Time to fill up your gas tank?

Is it time to fill up that old gas hog before prices start going back up?

First let's take a look at the world of oil.

The price of oil has been slashed from it's high near $140 to somewhere around $50 where it seems to be seeing some support. At the 140 dollar level, everything was different. Any and all alternative energy sources were being explored and developed because they were profitable with oil north of $100 dollars. The average consumers(myself included) were being absolutely hammered at the pumps. Businesses were being equally hammered and some areas of commerce, like trucking, were dangerously close to being completely shutdown. Impossible you say? Go ask an independent trucker what he was doing back then. The answer I got was that they were looking for cheap, long term parking.

The message is that the US Economy can not function at $140 per barrel. At least not yet. Not without higher wages and higher prices across the board.

Oil will eventually return to the $140 level if new technologies and/or new sources are not developed. But the equation will have to change before we can get there. Wages and productivity will have to rise and prices will have to rise for all goods and services. In short, the market has proven that $140 per barrel is not a sustainable price level.

At that level something called demand destruction occurs. People stop using the commodity in question. This is a long way of saying that the cure for high prices is high prices. But how low will we go? The reverse is also true. The cure for low prices is low prices and low prices call for supply destruction. There is no incentive for the producers to supply the product. In other words it's not profitable. These are basic tenants of capitalism. At $140 everyone with a shovel was out there looking for oil. At $50 it's not so exciting. We are already seeing supply destruction beginning in the oil sector.

Here is my opinion on the course of things; We are at or near the bottom for oil. It could go lower but I don't believe it will stay there because the fundamentals(there's that word again) have not changed. The Middle East has not suddenly become stable, Venezuela has not changed dictators and their oil services sector has not been suddenly revitalized. There have been no major, new oil field discoveries.

And much to my disappointment there have been no new technological breakthroughs on alternatives. And with oil at these levels I don't expect any. There is no longer the great financial incentives for entrepreneurs to take risks on alternatives.

But here is what I believe will happen; Something will break loose in the Middle East, China and or Russia. This new administration will be tested by one or all of the above mentioned. This is no great prediction, it always happens with new administrations. In addition there will probably be some government intervention in the price level of oil. Indeed President Elect Obama has already indicated his interest in a gas tax hike. Whether or not it's a good idea is irrelevant from an investment perspective. We need to be in position to profit from all of these things.

I believe that 70 or 80 dollar oil is a sustainable level and I think we will eventually stabilize around there.

I'll be building up holdings in large oil companies, top quality oil service companies as well as natural gas companies. Slowly and consistently, starting small and buying incrementally. This will be a little expensive in terms of extra commissions but it will give me some measure of downside protection if prices fall further. By doing this I don't use up all my capital(money) at once, saving some to buy more shares cheaper, if the price moves down, thus reducing my overall cost for the position. If the price moves up from here, I'll either buy more, wait for a temporary dip or reallocate entirely to a different strategy. This is investing 101, it is a technique that is tried and true and it's how the big boys and girls do it.

To put all this together into an overall investment strategy We are positioning ourselves for a ten year time frame. I don't think everything is going to turn around overnight. There is more pain coming but it's time to build core holdings by putting money aside regularly and buying undervalued companies that have tangible assets. Spending huge amounts of money on each position is not necessary, in fact with today's climate, it just might be stupid.

In conclusion, to answer the gas tank question, yeah it's time.

Fill 'er up!



Good Luck and Godspeed



JT

Legal disclaimer: This post is for informational purposes only and is solely the opinion of the writer. Nothing in this post should be considered investment advice. Before investing in anything, the reader is encouraged to do his or her own research and consult with a certified financial advisor. Which John Tompkins makes no claim to be. John Tompkins and Toro Creek Investments accept no liability for financial losses or damages incurred by the reader because of this post.