Oil, like most any form of energy that we will be looking at, is a commodity product. There might be two benefits in this for you. We’ve started discussing energy recently. Today, we look at the commodity advantages of oil.
The first advantage is that some believe that we have entered a longer term phase where commodities are more and more scarce. The thinking here is that as more people around the world become consumers, more and more commodities will be necessary. Thus prices would increase.
Second, if you are concerned with the value of the US Dollar dropping in the future, then having exposure to commodities can be a great protection against the value of your investment dropping.
For example, let’s say you own shares of Exxon Mobil. This is a US based company, so you might be concerned that the value of your investment would fall due to it trading in US Dollars (and we would agree that it probably would). However, their main product is oil which is bought and sold worldwide. While they might have to readjust their distribution strategy if this were to happen, they produce oil which is highly valued around the world. Thus if the price of oil became $1000/barrel because of Dollar depreciation, and thus no one in the US could afford this price, people in other countries would continue to buy it. In their currencies, this price would not be extreme. This is how a worldwide commodity gives you protection against hyperinflation.
Natural gas might be an exception to this rule because it is still primarily a local product. It is difficult to transport across oceans. Liquefied Natural Gas technology (LNG) has made it possible, but this is not the way the majority of gas is consumed. It will be interesting to see who gas prices are affected if indeed we see serious US Dollar depreciation.
Energy seems to be an area that will be of extreme importance in the coming years. You should carefully consider whether or not to invest here. In the next post in this series, we’ll look at the main factors you need to consider before investing in oil or any energy commodity. If you have any thoughts or questions on this or other topics, please let us know.