Book Review: The Oil Factor

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by Stephen Leeb and Donna Leeb

Warner Business Books ©2004, 218 pages

How to Profit From the Coming Energy Crisis

According to financial expert Stephen Leeb and his wife and collaborator, business journalist Donna Leeb, the world is running out of “economically extractable oil.” In The Oil Factor, they describe how this diminishing supply and a rise in demand will soon combine to create an increase in inflation that will reach levels that have not been seen since the 1970s. To help investors see the big picture and grow their investment portfolios in these times of rising oil prices and stock market volatility, the Leebs offer them an informed strategy for choosing the right investments.

Energy is a crucial part of the U.S. economy, and the Leebs believe the world is on the cusp of a major oil-centered transition that will dominate the investing environment for many years. The Oil Factor contains a collection of well-researched ideas and tools that can help investors deal with the challenges the transition entails. They explain that, because few heeded President Carter’s advice three decades ago to invest more deeply in alternative energies as alternatives to oil consumption, our current reliance on oil is not going to change abruptly any time soon.

The Pivotal Role of Oil

The Leebs write that there are two reasons oil will play a pivotal role in the changing economy. They are:

1. We are on the verge of a historic transition away from relying on oil as our primary fuel.

2. Oil is both the prime cause of this turbulent transition, and the best guide to getting through these difficult years.

The authors write that the economic transition away from oil will be forced on us because oil supplies are peaking, and oil producers aren’t going to be able to produce as much oil as the world needs. The resulting oil shortages and rising oil prices will create turbulence and uncertainty in the economy, they explain.

We are entering a new era in which inflationary pressures will mount, the authors point out, and as oil prices rise, energy costs will become an increasingly bigger part of the economy. The authors explain that even if inflation rises more slowly than they expect, an “inflationlike” environment will have similar repercussions for investors.

The Leebs write that buying a representative index of seemingly safe, conservative stocks will no longer solve the problem during the inflation they predict. They also explain that a buy-and-hold strategy will not work either. Investors must become more proactive, they write, so they can shift into inflation beneficiaries as inflation takes over, and into deflation hedges when deflation rears its threatening head.

‘Our Amazing Oil Indicator’

The Leebs predict that oil prices will rise to $100 a barrel by the end of the decade, if not sooner. They write that “oil prices have been the single most reliable guide to stock market performance.” This is why they insist that investors must pay attention to oil so they can stay on the right side of market lurches. To show investors when they should choose between inflation hedges and deflation hedges, the authors have designed a methodology that uses oil prices as the signals that tell them when to take action.

The authors write that investors will need to ignore the broad middle of stocks that are represented in the major averages. “Instead,” they write, “the key to using our oil indicator for maximum gains will be to focus on an alternating mix of inflation and deflation positions.”

Basically, their oil indicator creates a “negative” signal whenever oil prices are 80 percent or more higher than they were in the previous year. This is when they write that investors should shift most of their assets into deflationary hedges, such as T-bills and bonds. And when oil prices drop to 20 percent or less than they were the previous year, investors should invest their assets in inflationary hedges, such as energy stocks and precious metals.

By using their oil indicator to zero in on the right investments, they write that investors can outperform the overall market. They also explain how the global oil wars affect defense stocks, how investors can capitalize on the growing field of alternative energy, and how they should invest in real estate as well.~

Why We Like ThIs Book

In The Oil Factor, the Leebs create an investment road map that aims to take investors safely through the difficulties they believe are coming around the bend. Because the Leebs also encourage the United States to establish a leadership position in the development of alternative energies, their focus on oil not only will help investors profit from the impending shift in the oil economy, but it also helps to raise awareness of the world’s reliance on this finite resource before the next energy crunch. ~

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