Wednesday, June 4, 2008

Oil Bubble? Doubtful

I've seen lots of talk of an oil bubble thats about to burst. Unlike other bubbles (tech bubble, real estate bubble), oil is driven more on fundamentals. The tech bubble formed because companies which made little or no money were given immense valuations on nothing but talk of a "new economy" and internet hype. The real estate bubble inflated over a longer period of time and was due to money being too easily accessible. There is truly a strong demand for oil right now. And although there is some speculation in the price, much of it is pure demand.

I've discussed the potential solutions. You can increase supply or decrease demand. There is too much red tape involved in increasing supply in the US (at least for refineries). The most likely scenario is demand destruction through higher and higher prices. You're seeing it happen already. GM is shutting down plants that produce gas guzzling SUV's. United Airlines is cutting back their fleet due to fuel prices. Americans will adjust if they have to. Public transportation, carpooling, taking less vacations. None of these scenarios are great for the economy, but they will help lower US demand. But there isn't a lot we can do about overseas demand, which is why prices are likely to stay elevated either way.

The key here is finding a solution to power our vehicles, and for it to be good for the environment, and produced in this country. This will happen, but the wait will be painful. You can see it coming down the line with the current cap-and-trade discussion for fossil fuels. It will probably go into effect in the next administration. It will pass along higher electricity costs to us, but will force power companies to shift away from coal.

In this environment, you have to like industrial infrastructure companies who will be building new power plants and grids to adapt this change. I like Swiss company ABB. The stock has had a nice run, but I'm looking to buy it on overall market weakness.

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