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Guarding Your Wealth for Senior Citizens
OIL: The 800 lb.
Gorilla
Don’t be fooled by short-term trends in the
price of oil
By Jeffrey D. Voudrie, CFP
 October 9, 2006 - The price of oil is down almost
25%. Gasoline prices at the pump are down almost $1. Make no mistake,
though, the returns on your investment portfolio over the next 10-15
years will be determined by energy investments. Invest wisely and
prosper; don’t, and risk peril.
Don’t be fooled by short-term trends in the price
of oil and other energy-related commodities. Don’t be influenced by the
talking heads on the evening news or cable television who say that there
is a speculative commodities bubble and that the price is set to fall.
Although the price of oil will continue to fluctuate widely, the overall
trend is clearly up.
Recently, Chevron announced a major new oil
discovery in the Gulf of Mexico. It was front-page news all across the
nation. It was the lead story on the evening news. Reportedly, this
discovery will increase America’s oil reserves by 50%! The days of $70
per barrel oil must be coming to an end, right?
Wrong.
If the estimates prove true, the new discovery
won’t impact oil imports for at least 5 to 7 years. Moreover, the
discovery may not be all it’s cracked up to be. Chevron didn’t discover
one big pool of oil that just has to be tapped and pumped out.
The Lower Tertiary basin, where the test well was
located is about 80 miles wide, 300 miles long and is 175 miles
offshore. Geologists also believe that the oil in this zone will be
located in smaller pockets, not in a large pool.
Even as these pockets are discovered, getting at
the oil will not be easy. The discovery at the test well known as Jack
No. 2 was at a depth of 28,000 feet and in water that was 7,000 feet
deep.
The equipment needed to access these deposits is
very expensive. If the oil only exists in smaller pockets, it will
require more wells, more equipment and more money. By the way, this is
also an area of the Gulf of Mexico prone to Category 4 and 5 hurricanes.
The worldwide demand for oil continues to increase
far faster than its discovery and production. Many speculate that the
slowing US and World economy will reduce the demand and result in lower
prices. I disagree for three reasons.
Two reasons that I believe the price of oil will
continue to go up are China and India. These are two countries where the
majority of the population has lived at third-world standards. This is
changing, and quickly.
Supposedly, China is taking steps to throttle its
growth. It’s not working. Cities across the nation have begun to taste
the prosperity associated with courting multi-national corporations. If
anything, they are doing so more aggressively.
The result is that China’s economy grew 11.3
percent in the latest quarter—it’s fastest pace in more than a decade.
China is currently the world’s second largest importer of oil. Their oil
imports grew 15.6 percent in the first half of 2006. The U.S. economy
would have to practically be in a depression to offset that level of
growth.
The third reason is that when the demand for
something is high and the supplies are limited, the price goes up. Some
think that executives at big oil companies like BP and ExxonMobil
dictate the price of oil. Those who believe that obviously have no idea
how the world economy works. That’s like saying that a farmer in Iowa
controls the price of wheat.
Moreover, OPEC isn’t about to let the price of oil
decline much further. They announced yesterday the need for ‘oil-price
stability’. What they mean is that if the price of oil continues to
decline then they will reduce their output.
My clients have been profiting from energy-related
investments that pay dividends of 8% or more. They’ve seen their energy
holdings increase the overall value of their portfolio while broad
diversification has minimized the volatility. It’s not easy, but you can
do the same.
This all doesn’t mean that you should over-load
your portfolio with energy-related investments. It does mean that their
level in your portfolio must be addressed based on your needs,
time-frame and ability to accept fluctuations in value. Choose wisely
and that 800 lb. gorilla will be your best friend.
If you have a specific question or would like more
information give me a call toll-free at 1-877-827-1463 or you can also reach me by email at
jeff@guardingyourwealth.com.
About Guarding Your Wealth:
“Guarding Your Wealth” is a
nationally syndicated weekly personal finance column written by Jeffrey
D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group,
a private wealth management firm that employs sophisticated proprietary
strategies designed to protect and grow its clients' investments. Please
visit his website,
www.guardingyourwealth.com to read past articles under the Guarding
Your Wealth Article Archive.
Guarding Your Wealth for Seniors are
a collection of columns by Voudrie that deal with issues of particular
interest to senior citizens.
Click here
for all columns.
In addition to being a nationally
syndicated columnist and Certified Financial Planning Practitioner, Mr.
Voudrie provides personal, private money management services to clients
nationwide.
Looking for an energetic expert who
is passionate about financial and wealth management? Mr. Voudrie is an
excellent speaker who will excite and inspire your audience. Mr. Voudrie
is available for a limited number of speaking engagements, television
appearances and radio talk shows. For booking information, email e-mail
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