By Art Haws for the Nashville Business Journal | January 2015
Standing at the gas pump these days, it’s not hard to spot the smile on people’s faces as they fully register the actual cost of filling up their car. Big SUV owners are down-right giddy with pleasure. But the global economy is a fickle animal, and for everything it gives, it exacts a price in return. This is otherwise known as supply and demand — an Econ 101 principle that every smart investor should heed.
Presently, the United States is producing more oil than ever before. This impacts the volume of global production and subsequently pushes the supply beyond the demand; hence the declining price per barrel. That’s good for consumers, but causes some indecision at the investor level.
If you look at investment strategy relevant to energy stocks through a historic lens, there are a couple of things to consider. First, the volatility of energy prices is so significant that these stocks are excluded when calculating the core inflation rate. (Incidentally, so are food prices.) Translation: accurate projections in regards to energy stocks is kinda like connecting with a piñata while being spun in a circle amidst a crowd of screaming kids.
Second, oil in particular is often at the center of larger economic considerations. Case in point, the measured slowdown in China’s economy coupled with the increase of U.S. oil production has a lot of smart people scratching their heads about the future. Take into consideration the impact on other large energy-dependent players such as the Middle East and Russia and you’ve got a full-blown conundrum on your hands.
So how does this shake out for individual investors? The first point is to remain calm. Remember that energy stocks have always been volatile characters, and that the reality of today does not necessarily constitute the reality of tomorrow. Supply and demand are in a constant balancing act, even when one tilts a lot further in one direction than the other. Part of a solid investment strategy is to temper your instinct to react rashly when the market makes big swings, and energy stocks are no different.
HawsGoodwin believes that the chances of energy prices becoming stagnant long-term are very slim. That does not mean that they have necessarily hit their bottom, but it does mean that they can eventually cycle back up, and that could be a very lucrative position to be in if your cards are played right.
For now, consider the savings at the pump a pseudo tax break and speak with an advisor about potential investment opportunities in the energy markets. The turn-around may not happen in the immediate future, but if and when it does, you might be smiling about more than cheap gas.