How the rich make their killing from soaring oil prices?

June 1st, 2008

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Take a look at this article from the news media: Opportunities in crisis as oil stocks dwindle,

A new oil shock that is sweeping the world has sent airline tickets soaring, car drivers reeling and retailers bemoaning the shrinking purses of customers. It is an oil shock of rare proportions.

It is in such events that investors thrive: surely there is an opportunity here for an investor to make a profit from the rising oil price?

Well, how would the rich profit from the soaring oil prices?

There is one rule of thumb that all investors, especially the budding ones, should take note: by the time you get to read about profit opportunities on the media, the biggest and most lucrative killings have already been made. What remains are the leftover scraps. The best investors hop on to the long term major trend long before the mainstream media screams about it. As early as the end of 2006, we had already whispered about the future of oil prices at Is oil going to be more expensive?. The world-class investors who are making a killing from soaring oil prices now would have made their move two years ago.

So, now that mainstream media are talking about how to profit from soaring oil prices, what will the world-class investors be looking at right now? No doubt, they will be thinking steps from the crowd. We believe they will be casting their eyes on alternative energy.

Back in April last year, we examined the idea of alternative energy- see our currently evolving guide, How to profit from rising energy prices?. In particular, take a read at Part 3 (Centralised or Distributed Power) of the “Smart money in alternative energy” series to see how the future of energy will look like in the long run. Regardless of whether you believe the former model (centralised power) or the latter model (distributed power) will be the outcome of the future, there is one problem for the investor: currently, there is no certainty on which forms of alternative energy (e.g. wind, solar, geothermal, nuclear, clean coal, biofuels, etc) will be implemented or commercially successful in the future. By the time the world work them out, the most lucrative profits would have already been made.

But how would the best investors invest in alternative energy? Remember the concept of the asymmetric pay-off strategy in our guide, How to profit from a stock market crash?? The same applies to alternative energy. We do not know which alternative energy will be the winner, but we know that the winner (or winners) will probably win a whopping big victory (or victories). The losers may end up discarded and forgotten (we believe ethanol will probably go the way of the losers). Therefore, the way to invest in alternative energy will be to allocate fractions of your capital into each and every alternative energy candidate that you believe will have good chances of winning. Eventually, one or more of the candidate will win so big that your combined losses on the losers will pale in comparison to the combined wins.

Obviously, this strategy will work only for those who have large enough capital.

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  • Alex

    isn’t that kind of like going to the horse races and putting money on every horse?

  • Alex

    isn’t that kind of like going to the horse races and putting money on every horse?

  • Pete

    I think it is a bit more like hedging your bets…except not the strict version of hedging – more like a structured hedging. Then again, if all the alternative energy stocks flop, you’re in trouble…you’ve been betting on the wrong race altogether ๐Ÿ™‚

    How did I just destroy that analogy? Oops.

    I have quite a few alternative energy stocks myself, ones I have had for a while now…I have been burned pretty badly so far, in fact they are the only poor performers I have had really. I am not trying to contradict what you have written Ed, rather that I got into the alternative energy market at the wrong time…

    Hopefully now my stocks will go back up and i’ll get out of the red ๐Ÿ™‚

    But as you say Ed, this is essentially a play on diversification…the number one rule (well maybe not number one) of investing: dont overweight your stocks and have a diversified portfolio. Although on that note, I shan’t be buying any financials for a long time.

    The way I see things, we have a few main energy sources: Solar, Wind, Geothermal, Hydro (hard to invest in), Wave Power, and a few others. I think from memory the main problem with all of those is loading/peak times and storage. Without actually doing research, I believe it was a thing called Super Capacitors that could be a solution to the electricity storage issue.

    I also don’t believe that biofuels will be completely gone, but, as I was discussing with a friend last night, there are some serious conflicts in that sector. I believe we will always need fuel of some description, at least for flight and commercial boats, and maybe also for farming equipment and heavy transport (grocery trucks, etc). The building industry will be very tricky running purely on electricity – and we can imagine the loading on the grid if everyone is using electricity instead of petrol…ouch!

    The problem with biofuels in my opinion is the obvious food vs fuel argument. There is also an irony that farming generally requires fuel aswell (tractors, trucks, etc).

    I personally think that Oil usage will stay high, even if it costs several times the current price. People will become more thrifty with the fuel, biofuels will rear their head again, and there may well be some international hostilities over it all. I really don’t believe that the world, with its current highly dependent population, can de-couple from oil use that easily – especially the poorer or developing countries that have farming…but no oil (eg, china, india?).

    Due to my lack of faith in most of humanity, I believe we will let it go well beyond crisis point before we make any decent changes to our way of life…and sadly, I don’t think we can live with so many people, and also have any forms of prosperity, without oil.

    Good lord, my silly rant was almost longer than the article, sorry!

    Comments from anyone appreciated, I’d love to hear any other takes on things I have said, especially if you disagree – I’m not out to contradict, only theorise.

    – Pete

  • Pete

    I think it is a bit more like hedging your bets…except not the strict version of hedging – more like a structured hedging. Then again, if all the alternative energy stocks flop, you’re in trouble…you’ve been betting on the wrong race altogether ๐Ÿ™‚

    How did I just destroy that analogy? Oops.

    I have quite a few alternative energy stocks myself, ones I have had for a while now…I have been burned pretty badly so far, in fact they are the only poor performers I have had really. I am not trying to contradict what you have written Ed, rather that I got into the alternative energy market at the wrong time…

    Hopefully now my stocks will go back up and i’ll get out of the red ๐Ÿ™‚

    But as you say Ed, this is essentially a play on diversification…the number one rule (well maybe not number one) of investing: dont overweight your stocks and have a diversified portfolio. Although on that note, I shan’t be buying any financials for a long time.

    The way I see things, we have a few main energy sources: Solar, Wind, Geothermal, Hydro (hard to invest in), Wave Power, and a few others. I think from memory the main problem with all of those is loading/peak times and storage. Without actually doing research, I believe it was a thing called Super Capacitors that could be a solution to the electricity storage issue.

    I also don’t believe that biofuels will be completely gone, but, as I was discussing with a friend last night, there are some serious conflicts in that sector. I believe we will always need fuel of some description, at least for flight and commercial boats, and maybe also for farming equipment and heavy transport (grocery trucks, etc). The building industry will be very tricky running purely on electricity – and we can imagine the loading on the grid if everyone is using electricity instead of petrol…ouch!

    The problem with biofuels in my opinion is the obvious food vs fuel argument. There is also an irony that farming generally requires fuel aswell (tractors, trucks, etc).

    I personally think that Oil usage will stay high, even if it costs several times the current price. People will become more thrifty with the fuel, biofuels will rear their head again, and there may well be some international hostilities over it all. I really don’t believe that the world, with its current highly dependent population, can de-couple from oil use that easily – especially the poorer or developing countries that have farming…but no oil (eg, china, india?).

    Due to my lack of faith in most of humanity, I believe we will let it go well beyond crisis point before we make any decent changes to our way of life…and sadly, I don’t think we can live with so many people, and also have any forms of prosperity, without oil.

    Good lord, my silly rant was almost longer than the article, sorry!

    Comments from anyone appreciated, I’d love to hear any other takes on things I have said, especially if you disagree – I’m not out to contradict, only theorise.

    – Pete

  • Hi Alex!

    Yes, sort of, except that it is more complicated- there are far too many horses to bet on every one of them in this case.

  • Hi Alex!

    Yes, sort of, except that it is more complicated- there are far too many horses to bet on every one of them in this case.

  • Hi Pete!

    I think from memory the main problem with all of those is loading/peak times and storage. Without actually doing research, I believe it was a thing called Super Capacitors that could be a solution to the electricity storage issue.

    You’ve made a very good point here. Solar energy may not work when the sun is down or the sky is cloudy. Wind, when the wind is not blowing. Wave, when it is low tide. So far, geothermal is the most promising in terms of not having loading/peak time issues.

    That’s why we think a distributed power model should be the way to go for the future. It leaves a lot of room for alternative energy to ‘plug’ into the electrical grid incrementally as the technology develops. Also, when the alternatives are in the loading phase, they can draw power from the grid and when they are fully loaded, they can feed energy back into the grid.

    Super capacitors are also an new development.

  • Hi Pete!

    I think from memory the main problem with all of those is loading/peak times and storage. Without actually doing research, I believe it was a thing called Super Capacitors that could be a solution to the electricity storage issue.

    You’ve made a very good point here. Solar energy may not work when the sun is down or the sky is cloudy. Wind, when the wind is not blowing. Wave, when it is low tide. So far, geothermal is the most promising in terms of not having loading/peak time issues.

    That’s why we think a distributed power model should be the way to go for the future. It leaves a lot of room for alternative energy to ‘plug’ into the electrical grid incrementally as the technology develops. Also, when the alternatives are in the loading phase, they can draw power from the grid and when they are fully loaded, they can feed energy back into the grid.

    Super capacitors are also an new development.

  • david c

    It’s quite possible that the investment models for alternative energy are flawed as well as having bad timing.In the U.S.large ethanol plants are failing right and left,due to financial problems,matters of scale and lack of adaptability in feedstocks.Pollution is also plagueing these over-sized behemoths.Smaller,more regionalized production,may be the answer.As with solar,individual production is desirable,a small local plant can be more beneficial and responsive to a community.It might not give an investor a huge immediate wow,but in the long run could definitely be worth it all around.

  • david c

    It’s quite possible that the investment models for alternative energy are flawed as well as having bad timing.In the U.S.large ethanol plants are failing right and left,due to financial problems,matters of scale and lack of adaptability in feedstocks.Pollution is also plagueing these over-sized behemoths.Smaller,more regionalized production,may be the answer.As with solar,individual production is desirable,a small local plant can be more beneficial and responsive to a community.It might not give an investor a huge immediate wow,but in the long run could definitely be worth it all around.