General Question

cockswain's avatar

Should I put all my money into oil?

Asked by cockswain (15186 points ) February 17th, 2013

Having spent a decent amount of time reading articles and watching documentaries about peak oil, I’m personally of the belief that we have either passed or soon will pass global peak oil production. I further believe that this is going to create an economic crisis in the not-too-distant future (I’ll spare you my semi-apocalyptic visions). I don’t mind discussing how I reached these conclusions, but it isn’t the focus of this question. I don’t see any reason why increased global demand and reduced supply of this commodity won’t drive the price very high.

I have a 401k. Is there any obvious reason I shouldn’t move put most (like 80–90%) of my 401k exclusively into oil futures? How could I lose?

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68 Answers

PhiNotPi's avatar

Well, one thing to consider is that oil comes from a variety of sources. Once they start to run out of oil, it will be the cheap oil that they run out of first, and they have to start getting it from more expensive sources. Even though the cost of oil will skyrocket, the companies will also be selling less of it and will themselves be paying more to get it.

cockswain's avatar

@PhiNotPi I think they’re on the verge of getting the easy oil out already. I’m not thinking of investing in oil-producing companies, as I can see how it could be possible for their stock to drop if I pick the wrong one. But the price per barrel itself, how could it go down? Eventually I picture only the wealthy being the primary oil-based product consumers.

DrBill's avatar

Past performance is not a indicator of future performance. The price could very well drop if a new oil field is discovered. The risk is why they cannot borrow the money to fund new wells or explore new fields.

cockswain's avatar

@DrBill Sure, discovery of significant new oil fields could lower the price. But as far as I can tell, those discoveries are rare now. Even if one occurred, how long would it fuel the planet? 5, 10 years? And I wouldn’t want to invest in a company. As oil dries up, some of those companies will merge or disappear. I don’t want to risk picking the wrong one, so that’s why I’m contemplating an investment in futures, which is tied to the price itself.

ETpro's avatar

The death knell of the fossil fuel industry comes when a technological breakthrough suddenly renders a clean, renewable energy resource cheaper than fossil fuel. When will that happen? Could be tomorrow. Could be 20 years. The sooner we pass peak oil and see per barrel prices begin to soar, the more rapidly we approach the absolute end of powering the world with fossil fuel. Oil will still have its uses till organic chemistry can synthesize it more cheaply than it can be obtained from the ground. But a shift in demand for energy purposes will tank the price. Be off the train before it hits that station. What makes the game interesting is, you have no idea where that station sits along the train ride.

cockswain's avatar

Yes, @ETpro agreed completely. My plan would be to temper my greed for “waiting a little longer” with the wisdom to pull out even when I think it’s still possible and even likely the price will continue to rise for a time. That is the game indeed. But I see nothing on the horizon at all, besides hydrogen, that could be a game-changer. And even then we’re currently decades from having the necessary infrastructure to use it as ubiquitously as oil/gas.

An interesting question I heard last night was “do you think your grandchildren will ever ride on an airplane?” I thought wow. Probably, but not as many as I have.

CWOTUS's avatar

I may be wrong, but I don’t think you can buy “futures” (if you’re using the word the way it’s commonly meant in investing terms) in a 401(k) or IRA. Futures speculation is a fairly risky venture, which is (or has been, I haven’t checked the rules in a long time) a non-permitted use of qualified retirement plans.

You could easily buy common stocks, though, and there are plenty of oil company stocks to choose from.

cockswain's avatar

@CWOTUS I mean taking the money out of my 401k, paying the taxes, and investing directly in oil. I think it’s unlikely I could lose a 15 year bet on oil futures.

mazingerz88's avatar

80 to 90% of your 401K? No, just no. Even if you are 90% right in your assessment, that 10% percent chance of things souring could sink you deep. One word, diversify.

CWOTUS's avatar

To continue the discussion, oil / petroleum supplies won’t suddenly dry up overnight. We won’t reach “peak oil” because the planet’s stores have been exhausted, but because a better (read “more economical”, “safer”, etc.) fuel has become available that can be substituted for oil / petroleum.

For example, “peak wood” didn’t occur because we ran out of wood, but because oil was discovered and methods to recover and refine it improved over time.

cockswain's avatar

@mazingerz88 I guess I’m paranoid that peak oil will cause a global economic crisis. I want to make a lot of money quickly so I can secure a peaceful future.

cockswain's avatar

@CWOTUS I’m wary of the perpetual argument that “human innovation” will solve every problem. This problem, coupled with everything else I see on the horizon, indicates a calamity of sorts. I don’t have faith we will painlessly find a substitute for something as energy-intensive as oil to replace our current consumption. Not by a long shot.

wundayatta's avatar

Why gamble like that? Why not place between ten and fifty percent of your assets on you gamble, and leave the rest diversified in other investments?

I wanted to gamble with a lot of our money during the tech boom, but my wife said I could only play with ten percent of our money. It was a good thing she did, because after making a lot of money fast, I lost it all and more. Had I stayed with it, I probably would have made much of it back, but no.

I’ve had about ten percent of our money in energy at times. Right now, I’m diversified through mutual funds and I’m not in an energy fund. When I was in the energy fund, it doubled in a year or two, so that was nice. I took my gains and spread them around elsewhere. But mostly, I let Vanguard keep things diverse for me.

According to Quicken, we’ve seen an average return on investment of 12% over the last 25 years or so. This is without really trying—indeed, including all the mistakes I made.

I don’t think it’s wise to put all or most of your eggs in one basket. But if you are a gambling person, and you think it is a good gamble, you may choose to do it. However, if you were that much of a gambling person, you wouldn’t ask us. I think you should stay with tried and true. Diversify. If you want to gamble, put half your investments in oil. That way, if it doesn’t work out, you’ll still have something left.

cockswain's avatar

@wundayatta I guess I’ve been thinking about this for a while now, and worry I could be crazy. I’m looking for a sanity check. However, I can’t see how the price per barrel could not shoot up. I can’t envision such a scenario. I get the idea of being exposed to too much risk for sure, and this is why I’m soliciting other opinions. A lot of the people on Fluther are aware of global problems we’re facing, and I’d like other views from the community. I appreciate yours.

cockswain's avatar

In the timeless words of Cypress Hill, “When the shit goes down, you’d better be ready.”

CWOTUS's avatar

It’s not just that “innovation will magically occur”, @cockswain (though I believe it will, even without magic), but alternative forms of liquid fuels which are not now economic competitors to oil will become more economical as oil becomes more difficult and expensive to recover and refine. It’s an entire process of petroleum become more and more expensive, and gradual improvements in the alternative fuels and their production methods (read up on methanol production, for example, to see the improvements that are being made in making more-affordable methanol) making that fuel less expensive.

Then there’s the overhead of “distribution systems” (filling stations, large-scale refineries, side-by-side dispensing, etc.) that has to ramp up, and voila, we’d be an ethanol / methanol based industrial society rather than a petroleum-based one. (The process has already occurred in Brazil, in fact, where triple-fuel automobiles that would run on any mix of ethanol / methanol / gasoline were common during the 1980s after the oil shock of 1973. I don’t know if that is still the case, since oil prices declined so dramatically during the late 80s and into the 90s.)

cockswain's avatar

I agree with your statement that energy sources that are currently less economically viable than oil will replace oil. I don’t have the numbers memorized, but I know it takes more energy to produce ethanol than it yields. Obviously unsustainable, but currently economically viable given the continued supply of relatively cheap oil. Oil yields a huge amount of energy per barrel, relative to other sources. But I agree that other energy sources will eventually be cheaper than oil. But my estimation is they won’t sustain the current global energy demand, and there is highly likely to be a significant gap in energy supply vs. demand that causes a terrible crisis. I predict there will be a lifestyle “crunch” during this transition because I don’t see any evidence that the planet is adequately preparing for this at the needed rate.

So I don’t see why the price won’t go through the roof up to and during that time.

Man, I really hate to sound like “that crazy apocalyptic guy” too. It’s just I’ve found every indicator to support this idea despite really looking hard to find solid evidence it is an unlikely future.

cockswain's avatar

I don’t know how frequently Laureth and Incendiary Dan are on Fluther these days, but they would likely agree with my assertions.

LuckyGuy's avatar

I don’t believe you should put all your money in anything unless you have inside info, and that would be illegal.
If you are in favor of oil rather than selecting a single company or two, how about moving to the fund in your 401k that invests heavily in the energy sector? There must be one in the mix they offer.

Probably to the horror of many people here, I recently put a fair amount of money into the firearms industry – and I am still smiling. If I was a fortune teller I would know when to pull out.

fremen_warrior's avatar

Q: Should I put all my money into oil?

A: No.

cockswain's avatar

@LuckyGuy Yes, firearms is always a wise bet following the election of a majority of Democrats (especially a President, and super-especially a black one it seems), and any mass shooting.

And yes, reallocating my 401k into energy funds is also a fine idea. I just don’t see how oil prices can decline given the current situation. I just can’t see any scenario besides a gigantic leap in technology. And I further bet the big oil companies would buy those startup companies as quick as they could.

@fremen_warrior I respectfully find your answer lacking detail.

LuckyGuy's avatar

As the easy oil is taken out of the ground more and more energy is required to get it out of the ground and it gets more expensive. Butanol makes a wonderful replacement for gasoline but the cost of that is comparable to gasoline at $5.50–6.00 a gallon. We know it will get there eventually but we cannot say the price will be all profit for oil companies.

the easy oil used to bubble up out of the ground. now they are putting oil rigs out in the ocean, drilling down 4 miles and sideways 5 miles to get it. They are pumping high temp fluids into shale to crack tar like crud free out of the rock. To me that is a sign that change needs to be in the works. Right now oil is cheap because the world economy is slow. I’m betting it will get better.

One of my indicators for buying or selling a stock is watching CEO salaries and benefits. When the big boys demand tons of money to stay and the company pays it, that tells me they are in trouble.

cockswain's avatar

Everything you’re saying about oil is consistent with my understanding.

The CEO concept is an interesting one. I might message you at some point for advice.

LuckyGuy's avatar

Sure. You can PM me.
Full disclosure statement: I am not a financial adviser nor a fortune teller. Don’t listen to strangers on the internet. Your mileage may vary. I do own stock in Exxon Mobil XOM and Chevron CVX..
May produce swelling and irregular heartbeat. An erection lasting longer than 4 hours should be considered a medical emergency. Seek immediate professional help.

cockswain's avatar

I know you aren’t a financial adviser, but I also know you are far from a dumbass too.

wildpotato's avatar

How about this angle: No, because investing in oil makes you a cog in the machine that is destroying the earth. You lose by contributing to the exploitation of a non-renewable resource, of the environment, and of people in certain countries and regions.

SadieMartinPaul's avatar

There are reasons why “diversify” remains sound, sensible investment advice.

janbb's avatar

Conventional wisdom is that you should never put all your money into any one thing.

CWOTUS's avatar

On the other hand, a famous investor (ironic that I can’t recall his name right now, and just laziness that I don’t want to google the quotation) once said that it’s fine to “put all your eggs in one basket, and then watch that basket!”

fremen_warrior's avatar

@cockswain Ok, let me rephrase that:

Q: Should I bet everything on one thing?

A: Now why would you go and do something like that?

flutherother's avatar

There is no doubt in my mind that there is an energy crisis coming but we may never live to see it now that fracking technology has the potential to make the US energy sufficient by 2030. I might be worth investing in this but not to the extent you suggested. The stock market is always a gamble.

wundayatta's avatar

Oh, @CWOTUS. I have watched baskets soar high and then fall and then crash and burn while I stood there somehow not believing they would actually hit the ground. Diversification is better protection than watching something closely.

gorillapaws's avatar

I think it’s a crazy idea to forgo the security of diversification based on a hunch about future technology. I think betting on oil futures is a smart play, but I would hedge my bets to be sure.

What an “all in” approach to betting on oil futures means is that you are betting that thousands of the smartest minds in the world, who are motivated to prevent environmental armageddon, and have the potential to earn trillions by figuring out then next big energy source, will fail. Now they sure as hell may, but it’s impossible to see the next big thing until it’s here. Look at how the iPhone transformed personal communication—and who could possibly have predicted it before it was released? Technology comes in leaps and bounds. Perhaps nano technology will be able to assemble fuels quickly and cheaply, perhaps a strain of algae or bacteria will be bioengineered to turn feces into fuel. I cannot possibly fathom what could come next, and fully acknowledge that you may be completely right about how things will go down. But how sure are you that all of these other projects will fail, despite massive financial incentive, and the determination of brilliant minds to prove you wrong. Are you really willing to bet 100% they’ll be wrong?

I’d put at most 50% of my savings into any one investment, and keep the rest diversified.

laureth's avatar

I have only skimmed most of the above responses, so I apologize if I repeat anything.

1. You’re talking about betting your own personal, metaphorical farm (or 80–90% of it) on one thing. This is almost never a good idea, no matter what the thing is. It pretty much gives you one chance to make it or blow it; are you feelin’ lucky, punk? ;)

2. Unless you work in this industry every day like an insider, you are an amateur betting against the pros. Do you feel confident that you know more than they do? (Mr. Laureth, a fan of trading stocks, has likened futures trading to “going into the bad wolf kennel while wearing Milk-Bone underwear.)

3. With futures, you either need to trade the contract before the delivery date, or you need to take delivery of the product. Do you have a place to store a lot of oil? Those who trade in futures usually do.

4. Finally, the Peak Oil situation is whole lot more complex than “once you reach peak, it goes nowhere but up, up, UP!”. In fact, one way we can identify the peak is price volatility. Demand fluctuates wildly as people move to new energy sources or improve efficiency. Supply, no longer stable, has peaks and troughs as wells dry up or small discoveries are made, but it’s not the smooth flow of product that we’re used to. Are you willing to bet your future on something so volatile?

5. Oil may be a bubble as well. If you watch your investments like a hawk, daily readjusting them, you might possibly play the market to your advantage. Are you the sort of person who is willing to do this, or would you rather park it somewhere and relax, play with the kids, sleep at night?

6. It may be best to pick something else you think the world, or you, will need in the future. Or at least diversify, with some stable investments to offset any losses on oil as prices rise and plummet. I’m not making any promises and I am far from expert. But I think other options are better.

ETpro's avatar

@CWOTUS I’m in to this late, but had to mention that comparing peak oil and peak wood is worse than apples and oranges. It’s more like apples and fossilized apples. Wood is a renewable resource. Oil is not.

I’m sure @cockswain is aware of that key difference and will factor it into his decision.

CWOTUS's avatar

Hmm, not to quibble overmuch, but oil does seem to be a renewable resource, speaking geologically, only not in the same human lifetimes as wood. Whatever geo-biological processes once created the fossil fuels we now use are still occurring, but on a time scale that seems imperceptible to us, so we punt and call it “non-renewable”.

I could compare oil to “Peak Stone” or “Peak Iron”, which are also “nonrenewable” resources, but since the planet is made out of stone and iron (to a great degree, and nickel and iron much more than stone, apparently) the necessity of renewability is a non-issue. Hell, for that matter, the hydrological cycle that makes rivers and hydro power available for our use is essentially nonrenewable, too, only it occurs on an annual, cyclical basis that we assume will continue forever, and even that isn’t true.

My use of the terms “Peak Something-or-other” refers to the “most universal human use of the something-or-other”, not “whether it still exists or not”.

cockswain's avatar

Thanks for the sanity check, guys. I’ve been getting increasingly paranoid about the future of the economy (and therefore my investments in general) due to what is appearing to be faster than expected climate change, rapid topsoil depletion, loss of fresh water, growing population, lack of political will to tackle this. Most of the above concerns aren’t just on an unsustainable trajectory, but actually appear to be accelerating towards certain tragedy.

Maybe I read too many doom and gloom type things, but I worry that any one of those items I list above could cause serious global disruption. I fear a perfect storm of several of them hitting us at once. While I have a lot of faith in human innovation, my faith has its limits.

So I’ve been trying to picture some way to maximize my gains in my investments more rapidly (obviously with a lot of risk) so that I could have more resources available to me and my family while monitoring the way the world adapts to this somewhat bleak future. I’ve literally been looking at places on the globe where I think the weather won’t be too extreme and there will be plenty of fresh water and not too many people. The Yukon might be pretty nice in 30 years.

I almost hate putting that in writing since it makes me sound a little nuts, but all signs are pointing to trouble.

cockswain's avatar

Anyone that can show me how I’m way off base would be appreciated.

janbb's avatar

@cockswain I think many of us have the same worries but I don’t think you can second guess investments by other than diversifying with maybe some heavy investment in renewable energy sources.

cockswain's avatar

I guess my worry is that these are not conventional problems so therefore I shouldn’t take a conventional investment approach.

janbb's avatar

@cockswain I hear you and some people will be making scads of money but I don’t think it will be the likes of you and I.

cockswain's avatar

I don’t even need a scad of money. Just enough to hook myself up with a decent place.

janbb's avatar

Get a financial planner you feel comfortable with and work with him or her to adjust your goals as the markets change.

cockswain's avatar

Oh, absolutely. I’m just contemplating ideas and wanted to bounce this one off the collective. No way I was going to just liquidate my 401k and throw it all in oil futures and figure I’d be fine with all the margin calls. Just looking for feedback before getting serious with a financial planner.

CWOTUS's avatar

A responsible financial planner is going to tell you to take a deep breath, look at the long term (and look at history, especially at points where others thought the world was going to end, such as WWI and WWII, the Cold War, earthquakes and massive floods, etc., and realize that life really does go on, even after massive human disruptions) ... and plan a little bit for the possibility of some of those disruptions, but don’t let those plans rule your life.

Get a good one.

cockswain's avatar

@laureth I just read the links you posted and feel there is some good stuff to discuss in there if you’re interested. While I get that the prices are getting increasingly volatile, I still can’t see how any of the analyses in those links necessarily upset the argument that the long-term price should still trend up. Let me know if you want to wonk out a little.

wundayatta's avatar

Future beach front property in Canada seems like it is worth thinking about to me. I’ve been considering that for years. But in the end, I’ve decided it’s better to be flexible than to be tied down to something as immovable as land unless you plan to be using it in the interim. Anyway, I have friends with plenty of land halfway up a volcano in Hawaii. They are dying for neighbors. They also have beachfront property, but that was run over by lava only twenty years ago.

According to the New Yorker, if the ice caps completely melt, the Statue of Liberty will be up to her waist in water. I didn’t think the sea levels would rise that far, but I if they do, I suspect my property will be underwater, even though most analyses I’ve seen say no.

Still, we have a lot of time. The ice caps won’t melt for at least a hundred more years, I think, if that. Plus you can’t predict these things. The earth has many self regulations techniques that have kept it in good shape for humans. And humans also can do things to regulate global temps. We have time. The end of the story has not yet been written.

We need to keep an eye on it, but panic is not called for.

LuckyGuy's avatar

I am living in one of the few places on the planet that will actually benefit from climate change – Western NY. We have power from Niagara Falls, the Great Lakes for pure water and ground water, a warming climate and plenty of farm land and forest that will grow more vigorously with warmer temperatures.
Using the latest genetically modified energy crop I can heat my house year round with the yield from an acre of land and my wood burning stove.
I look out my window and think, “If this is global warming, sign me up!”

cockswain's avatar

Yes, that seems forecast to be a decent area. Except I’d worry about people in a crisis.

Glad you’re such an optimist.

LuckyGuy's avatar

You wrote: “I’d worry about people in a crisis” Are you kidding? This area has one of the lowest crime rates in the country. Amherst NY and Greece NY often take the #! and #2 spots in the US for lowest crime rates in communities with over 90,000 people. (Some years they are only in the top 5.) We are also the most polite drivers on the planet. Sorry Kokomo Indiana residents I’‘ve driven there and we are a whole bunch nicer.
As a side note – us rural folk have guns. And our crime rate is still lower than any place in the US – with or without guns.

cockswain's avatar

@wundayatta Really all I’m picturing is a place near a smallish town with a well, good soil, and good climate for growing food. Sort of a permaculture settlement. But I don’t want to get there too soon. Just have it in case I need it.

@LuckyGuy I wonder how nice anyone will be if they are struggling to survive. We’re still animals beneath the surface, and things are getting bad in Greece. Imagine a Greece-like scenario in the US. These are the sorts of paranoid thoughts plaguing me. I’d much rather end up incorrect with some nice little mini-farm near a Canadian lake that I sometimes visit rather than living on it full time and wary of strangers.

cockswain's avatar

God I hate sounding like a lunatic.

wildpotato's avatar

@CWOTUS Your more restricted sense of what the term “non-renewable resource” means is, for sure, the more scientifically accurate. However, people tend to think of it as the second definition given, where it’s a matter of the unsustainable rate of consumption of the resource in question, as well as the first definition you mentioned, where it’s a matter of the overall potential for the element’s further extraction from the environment.

cockswain's avatar

@wildpotato Agreed. Taking a resource that took millions of years to produce and using it within a couple hundred years isn’t really all that renewable in the span of a species that has existed 100,000 years or so.

LuckyGuy's avatar

Did you catch that I wrote Greece NY not the country Greece?
My point is that resources, food, water and power, are plentiful here. There is plenty of land to grow things and Niagara falls to make power, and pure water in the lakes. Farming will improve even more than it has already. This area is known for fruit trees, corn, cabbage, grapes, soy, peaches.

Holley NY was one of the largest suppliers of cabbage in the US. If you’ve eaten a chinese egg roll at a restaurant or had take out, most likely the cabbage came from Holley. The largest egg roll factory in the country is in NJ, and Western NY keeps the place running.

cockswain's avatar

I did see that you wrote “Greece NY”. I just made me think of Greece the nation as an example of behavior in a deteriorating society. In fact, there are reports of people moving out of the cities into rural areas for survival.

Do you think your area would be as nice if a dozen or so million more people realized it seems pretty nice compared to where they currently live?

cockswain's avatar

Oh, and thanks for the cabbage/egg roll fun facts. I was completely unaware.

cockswain's avatar

Picture a bunch of crazed New Yorkers migrating to your area in an energy/climate/economic crisis. People that have never grown a tomato or rarely gone camping in their lives. Millions of them trying to get out of an increasingly chaotic city trying migrate out over a few years. I don’t want to be near those people as they figure out how to chill out and adjust.

cockswain's avatar

Take that last post with a grain of salt too please, i was exaggerating (to an extent).

LuckyGuy's avatar

That’s why we all have guns. They are to keep the down-staters out. :-)

Also note we are 8 hours from NYC. It is a different world here.

cockswain's avatar

There’s just too many of them, @LuckyGuy , too damn many! And what will they do when they haven’t had a bagel, latte, or gotten laid lately? Chaos!

cockswain's avatar

That’s nearly an exact quote from my buddy who has been living there the last many years as we walked across the Brooklyn Bridge together a couple weeks ago. We were discussing climate change in light of how things were in lower Manhattan after Hurricane Sandy.

LuckyGuy's avatar

@cockswain I had a NYC relative visit once. He drove up with his family in his fancy BMW.
Upon arrival, he complained that he was all stiff after the drive and wanted to know where he could get a massage. A massage. A freaking massage!!!

People like that would not last a day here. Someone would send him out into the woods to feed the deer with some slices of warmed roast beef or turkey. The neighborhood coyote pack would make short work of him. If they can take down a healthy deer, they can finish off an overweight New Yawkah who has not moved faster than a walk in 30 years.

“Leo, Make sure to smear the hot roast beef all over your gloves and boots to mask your scent. Stand quietly and the deer will eat it right out of your hand.”

cockswain's avatar

Haha, awesome.

ETpro's avatar

@cockswain This quote from Nikola Tesla came across my desk this morning. Amazingly prescient. One man gets to tell the entire planet, “I told you so.”

cockswain's avatar

Yes, and here are others that could foresee problems with moneyed interests obscuring the facts from the masses for personal gain.

ETpro's avatar

@cockswain Bookmarked. What a treasure trove of quotes. Thanks.

laureth's avatar

@cockswain

Re: ”@laureth I just read the links you posted and feel there is some good stuff to discuss in there if you’re interested. While I get that the prices are getting increasingly volatile, I still can’t see how any of the analyses in those links necessarily upset the argument that the long-term price should still trend up. Let me know if you want to wonk out a little.”

I love wonking out. That’s why my Facebook has so much of it. Will be glad to talk to you anytime. :)

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