Punish BP! Blood! Murder! Money!

I know it's a little off-topic for this blog, but I just can't help myself.

9 days before Deepwater Horizon blew up, I wrote that even though oil prices would really be taking off this decade, oil companies would probably not be a great investment because even in good times, the government loves to hate them. If the economy starts to go south again and it can be made to look like oil companies are to blame, God help them.

And the spill came at a perfect time to bolster my prediction. Since the public now increasingly thinks of oil companies as "bad" and "dirty," politicians know it's good for their careers to look like they are "punishing" the "bad" oil companies. And punish they will.

If I were just a wee bit more cynical, I might suggest a government bailout of BP. I mean, the explosion could have happened to anyone, right? It was all about a misunderstanding of the systemic risk...

It's All About The Oil

With the economy recovering I bet gas prices will be on everyone's minds again soon. Here is an interesting article: the US military admitting that supply may go south of demand in short order. Probably the mainstream media will start picking up more stories like this as fuel prices continue to rise.

I don't think anyone who has seriously looked at the issue doubts an oil crunch is forthcoming. The real questions are about how it's going to play out: for example, will there be one or more price shocks where the price of oil climbs quickly and the economy crashes, or will we see a long, gradual increase that just tends to hold growth to a lower curve than it would have been with cheaper oil? How will the government react to any price shocks? The same way it did last time?

And, practically speaking, how should we invest to best take advantage of the situation? The annoying thing about rising fuel costs is that they are almost a black swan—for much of the last hundred years or so (during which time most modern investment advice was formulated) fuel has been relatively cheap and the price has been relatively stable. So the traditional "safe" long-term investment advice (ie, buy a broadly diversified set of stocks or mutual funds and hold) may be worse than useless in this scenario.

You could invest in oil companies specifically, and although it seems pretty likely they will do better than average as the cost of oil increases, if it increases too much they will have less volume to make a profit from and there will be a bunch of wasted refining and transport capacity which could hurt their margins. I am also concerned that, if oil companies do start making huge profits, Obama et al. will see them as an excellent target to unleash populist furor on which could result in heavy punitive taxes which erode gains, or, at worst, socialization of parts or all of the oil industry. Hey, it wouldn't exactly be unprecedented.

In other words, oil companies are not as safe of a bet as you might guess.

Maybe companies that deal with energy mostly from non-petroleum sources, those which can better market themselves as "green" than the oil giants are a good choice. Broadly speaking they stand to gain from more expensive oil but have much less risk of getting attacked by the Gov't because green is trendy and the plebs wouldn't approve.

Frankly I have no idea what to do. Just thinking out loud.

EDIT : Interesting article with way more sophisticated speculation than I can pull off