The Good, The Bad, and The Ugly: Cheap Oil

The Good, The Bad, and The Ugly: Cheap Oil

            Well we have wanted lower gas prices for quite some time now, probably dating back to late 2008 after they started recovering after the financial crisis. Back then the price dropped because of risky commodity trading followed up by an imploding financial world. Today I would be willing to bet it has come on the heels of our home grown oil boom. Bad thing? I say nay, but it is possibly too soon to tell. In spite of that let’s analyze the good, the bad, and the ugly in this oil crash.  

            The worst news will only get better with time so let’s start with the ugly first. The drop in oil prices will stifle the exponential growth in the U.S. oil boom. There is always a price point in oil where it is no longer profitable to extract it, refine it, and sell it, it all depends on the type of oil being extracted, and what method it is being extracted with. Unfortunately for the U.S. our price point is quite high sitting anywhere form $50-$70 compared to OPEC’s lowest of $4-$6 (Saudi Arabia). We are already catching wind of Oil producers cutting back on investments to hedge future losses of profitability because of this drop. British Petroleum (NYSE: BP) is even spending money in hopes to save money in the future by using $1 Billion to restructure their company.

If oil prices drop further U.S. companies will be forced to cut back on investments, this would put a damper on solid U.S. economic growth that we have been calling for. If the price goes lower and stays that way some companies might be forced to sell off assets and/or go out of business. Jobs will be cut, research and development will be scaled back, and exploration will slow all to save money. This could cause quite the ordeal in the U.S. possibly creating another recession. Would it destroy U.S. oil production? No, but it sure would hamper its growth.

            The bad is not really all that bad, at least for us that is. A lot of people more than likely lost money on this price drop, not just the oil companies, but people that trade oil as a commodity or the company’s stocks. They panicked when the price of oil dropped and sold off their assets to prevent incurring and further losses. While losing money is a common occurrence on Wall Street it prevents these companies from putting those profits back into the market possibly stifling growth further. And as long as those losses are not cripplingly large it won’t hurt the common consumer all that much.

            The good is actually linked closely to the ugly and the bad in this case as is often in crashes that occur in the market. What makes this crash more exciting than many others is that if done correctly Investing in the Oil Industry can be very profitable. The environment right now is very comfortable to make an investment in an oil company. This crash offers many companies at a largely discounted rate such as Devon Energy (NYSE: DVN) down about 25% from about six months ago. Many of these companies also offer a very attractive dividend sometimes approaching the 6% range as is the case with British Petroleum (NYSE: BP). Remember be greedy when others are fearful, but don’t let your greed blind you from conducting proper research on the investment you are making.  

            Will oil prices continue to drop? I could not really tell you, but if they do it will create an even bigger discount for those established oil companies that can weather this storm. You will never time the market correctly but if you never take the time to make the investment you will miss out on it. And if you decide not to invest in this value you will at least be saving money at the gas pump. 

5 Basic Investing Tips

How To Make Your Money Work For You: Let It GROW!

            These are not really in any order you can use them as you see fit, or not at all. And actually I would prefer that you formulate your own investment strategy. However they may serve as a starting point of your own formulation.

1.   “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” – Warren Buffet. When others are taking ever increasingly risky means of gaining wealth you should be fearful of the stability of the market. And when everyone is afraid that the market is plummeting be greedy. Mr. Buffet is not telling you to time the market here nor is he specifically saying divest or invest when the market is way up or way down. He is just telling you to analyze market environments in order to receive the best value that you can when purchasing.

2.   Shop for investments like you would shop for a new car. You would never buy an unsafe car, so why would you buy an unsafe investment. What I am saying here is do your research. You spend countless hours and trips to different car lots to buy a vehicle that can potentially impact your future. Investments have just the same impact on your financial security as cars do with your physical security. Spend the time to find that investment that will get the 5 star safety rating of Wall Street.

3.    Every day is Black Friday in the stock market. You can always find a deal when looking for investments, you just have to be willing to dig for it and sometimes wait for it. A great example is the bear market from 2007-09 if we pick one stock, let’s say Ford (NYSE: F) and bought a modest $100 worth on 24/NOV/08 when it hit it’s all time low of $1.01 and forgot about it until now 17/DEC/14. If we sold ford today we would net $1375 after taxes for a gain of almost 1,400%! While I can’t tell you what investment will be the black market deal today I can tell you if you don’t search for it you will never find it.

4.   Don’t cut down what you are growing! If you keep eating your harvest your garden will never grow into a full blown farm. Same goes with investing as does gardening, if you keep spending your growth and don’t add it back to your principal investment, that first seed that you sowed, you will never grow it into a 1,000 acre farm. Reinvest your dividends, reinvest your stock sales, and reinvest surplus income. The more you put into it the more you will get out of it when it is time to harvest your growths.

5.   Taxes were created by the devil, don’t give him more than he deserves. Yes your investments are taxed too! And no the government isn’t the devil but to maximize your gains you should familiarize yourself with the U.S. tax code regarding investing. By doing the research you can easily increase your profit while investing. While the U.S. tax code is upwards of 70,000 pages, the easiest way to increase profit margin is waiting. If you simply hold an investment for at least 1 year the tax on your gains from investing will decrease. If you want to do your part in sticking it to the man then just wait it out a bit.

   If you want to be successful in the world of investing put the time in to educate yourself about it and what you are purchasing. Being patient will pay off in more ways than one. Let your garden of investments grow unimpeded by your own greedy fingers and water and fertilize it often. Only time will tell if your garden will grow into a full-fledged farm.