The Oil Market's Wild Ride
The Oil Market's Wild Ride
Recent years have seen a dramatic increase in oil prices, which has contributed to a public mythology surrounding the oil markets. The general public seems to believe that the oil firms are to blame for the price hikes because it is their responsibility to get the ingredients needed to produce petroleum products, such as gasoline. Blaming corporations is a popular public perception.
The truth is that individuals working inside the oil industry are well aware of how cyclical the industry is. This proves that the age-old saying, "whatever goes up must come down," is certainly true in the global and domestic oil markets. Rather than reflecting the business goals of the oil companies involved, the present high prices reflect issues with refineries and supply caused by conflict in the Middle East. To be more accurate, oil firms are just as, if not more, affected by massive changes in supply and demand than the ordinary customer is when it comes to economic planning for the future.
This spike in gas prices is only the latest example of how the oil industry has had unprecedented financial success. Furthermore, anyone with even a passing familiarity with the oil industry for more than a few decades will tell you with certainty that the present highly profitable economy, which is immensely benefiting oil firms, will eventually reverse course. At present, there is a scarcity caused by maintenance issues or temporary shutdowns at the country's refineries. However, once all refineries reach full capacity, there will be an excess of supply and prices would fall.
Just as customers worry about and the market is dominated by oil shortages due to tensions in the Middle East, oil supplies can also change drastically. Worldwide gas prices can fall precipitously if new oil reserves are unexpectedly found in Asia, the Soviet Union, Europe, South America, or even offshore in the United States, leading to an oversupply of the market and cheap crude oil.
This isn't just wishful thinking; it's a trend in the oil sector that the corporations most affected by market fluctuations in supply and demand—the major oil majors—have been following for years. Even though oil prices are high and supply is above demand, the industry is already planning for the next downturn, when it will have to make significant changes to its operations to survive. This is nothing new for the oil industry; it is accustomed to the ups and downs of the market.
When faced with unpredictable markets like the one in the oil industry, a savvy manager or investor will know to diversify their holdings. And that has been fundamental to the tactics that have allowed oil corporations to weather the industry's cyclical price, supply, and demand fluctuations at a profit. Even though the oil business is currently experiencing unparalleled success, it will eventually suffer a decline in revenues. Until then, it will have to prepare for a downturn of unknown duration and ride it out.
Every major oil corporation in the world is already pouring a lot of money into diversified businesses that can bring in money even when oil prices drop. Those investments will span the stock market, real estate, and even completely unconnected fields like retail and entertainment. A company's ability to weather the volatile oil market depends on its level of diversification.
This astute business move also sends a positive message to oil industry investors. Companies that are now adding value to our portfolios are solid investments, but we should diversify now since we know a slump is on the way. With everything in place, we will be able to weather the next oil collapse with the same ease as the corporations whose fate is determined by the oil markets.
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