Oil: A No-Brainer Investment

Monday, 15 Oct 2012 07:36 AM

By Sean Hyman

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In my newsletter, the Ultimate Wealth Report, I own an oil stock and I’m about to buy another one. Why?

Oil is what I call a “no-brainer” investment. It has all of the math working in the favor of higher prices over time.

For instance, the global population is growing at a faster pace than ever, and that will put increased demand upon the world’s finite supplies of oil over time, thus driving up oil’s price.

Editor's Note: 5 Signs Stock Market Will Collapse in 2013

Back in 1804, the world’s population hit 1 billion people. Then 123 years later in 1927, it hit 2 billion people. Just 33 years later it hit 3 billion in 1960. The 4 billion mark was hit 15 years later in 1975, and the 5 billion mark was hit 12 years later in 1987. The 6 billion mark was hit 12 years later in 1999, and now the 7 billion mark has been hit another 12 years later in 2011.

Well, it was one thing when it took over 100 years or even 33 years to grow by a billion people, but these days that’s happening about every 12 years. That means the demand put upon the supplies of oil will grow faster than ever before.

When I’m 81, the 10 billion mark will be hit by the year 2050.

Another reason why the global supplies of oil will have increased demand placed upon them is because China continues to grow overall at double-digit rates. And right now the country imports around 50 percent of its oil, but by the end of this decade up to 60 percent of its oil will have to be imported.

China is the “new America” as far as growth and consumption goes. Just as what the United States did moved commodities due to our economic growth and consumption, now it’s that way in China. So China’s continued growth will demand more oil, which will further push up oil’s price over time.

Another reason oil will head higher over time is because the breakeven point for Middle Eastern oil exporters continues to rise. Their breakeven points are derived by seeing what it takes for them to meet their budgets.

Well for the past 30+ years, they’ve been able to do very little for their people and get by with it. But within the last couple of years that “party” has come to an end for their dictators.

Editor's Note: 5 Signs Stock Market Will Collapse in 2013

Now they are spending more money in order to remain in power and not get overthrown. Why? It’s because of the rise of inflation over time, especially in food costs.

The average Middle Easterner is very poor by Western standards. They don’t make much money. So every little bit counts … and when they see food prices rise significantly, they can hardly survive. When it gets to that point, riots and protests breakout and these dictators risk giving up the reins to their kingdoms, which they’ve ruled for over 30 years now.

They aren’t going to let that happen. So what are they going to do? They’re going to spend more of that money they receive from oil revenue on the people. However, this makes their budgets go higher, which causes them to need a higher breakeven price on each barrel of oil produced.

For example, the average breakeven price they needed back as recently as 2006 was just $33.60 per barrel. Today they need $79.80 per barrel, a 137 percent increase over what it was just six short years ago.

This is a trend that will continue. In fact, the Institute for International Finance believes that this breakeven price will have no problem growing to $110 a barrel.

Now while oil can slip in price for some weeks or some months, they aren’t letting oil slip below their breakeven prices for even one year.

So this tells me that all pullbacks in the price of oil are temporary and that with a little patience, purchases of an oil exchange-traded fund, or better yet an undervalued oil stock, can reap huge rewards over time.

Editor's Note: 5 Signs Stock Market Will Collapse in 2013

Our current oil stock that we own is up 17.5 percent within four and a half months … and its poised to go much higher in the months ahead.

I expect the next oil stock that I’m recommending in my next monthly issue to have a very similar return.

So if you don’t have any oil investments, I’d urge you to get some today. This is a no-brainer investment over time. It doesn’t mean oil will go up every day or even every month, because it won’t. But you can buy oil or undervalued oil stocks on dips and expect them to be notably higher every couple of years.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.

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