INVESTING: Roiled energy sector’s history suggests higher returns

With energy stocks all the rage today, I did a little research into the history of the industry and its impact on investors.

Oil is in uncharted territory price wise. OPEC refuses to increase production. China is soaking the stuff up like a sponge, and Americans want some relief from high gas prices.

Oil has been used for thousands of years as fuel for lamps and as a lubricant. Until the mid-1800s, most of the world’s oil came from whales. Then about 1860 in Pennsylvania, some speculators found oil in the ground. The discoveries on land were seen as a decent replacement for the whale oil, which was running low due to overhunting. By the late 1800s, though, the economic landscape of America was changing caused by the huge increase in factories and machinery, but not yet due to the internalcombustion engine.

By 1890, refineries were popping up all over the northeast, but especially in Cleveland, where John D. Rockefeller created Standard Oil. Accurate records were hard to come by then because we didn’t have an income tax, but some experts think he was our nation’s first billionaire.

The foundation of Rockefeller’s immense empire was firmly planted even before the first cars and planes became popular. Standard Oil’s power is still felt today in the guise of Exxon Mobil, which is the most valuable company on the planet.

By the turn of the century, it was evident that the world needed more oil, and it was found by the gusher in a small town in Texas in 1901. Within days the town was flooded with thousands of people. The speculation and trading made the later Internet days look tame. In one minute, an acre would sell for $1,000, and in one hour, that same acre would turn over for $50,000.

Investing in oil continued to be a narrow prospect until the late 1950s. An investor could either try to buy a share in a drilling operation or buy stock in Standard Oil. By 1957, Standard Oil was broken up into various components (think the AT&T breakup in the 1980s).

Standard and Poor’s Corp., which had only 90 stocks in its index from 1927 until 1958, expanded the list to 500 stocks, and there were seven oil stocks in the top 10. Royal Dutch, Chevron and Exxon were in the top 10 then, and they are among the largest companies in the S&P 500 today. Since 1957, Exxon has delivered a 12.6-percent annual rate of return.

Playing the oil game today is far from the total wildcatting scene it was 100 years ago. A cartel and a few large companies control almost the entire market. And discovery is only a part of the equation now. Investors can also buy stock in refineries, marketing and retail-related oil stocks.

The fastest and easiest way to get involved is by purchasing shares in OIH, an exchange-traded fund that owns the shares of companies such as Exxon, Chevron and Diamond Offshore. As popular as these stocks have become recently, I would expect a slight pullback for a while. But cheaper prices on these stocks should be used as a buying opportunity, because the run most likely is far from over.



Hauke is a local money manager. His column appears weekly. Views expressed here are the writer’s. Hauke can be reached at 566-2162 or at keenan@samexcapital.com.

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