Oil Prices: Behind the Scenes Look

Gas prices have been bouncing around quite a bit in different parts of the country. It reminds me of some oil-related conversations I’ve seen during my time in the industry.

Early 2003 

I was at a brokerage firm, very early in my career. At that time, worrying about the price of oil had never occurred to me. All I knew were some details about the handful of stocks I was supposed to sell. I remember another broker in a heated conversation with a prospect. The prospect didn’t want to buy any stock. He was worried about the economy and the price of oil in case the US went into Iraq. Apparently this prospect had read some article that oil would go to $50 a barrel. In response, the broker said, “You think oil is going to $50 a barrel? That is the most ridiculous thing I ever heard.” At the time, roughly January 2003, oil was around $29 per barrel. $50 per barrel represented roughly a 75% increase. It probably seemed unlikely at the time……

Summer 2005

Oil is getting around $60 per barrel. There are worries it could climb higher. Remember all that talk about the “speculators” that were pushing up oil prices? However, some brave souls are willing to bet that oil will come down. I remember a client asking how he could buy some derivatives contracts to make money if oil went down. Luckily he never bought any.

Summer 2008

Oil touches prices above $140 per barrel. I knew someone who actually did work in the oil industry who figured it would continue to go up – perhaps to $400 per barrel. The general consensus on the street seemed to be that it would probably get to at least $200 per barrel. This particular person did end up buying some oil and commodity related investments – just to “hedge” and “diversify” his portfolio. I never recommend commodities as a diversifier, but that is a topic for another post. This particular decision cost this person many tens of thousands of dollars.

Today

Oil closed at $94.90 per barrel.

Now, see how the price of this commodity is extremely volatile. But more importantly, look at the investor attitude and behavior in reaction to these price swings over the years. They seem a little silly now, but at the time they seemed rational. This is one reason discipline is so important. Without a disciplined plan, it is so easy to get whipsawed around by what seem to be very rational investment concerns. This is yet another way that inheritors can lose out on the returns they could otherwise get with a relatively simple investment strategy.

Photo by Paul Lowry

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