6/16/08

We All Know the Bad, but Hgher Oil Prices Can Be Good Too

The price of oil goes up, whether because of supply and demand or speculation, or a mix of both. Supply will almost certainly reach its peak soon, if it hasn't already. Refiners, who pay the higher price, raise gasoline and diesel prices to protect their margins. We pay more at the pump. Goods have to be transported, which takes energy. As oil is our principal energy source, food prices rise, as do the prices of other products and services that require transportation. The price you pay for a good or service might stay the same, but the quantity or quality diminishes. For example, you may have noticed that meals on airlines have become scant or nonexistent. The list goes on.

High oil prices are not intrinsically bad. Rather, they are bad only because we rely on oil. Besides the economic costs of our reliance on oil, which we experience in our daily lives, there are the social and environmental costs. Save for a few democratic oil producing states, like Norway, most of the world's oil comes from unstable regions and nations run by dictators or quasi-totalitarian regimes (I'm thinking of Russia for this last one). We prop them up by paying for the oil they sell. There's also terrorism. Then there are the environmental effects of our oil consumption, from oil spills to smog to global warming (although this last one is debated).

There are benefits to higher oil prices

For one, by owning shares of those companies making higher profits from higher energy prices, we can make money.

Second, our reliance on oil will only end if it becomes too expensive to use it. We can have all the warm and fuzzy thoughts we want about being energy efficient, not supporting oppressive regimes, and doing things for the environment, but we'll do nothing if prices are cheap. Who would talk about alternative energy if oil and gas were a quarter of today's price?

Higher oil prices turn ideas into actions. For example, automobile manufacturers are starting to produce better, cleaner, and more fuel efficient cars. Alternative energy companies are springing up all over the place (we can leave the types of ethanol that contribute to higher food prices out of the good category). Their incentive is higher energy prices. There would be no demand for their products without high oil prices.

As technological innovations, driven by necessity and demand, lead to better products and become available for mainstream consumption, our reliance on oil will decrease and may eventually end. While we'll probably have some other problems as a side effect (we humans are great at finding solutions that come with a host of new problems), the negative economic, social, and environmental consequences of our oil consumption will lessen.

Along the way, by investing in the right companies or industries, we can turn a tidy profit.


These are not recommendations, but if you are interested in alternative energy, check out the following ETFs and an ETN.

ETFs

Claymore Global MAC Solar Energy (TAN)
Claymore Green (GRN)
First Trust NASDAQ Clean Edge (QCLN)
PowerShares Cleantech Portfolio ETF (PZD)
PowerShares Global Clean Energy Portfolio ETF (PBD)
PowerShares Global Nuclear Energy Portfolio ETF (PKN)
PowerShares WilderHill Clean Energy Portfolio ETF (PBW)
PowerShares WilderHill Progressive Energy Portfolio ETF (PUW)
Van Eck Market Vectors Global Alternative Energy ETF (GEX)
Van Eck Market Vectors Nuclear Energy ETF (NLR)
Van Eck Market Vectors Solar Energy ETF (KWT)

ETN

Global Warming ELEMENTS ETN
(link does not go directly to the fund page, scroll down to find the prospectus, etc) (GWO)