Wednesday, March 4, 2015

It is Inevitable that oil will go back up in price

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Oil's rapid decline since August of last year has been dramatic. To listen to some commentators you would also think it is unprecedented and irreversible. Those claiming that oil will continue to fall from here and remain low for evermore, however, are flying in the face of both history and common sense. The question we should be asking ourselves is not if oil prices will recover, but when they will.

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History tells us that the price of oil will bounce back, but so does basic logic. Oil is a finite resource that we are using at an increasing rate, and as long as that situation remains, the laws of supply and demand mean that the price must recover. That is a good thing. As long as oil remains cheap there is little incentive to invest in the alternatives that we will inevitably need someday, nor to reduce our consumption of what is essentially a dirty fuel source. So, enjoy low fuel prices while you can, but don't expect them to last forever.

The bottom line here is that whatever happens in the short term the long term facts are in our favor. Most of the world continues to industrialize and urbanize. From past evidence of other countries going through this process we know per capita oil consumption will increase as this urbanization continues. So the demand side is continually going to grow as it has for the past several decades. On the supply side we know that oil wells deplete eventually. As the price has collapsed investment in finding and developing new oil resources will not happen. This will lead to an eventual balance in supply/demand. Therefore buying oil and oil stocks when most are negative on the industry is consistent with my contrarian investment philosophy. No it is just a matter of doing what Jesse Livermore advised, "be right and sit tight."


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