History Of Oil

I have been studying a text about the oil & gas business written by the research team at Deutsche Bank. Since I grew up on a farm and experienced the volatility of commodity pricing, I have never been interested in oil & gas investing. However, watching the oil producing countries effectively "tax the world" has at least gotten my attention.

Since the beginning in 1859 when Colonel Edwin Drake struck oil, one clear pattern has emerged. Left to its own, capitalist enterprises will compete self-destructively to deliver oil at increasingly low prices. As a result, artificial constraints are necessary. The role of Standard Oil, the Texas Railroad Commission and OPEC has been the same - to impose these constraints.

I had formerly assumed that these "price-fixing" entities were not in the market's best interest. Actually, that is not true. Without their discipline, oil pricing would cause inappropriate pricing and utilization of a limited resource. OPEC is Big Oil's best friend. Current profits confirm this.

Also, there appears reflexivity between inflation and oil profits. With inflation, "stuff" is worth more. Gold reflects this. Yet oil not only reflects it, but is in a feedback loop pushing inflation up. Further, the best periods of investment performance for oil stocks have also been the best periods for small cap stocks. While I do not pretend to understand the connection here, it's worth thinking about.