Pennsylvania Investment Observer

The Price of Oil

by Daniel J. Nestlerode

Driving back from a meeting in Altoona today, I was greeted by a news story on CNBC (I have XM satellite radio in my truck) about the damage that hurricane Katrina had wrought upon the Louisiana and Mississippi area. Apparently, a number of oil drilling platforms are adrift in the Gulf of Mexico and several refineries are either shut down or operating on a curtailed basis. Sheetz, one of our local convenience stores, raised the price of unleaded gasoline from 2.499 to 2.599 over night. Further, the commodities trading of unleaded gasoline was up today, about thirty-five cents a gallon. Liquid fuels and natural gas are becoming seriously expensive. Filling up my Dodge Ram truck now costs about $50. Furthermore, Wal-Mart was down on Wall Street today, a victim in investors' minds of higher oil prices. So was General Electric. What should we do about this situation?

From a political standpoint, we should probably do almost nothing. Any attempt to fix the price of liquid fuels will immediately make them difficult to buy. Remember the gasoline lines in the mid seventies. Restricting the price of a commodity only puts that commodity in short supply. Second, we should leave the oil companies alone. There is no justification for government to tax the profits of oil companies. Do politicians solve problems?

Rather we should encourage the oil companies to take their outsized profits and invest them back into production and refining capabilities so that eventually the supply of these commodities comes back into alignment with demand at lower prices. I am sure that tax money usually is frittered away (remember Synfuels?) whereas good businesses recognize the opportunities to provide goods and services in the future and make judicious investments and set goals to fulfill our energy needs. High profits resulting from high prices is the catalyst that creates conservation in the short run and increases supplies of energy in the long run.

So what is my strategy going into the fall and as a result of Katrina? First, I will look to see where I can conserve fuels and cut some expenses. Second, I will look at the energy companies and invest money into those companies that will help increase the supply of energy. It will take some time, but it will happen. Third, I will look at those companies that have been beaten down in price as the result of high energy prices and see if the they are selling for really cheap prices right now. I am looking for profits in the next several years, not tomorrow morning. Dislocations in the economy usually lead to extremes in pricing in the stock market. Then, as the economy rights itself, the more usual price relationships reestablish themselves. So what I have right now is a screaming investment opportunity, not a crisis.

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