This lesson goes into some complex oil investment concepts, expands on the way that oil became more of a commodity. Some might find this to be a review, but all need to have an understanding of how they apply to the oil industry.
Historically, the United States has led the oil industry, thus the price of oil has been tied to the US dollar. As the price of the dollar went down, the price of oil went up; enter inflation. This would be caused by the value of the dollar going down, but the value of oil remains consistent, so the price of oil would have to go up to accommodate this currency value change. Oil has a lasting long-term value and can be used for stability for investment and ultimately gaining profit. Thus, investors can assume oil will maintain relative value over the long term. This makes it a good commodity to hedge higher risk investments. The demand for oil will continue to grow, as oil does not have a strong or consistent competitor through alternative energy options. The power of the oil industry will continue until an economically viable alternative gains a significant market share.
The Quest goes into extended focus on the 1970s - 1980s oil trading, beyond the daily trading. Going into the 1970s, oil companies were integrated, following the example of Rockefeller as he built Standard Oil. Taking all the parts of the process under one large company allows for the company to absorb higher costs with higher profits along the process. The nationalization of oil companies in many oil-exporting countries contributed to the breakup and new approach to the flow of oil. The oil-exporting countries did not want the challenge of finding the individual consumer, but instead to pass on the risk to international oil companies, who were already equipped with gas stations all over the world.
The separation of the process allowed for companies to sell off the higher-risk areas and potentially make more profit while allowing for new speculators to enter the Wonderful World of Oil.
The Quest: Chapter 8 -The Demand Shock
Questions to Guide Your Reading:
How do oil prices relate to the US dollar?
What are some characteristics of oil trading?