Financially Speaking Podcast

The Amazing Rise of the Oil Phoenix

Published on July 14, 2014

On Wednesday, June 25, 2014, The Wall St. Journal reported that the way had been cleared for the first export of unrefined American oil in nearly four decades.  Now, let that soak in.  When can you recall seeing, or hearing, those three words in the same sentence:  export, American, oil?

During 1956, a geophysicist named Hubbert predicted ‘peak oil’ in 1970, which is when the U.S. oil would reach its peak production; and then decline thereafter.  More geologist piled onto the theory as production did, indeed, decline and predicted that U.S. oil reserves would be exhausted around 2006.  Hence the predictions by the academic and financial experts that oil prices would to rise to $300, $400 or more per barrel.

During the first week of February, 2006 oil traded at $80 and was up nearly 50% from the beginning of 2005.  At the time, it appeared as if those predictions of peak oil and rising prices were correct.  Fear and concern gripped investors about the economic impact of $300 oil that everyone expected.  We were in another yet another oil crisis.

Fast forward to today, July 11, 2014:  The Wall St. Journal, “The steady rise of North American oil-and-gas production has diminished [escalating violence in the Middle East; increasing consumer demand] threats, calming energy markets to a degree that investors and analysts say would have been hard to imagine even five years ago.”  Oil prices are on the on decline for the short-term, anyway.

In a matter of only a short few years, new oil production techniques have transformed the U.S. from being the biggest importer of foreign oil to now an exporter of oil.  Who would have thought?  Obviously not some of the best geologist in the country.

What’s the lesson here?  For investors, buying into predictions is risky business.  The longer the prediction, the more susceptible it is to unknown and new information, new developments.  Even when the predictors are well-educated, highly respected and seemingly vary wise, they know as much about the future as you and I do – which is nothing.

What is worth more than oil in Saudi Arabia?  Salt.  Take everything you hear about predictions, especially fearful long-term predictions about anything, with a grain of it.  It will serve you well.

Tags: investment predictions; investor decisions

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