Oil is dwindling. Right now it happens to also be cheap. I should "buy" it, right?
November 23, 2008 6:18 PM   Subscribe

So the price of oil is ridiculously low right now. But since we're running out of the stuff in the mid-to-long-term, can you explain to me why i shouldn't pour a nice big chunk of my investment egg into oil futures?

It would be nice to hear it in finance one oh one terms, although if i get the wonky stuff, i'll figure that out too.
posted by snortlebort to Work & Money (15 answers total) 2 users marked this as a favorite
Because everybody else knows that too, so it'll generally have been priced in.
posted by pompomtom at 6:46 PM on November 23, 2008

Because you can't know what " mid to long term" means in this case, and oil futures have a hard date. If you guess wrong, your futures expire before the crisis and you lose.
posted by Class Goat at 6:48 PM on November 23, 2008 [1 favorite]

The general argument against investing in commodities is that they don't have any "real" return, meaning that in the long run you're left with the same value of money you invested (taking into consideration inflation). Stocks give you dividends and bonds give you interest so your money compounds and grows. However, that doesn't mean you shouldn't invest in commodities or oil futures at all. They are considered a separate asset class with minimal correlation to stocks (although not recently) and can give you more diversification. If you're thinking about an ETF (exchange-traded fund) like USO, you need to read their prospectus which addresses the numerous risks involved, chiefly that they may fail to track the price of oil perfectly. In fact, it's probably most likely to fail in the event of major economic shocks like peak oil. That being said, if you're just investing some money that you can afford to lose and/or you want to hedge your future oil consumption some, I don't think USO is that bad.

(disclaimer: I'm in USO and looking to buy more soon.)
posted by Durin's Bane at 6:51 PM on November 23, 2008

Class Goat provides the "right" answer IMHO. A slightly more detailed answer would include that the level by which we're "running out of the stuff" is by no means entirely known or guaranteed to remain the same over the mid-term.

Technology advances could make it possible to cheaply extract significant amounts of oil from sources that are currently too expensive (such as oil sands - currently cost effective if oil is over $90 a barrel or so, improved technology could send that crashing though..) or significant improvements in how we consume energy over the next 10 - 20 years could result in oil becoming almost obsolete in various sectors.

There is zilch guarantee that oil prices (in real terms) will go up in the long term. If you think they will, get the futures. If you don't, then don't. That's what investment is all about - gambling on your hunches.
posted by wackybrit at 6:55 PM on November 23, 2008

Oh, forgot to mention: USO and other commodities funds generally charge a 0.5% or more fee each year. That means that the real value of your money is actually shrinking slightly over time.
posted by Durin's Bane at 6:55 PM on November 23, 2008

You can get around the expiring future thing by getting into something like USO, which is an ETF that follows oil futures. (For full disclosure, I am short USO at the moment.)

But since we all know that oil is going away, we are moving away from using it, particularly as it was super expensive recently. So with the economy slowing down and oil in less demand, it will be something of a race between oil picking up again and the world moving away from it.
posted by procrastination at 6:55 PM on November 23, 2008

Careful about investing in O&G at all right now. A friend in the O&G industry warned me that there are a lot of companies who didn't do the math on futures and they're having to dump a lot of their assets right now at fire sale prices, but some of these assets aren't worth the money they paid for them in the first place.

Or, to summarize how I feel about it -- I don't understand it, therefore I shouldn't invest in it until I understand it.
posted by SpecialK at 7:10 PM on November 23, 2008

Because everybody else knows that too, so it'll generally have been priced in.

Yes. Or, as the old economics joke has it - If you find a $20 bill on the sidewalk, someone else has already picked it up.
posted by chinston at 7:41 PM on November 23, 2008

My guess is that the weight of money agrees with you, but feels it can make more in other areas and still have time to get into oil before it ramps again. If you have $100 to invest, you could stick it in oil futures which will go up one day (I don't agree that there will be any meaningful move to alternative energy until oil is priced much higher) or you can invest in something that will go up in the next few days, take the gain, then do your oil investment.
I think the recessionary forces in the economy mean oil will not be in supply-exceeding demand for a little while, so investors/speculators are looking elsewhere.
I suspect our grandkids will ask why we didn't invest everything we had in oil at this time, when it will look so clear in hindsight.
Disclosure: I own a few oil stocks, but don't want peak oil anytime soon.
posted by bystander at 8:16 PM on November 23, 2008

Mid-term that might be great. But long term? I wouldn't bet on it. Once oil gets too scarce/expensive, people are going to do without it, one way or another. Either we'll be like the post-Roman Britons, and abandon a bunch of technologies we don't really understand how to maintain, or petro-products will go the way of Bakelite - replaced by better alternatives.
posted by rodgerd at 8:19 PM on November 23, 2008

we don't really understand how to maintain

Urgh. I should have elaborated on my analogy a bit better. The Britons couldn't maintain Roman technology, and if oil becomes too expensive, it'll be so expensive it won't be worth our maintaining it except in niche markets.
posted by rodgerd at 8:25 PM on November 23, 2008

Note also, the longer term futures are at a record premium to current, indicating the belief that these lower prices will not last. see http://www.reuters.com/article/GCA-Oil/idUSTRE4AK3SM20081121
posted by bystander at 2:45 AM on November 24, 2008

You can get around the expiring future thing by getting into something like USO

Or you could just buy the near month and roll it over to the next month near expiry, for as long as you want to stay long. Many people like to do it that way. When it's in contango there's a cost to that of course, but that affects USO too. You might also consider options.

My working theory at the moment is that much of the big price decline recently has been about the concentration of price discovery in places where demand is falling, as in WTIC. There are geographic, political, and economic reasons why the market might be slow to adjust to less demand in the OECD balanced by more elsewhere. No telling how it will go in the future of course, but that would support the idea that it's a good long-term buy.
posted by sfenders at 5:22 AM on November 24, 2008

Response by poster: i mean, i'm fully prepared to believe that my own little hunch is not going to be able to beat the market.

on the other hand, i'm also fine with dismissing the dismissals of peak oil. even without getting apocalyptic about things, i still don't see here any compelling arguments that the price won't rise no matter how else the market reacts.

in any case, bystander's link about premiums and the upthread insight into USO is useful - thanks.
posted by snortlebort at 5:23 AM on November 24, 2008

So the price of oil is ridiculously low right now

Your joking right? Its barely under 2 bucks....just 7 years ago, it was 89 cents where I lived in central Virginia....when it gets back to that level, then its "ridiculously low" and I would think about investing...as it stands its way too inconsistient.
posted by TeachTheDead at 10:27 AM on November 25, 2008

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