Monday, March 10, 2008

Smart Money Buys Oil

I drove buy a gas station today charging 3.75 a gallon for basic, non-premium gas. Holy shit, I thought, I wish I was cashing in somehow.

Just kidding. I actually thought - I'm never driving out to Silverlake again. But I wish I was deeply invested in oil. Here's why:

In a normal gas/oil market, the business is straight forward and simple. Pull it out of the ground for $1, process it, and sell it to the customer for $2. No mystery, no big chance of a demand shortage, just straight forward business. Everyone gets their 10% profits from the drillers to refiners to truckers to the pumps. No tech bubble, no housing bubble, no recession...people still will always need (and pay for) gas.

But in times like these - with oil prices high - comes the real racket. See, when oil prices jump, all other prices have a corresponding jump. Every business that depends on transportation, which is to say, every business has increased costs. Which makes them less profitable. Which makes them less valuable.

So while the cost and profits on gas/oil increase, the value of ALL other commodities decreases. Which means the flush-with-cash beneficiaries of oil revenue can make corresponding investments in depressed industries. It's like getting a windfall of money when all other investments are on sale.

Which is why Exxon Mobil is probably a better stock over the past 50 years than Microsoft, Johnson and Johnson, or Apple.

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