The Changing World of Investment
In my last blog, I talked about how rapidly investments can change in scope and importance. I talked about the bountiful supply of shale gas coming on stream, and the profits of large equipment manufacturers.
The essential point was that investors could never simply “Buy and Hold”, but had to be watchful about what is happening in the world around us.
The Price of Shale Gas & the Relationship of Gas Price to Oil Price
If you start to understand the bountiful and cheap supplies of shale gas becoming available, you have to start to wonder about the price of this shale gas. For some years now, the price of natural gas has drifted lower.
There are a large body of technical market analysts who spend their careers measuring historical relationships and comparison pricing and how relationships affect future pricing. A prime example is the historical relationship between the price of gold and the price of silver. Another equally prevalent theory governs the relationship between the price of oil and the price of gas.
Investment Advisors rely on these theories to calm their customers and to urge investing based upon these theories.
Both theories are very outdated and are quite irrelevant to today’s world.
As I pointed out in a recent blog, the price of silver is likely to increase because of demand and the price of gold is more suspect.
It is my view that historical relationships are quite irrelevant in today’s world. We live in a rapidly changing world. The price of any commodity, service or product will always vary directly with the demand for that commodity, service or product. Therefore the historical relationship between the price of gas and the price of oil is quite irrelevant.
In the example of gas and oil, there is a long historical relationship and there remains an expectation on the part of these analysts that the price of gas will – sooner or later – increase to be in an historical price range relative to the price of oil.
Unfortunately, this will not happen. Investors must be attuned to the world around us to understand why.
The Price of Oil
As alternative energy sources become more available, the demand for oil will drop. When demand drops, the price drops.
The Price of Gas
As supplies expand, as they most certainly are, the price drops.
There may indeed again be a historical price relationship between the two, but at much lower prices.
Think about your investments in the energy sector and bear in mind what is happening in the world today. Sometimes dividend stocks are not an indication of value, especially when those dividends are based on $100/brl pricing of oil.
Some Say The US Will Never Recover
Here again, the doomsayers are blinded by the current economic malaise, and can’t see what is happening around us.
I talked previously and extensively about the USA and how it remains an economic powerhouse. I talked about how the current economic reports out of the USA are quite positive and the beginnings of the next cycle are becoming evident.
The Flow of Oil Money to the Arab Gulf States
Now imagine what the long term effects of shale gas will be. There will be no construction of liquefied natural gas plants as they will cost too much and if gas is freely and cheaply available in North America, why would anyone build these plants. Therefore there will be no imports of natural gas to North America in the future.
If energy needs are met locally, why import $100 barrels of oil at enormous cost and enormous environmental hazards. Oil imports will shrink and shrink more, and more again. Imagine what this will do to prices.
Now imagine those enormous cities and monuments built throughout the Middle East – all built with oil money.
Terrorism
Now imagine the insecurity felt around the world because of terrorism. Terrorism comes because there is an unlimited flow of oil money from ‘have’ nations to oil rich nations. Some of this money goes quickly to Islamic terrorist groups around the world. The irony of high oil prices, is that this oil money gives rise to those that wish to conquer the world and are using terrorism to accomplish their goals.
What a tangled web of cause and effect
> We pay high oil prices because our multinational companies make lots of money if we willingly pay high oil prices
> These high prices enrich formerly poor nations
> The money received – in part – goes to fund terrorism
> The terrorists attacks the payers of the high oil prices (the rich nations)
> We spend enormous money and incur enormous inconvenience to protect ourselves against terrorism
> In effect, we fund the terrorists who wage war against us.
How insane this modern world is.
Now imagine a severely reduced flow of money to the Arab states – goodbye terrorism.
Next: Let’s talk about the effect of this on productivity and economic expansion in the USA. Prosperity in the Middle East and in third world oil producing countries will fall, as oil exports to North America fall
The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds
