Today’s Brew 11-2-05

John Tamny writes at National Review Online:

The Boon of Big Oil Profits

Lawmakers must understand that cheaper fuel is on the horizon.


Back in 1980, in the midst of the last era of expensive oil, oil companies represented 28 percent of the S&P 500’s value. This investment boom stimulated exploration and led to an oil “glut” in the 1980s and ’90s. In this new environment, cheaper oil and lower oil-company profits meant that investment moved elsewhere, and with this asset redeployment, oil-company share of the S&P 500 fell to 7 percent. The latter number arguably foretold today’s energy prices to the extent that they’re a demand, as opposed to a weak-dollar, phenomenon.

Notably, oil companies now comprise 10 percent of the S&P’s value, and the number will presumably rise as oil companies report earnings and are subsequently rewarded with higher valuations. This change in the S&P’s makeup heralds cheaper oil in the future.

Also, record profits attract imitators and innovators. Canadian oil company Suncor Energy is an example of innovation at work. It has devised a way to extract crude from oil sands, and the consensus is that this process will greatly expand the amount of proven reserves around the world. Happily, investors have rewarded Suncor; its stock is up 400 percent over the last five years, a timeframe in which the Dow has been flat while the S&P 500 and Nasdaq have been down.


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