The Roller Coaster Oil Market

There are general myths about oil markets that are fueled by the sharp rise in oil prices in the past few years. This perception is that oil companies whose task is to obtain raw materials for the manufacture of petroleum products, including gasoline for transportation purposes, are the source of high prices. It’s easy for the public to blame big companies.

The truth is that those within the oil business know very well that the oil business is tremendously cyclical. This means that the old adage, “whatever goes up must go down” certainly applies to oil markets domestically and around the world. The current high prices are more a reflection of the refinery and supply problems caused by the tension in the Middle East than they are with the profit targets of the oil companies involved. In truth, oil companies have to deal with sweeping shifts in supply and demand and they affect how they plan their economic future as much or more than they affect the average consumer.

This rise in gas prices is not the first time that the oil business has seen huge profits and gains in its revenues. Anyone who has been in the oil business for several decades knows very well that the current highly profitable economy that greatly benefits oil companies will turn the other way at some point. Just as there is a shortage due to repair or temporary shutdown problems in the refineries in the country, there will come a time when all the refineries are producing at full capacity and there will be an abundance in the market which will bring down prices.

Likewise, just as the shortage of oil dominates the market and is in the minds of consumers due to the tension in the Middle East, oil supplies can change dramatically. A new discovery in Asia, the Soviet Union, Europe, South America, or off the coast of America could suddenly send a glut of supplies to the market that will drive down crude oil prices and with it gas prices around the world.

This is not just a forecast in the sky, but an industrial trend in the field of oil backed by years of experience, research and tracking by the companies most affected by sudden changes in supply and demand in the markets, those major oil companies. The oil business is so used to the tumbling nature of the market that even though the market is now fine for the oil companies, they are already preparing for the next downturn and how they will survive when supply exceeds demand and prices fall leaving them with major adjustments to how they do business.

As with any savvy corporate manager or investor for that matter, diversification is the way to prepare a strategy for dealing with volatile markets as we see in the oil business. This was the cornerstone of the strategies that kept the oil companies able to ride the ups and downs of their industry in these huge fluctuations in supply, demand and profitability. While the oil industry is now enjoying an unprecedented boom, there will come a time when they will see their profits plummet and will have to prepare for a downturn of unknown length and survive until the next swing of the pendulum.

So far, you can bet that every major oil company in the world is already investing heavily in diversified business interests that can generate revenue to keep the company afloat when oil revenues aren’t as profitable as they are now. These investments will be in real estate, the stock market, and even in remotely unrelated industries such as retail or the entertainment industry. The more diversified the company, the more prepared it is to conquer the rollercoaster oil market.

And this shrewd trading practice is a good sign for those who are investors in the oil industry as well. Just as the companies fattening our portfolios now are solid investments, we should know that downturn is coming and diversifying while times are good. Then we can get through the next oil recession just as easily as the companies that live or die because of the oil markets, throughout the year.

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