upcoming election will influence the regulatory environment, which will directly impact each and every one of us as consumers of energy. What it will mean for investors is yet to be determined.
Investing in energy can be done in many ways. Depending on the individual investor, the objective can be to target price increases of the commodities themselves, the success of the producing companies, or investments in the service companies and utilities that transform the energy for consumers. At Van Wie Financial, we prefer using Exchange-Traded Funds, or ETFs, to facilitate these investments. Because the energy sector is largely dominated by a few large companies, diversification is difficult. Depending on the particular ETF, we can get either a narrow or broad diversification.
Investors interested in the energy sector need to be aware of constantly-changing market conditions, including the geo-political climate, consumer preferences, and a host of specific potential problems, such as market interruptions. We welcome your inquiries and discussions, both in the office and on the radio.