Oil Barrel: Half Empty or Half Full?

Every coin has two sides and so does every story. The current oil crisis is no exception. Those who wish to protect the environment at all costs have made an art of spinning every oil news story into one that discourages any additional domestic drilling. Of course those on the side of the oil industry are no dummies in the spin department, either. But here’s a recent example that shows how the spin zone works. And you can decide for yourself if the glass, or the oil barrel, is really half full or half empty.

Increasing supply is one of the many solutions being offered to solve the world’s oil crisis. Naturally this alone will not solve the problem, but with the long-term increasing demand from developing nations, obviously a growth in supply would be highly beneficial.

Recently, the US Geological Survey released a study that concerns the Arctic region’s potential supply of oil and natural gas. You can view this assessment for yourself at www.usgs.gov, but here are a few selected quotes: “The area north of the Arctic Circle has an estimated 90 billion barrels of undiscovered, technically recoverable oil, 1,670 trillion cubic feet of technically recoverable natural gas, and 44 billion barrels of technically recoverable natural gas liquids in 25 geologically defined areas thought to have potential for petroleum.”

“These resources account for about 22 percent of the undiscovered, technically recoverable resources in the world. The Arctic accounts for about 13 percent of the undiscovered oil, 30 percent of the undiscovered natural gas, and 20 percent of the undiscovered natural gas liquids in the world. About 84 percent of the estimated resources are expected to occur offshore.”

The Arctic region covers a large area, including Siberia, Greenland, Canada and upper Alaska. While we can’t influence exploration in most of those regions, we certainly can in Alaska. Arguments about opening up ANWAR to drilling have been going on for years and this report is certain to add fuel to the fire.

This is especially true since this report points out that Arctic Alaska is one of the three geological provinces that make up “more than half of the undiscovered oil resources” and “more than 70 percent of the undiscovered natural gas.” The undiscovered oil resources in Arctic Alaska are estimated to be 30 billion barrels.

Sounds like great news, doesn’t it? But not to those who oppose any and all oil drilling. They have come out with their own interpretation of the data, saying that all the oil in the Arctic would only supply the world for three years. So why put the Arctic environment at risk for such a small return?

One problem with this argument is the way in which these environmentalists came up with their three year figure. They took the world’s annual use of 30 billion barrels a year (that’s 83 million barrels a day) and divided it into the 90 billion barrels said to exist in the Arctic. But this isn’t really a valid argument. One of the main reasons that oil prices are so high right now is that there is very little margin between world demand and world supply. Any additional oil put into the supply line would lessen these margins and bring down prices.

Even the democrats in Congress are pushing for a release of petroleum from our Strategic Oil Reserve for this very reason. They know that adding some supply would put downward pressure on current oil prices. You don’t hear them explaining that the 706 million barrels in our Strategic Oil Reserve would only supply the world’s needs for 8 ½ days, so why bother tapping it at all? And yet, they argue that we shouldn’t open up new drilling in Alaska, or anywhere else where there is domestic oil, because the 30 billion barrels or more we could access wouldn’t fill the world’s demand for more than a few years. It’s hypocritical to say the least!

Increases in technology will only add to the available reserves already existing in the Arctic. And think of those 90 billion barrels this way: if the Arctic could add 2 million barrels of oil a day to the world’s supply, that oil would last 123 years. You can spin it however you want, but without increased oil supply, our oil crisis will only get worse.

Mr. Voudrie is a Certified Financial Planning Practitioner and provides personal, private money management services to clients nationwide. Find out more at www.guardingyourwealth.com.

De-Stressing the Markets

For the first in time in about seven years, we find ourselves in a true bear market. The problems in the financial sector, pervasive gloom and doom forecasts and ever increasing oil prices have combined to create one of the most tumultuous financial climates of recent history. Inflation fears, the credit crisis, mortgage foreclosures, tension with Iran, recession woes: it’s enough to give even the most seasoned investor sweaty palms. How can you navigate these tough times without losing your cool?

There are two levels where you can de-stress the influences of the market. The first is in your own portfolio. No matter how your portfolio is structured, there are several key points to remember. Most important, is that you cannot control the market and shouldn’t act hastily. Any portfolio adjustments should be well reasoned. Some investors make the mistake of knee-jerk reactions when markets turn sour and make mistakes that cost them thousands of dollars down the road.

The second thing to remember is that you need to focus on minimizing loss, but recognize that you cannot eliminate it. Some people want to turn to all fixed investments during hard times, thinking they are ‘safe.’ But today, what used to be some of the most conservative investments are becoming some of the most risky. Financial stocks are the perfect example.

To avoid loss completely, some investors are tempted to liquidate all equity holdings and move 100% into cash. You might gain some temporary peace of mind, but you end up costing yourself in the end. Another common mistake during difficult markets is for investors to fall for all-encompassing products that appear to promise them market gains without any risk of loss. These include variable annuities with their guaranteed income riders and equity indexed annuities. If you are tempted to purchase either one of these products, please take the time to do your research and at least read some of my past articles on the subject!

Here’s what I’m doing for my clients. I have their portfolios well diversified between a number of holdings, across a broad range of sectors and strategies. This includes a division between short term and longer term holdings. My shorter term holdings have more trades, to take advantage of trends and special opportunities. I am apt to move these holdings to cash more quickly as the markets turn down.

My longer term holdings include those with long term growth potential and stocks purchased for their high dividend yields. When markets are trending up, I’ll have more money in these longer-term holdings than in shorter term ones. But when markets are trending down like they are now, buy and hold strategies get hammered. So I am more weighted in shorter term holdings, where I move a higher percentage into cash as necessary. However, I’m not as quick to liquidate my high-dividend holdings, since they’re paying us along the way.

If you have most of your money in mutual funds, I certainly wouldn’t leave it up to the fund money managers to decide what is in your best interest. Look at how your money is divided and make sure you aren’t over exposed in one area. Some investors think they are well diversified because they own several funds, not realizing that all of those funds are basically investing in the same pool of stocks.

For mutual fund investors, pre-determine how much loss you are willing to tolerate. Based on that, you may decide that if Fund A drops 10% that you’ll liquidate 25%, etc. That way you are limiting the downside risk but still in a position to benefit should the market turn around..

The second area where you need to de-stress is on the personal side. Keeping the right perspective can make all the difference. As bad as times seem to be, they are temporary. Remember all that we have come through before: wars, the inflation of the 70s, the terrorist attacks of 9/11, etc. We will see our way through today’s challenges as well.

If you find yourself losing sleep, maybe you should take a break from the news coverage for a bit. Focus on what really matters: your family, your faith, your friends. Those are the things that will outlast high gas prices and inflation, and are what make life worth living in the first place. After you’ve relaxed, re-visit portfolio decisions.

Mr. Voudrie is a Certified Financial Planning Practitioner and provides personal, private money management services to clients nationwide. Find out more at www.guardingyourwealth.com.

Going Green, Part 2

As the summer heats up, so does the rhetoric about the energy crisis. The presidential candidates are taking political shots at each other’s solutions to the problems, while everyone else in Washington is playing the blame game. Even OPEC is washing their hands of the matter, blaming ‘speculators’ for the current crisis.

As investors, all the arguments and finger pointing do nothing to help our bottom line. If we wait for our own government or powers abroad to take action to benefit us, I’m afraid we’ll be waiting a very long time.

But the good news is that you aren’t at the mercy of feuding politicians or oil-producing nations. There are steps you can take to protect your nest egg and your standard of living.

One important factor to understand so that you can navigate these turbulent times is that the issue isn’t just the price of oil. The supply/demand problem we discussed last week is occurring across the board with all natural resources. Just as China and India are increasing their demand for oil, they’re also increasing the demand for food products, such as soy beans, corn, and wheat.

As supplies tighten and demand increases, we’re seeing a world-wide increase in food costs. Ethanol production and drought conditions in some wheat-growing areas like Australia are only adding to the problem. The recent floods in the Midwest have also destroyed many acres of grain crops. All of this means that consumers shouldn’t expect to see relief at the checkout any time soon.

Since consumers world wide have to spend more of their money on food, we see two obvious results. First, they are less optimistic about their financial situation, and second, because food and fuel is consuming a larger percentage of their disposable income, they are cutting back their spending in other areas. We’ve already seen this here in the United States, where one large home improvement chain recently reported a decrease in big ticket purchases and a sharp increase in repair items.

When consumers are feeling the pinch, it’s usually a hard time for the stock market. The temptation might be to pull out of equities all together and head for the ‘safety’ of cash, bonds or CDs, but these investments have their own set of risks. Interest rates are quite low and these investments give you no protection from inflation.

Real estate often performs well in an inflationary environment, but we are still feeling the effects of the real estate bubble and sub-prime mess. Savvy investors can take advantage of the situation, but if you don’t know what you’re doing, you can certainly get burned.

In these uncertain times, investors can make an even more costly mistake: believing the hype about ‘miracle’ investments that promise to solve all your problems. These products are promoted as ways to protect your money and give you a bonus for investing, but instead they lock up your money for years, give below-average returns, and provide a handsome payday for the advisor.

If ever there was a time to keep control, access and flexibility over your money, it’s now. In these difficult markets, you must be able to take quick action to protect your money and have the flexibility to take advantage of changing opportunities.

The good news for investors is that you can be in control of your financial future. You don’t just have to sit back and take what the markets give you. Yes, you will need to tread cautiously and be highly selective in the sectors and countries in which you choose to invest. But you don’t have to be at the mercy of pre-packaged, mass-marketed products that do little to help you meet your financial goals.

There are times you might need to ‘stand aside’ and let the markets work through an issue. Remember, all the money managers are seeing the same trends and what used to take several days to play out is now happening in a single day. This is increasing volatility.

Don’t let the current energy crisis turn into a financial one for you. Maintain control, access and flexibility over your money and keep a close eye on your investments. This isn’t the time to simply buy an investment and hope it does OK over the long-term. Instead, opportunities and risks must be closely managed—something few advisors do.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide. For more information go to www.guardingyourwealth.com.