The Oil Factor: Protect Yourself and Profit from the Coming Energycrisis

This is an unusually lucid guide for investors with the focus on the price of oil as the key economic indicator. Stephen and Donna Leeb argue rather convincingly that oil has been and will continue to be the big moose that moves the financial markets one way or the other. They show how sharp jumps in the price of oil in the past have triggered market downturns, and how falling, moderate or stable prices have led to bull markets. With oil at or near its so-called Hubbert's peak (one trillion barrels used; one trillion still left in the ground), and with rising demand from an increasingly industrialized world, especially from a voracious China, the authors see oil ratcheting up to record highs in the near future and more or less staying there. They see this as leading to inflation and negative real interest rates--although in some scenarios (hedging their bets, as all wise prognosticators do), the authors warn about periods of deflation. Consequently, investors need to pick investments that protect them against the erosion of their dollars, while hedging against intermittent economic slowdowns. The authors have a table on page 202 that uses what they call the "oil indicator" to tell you which investments are best for inflationary periods (the coming norm) and deflationary. For example, when the oil indicator is positive (that is, oil is rising only modestly) you should buy energy stocks, gold, and a few hand-picked others, like Real Estate Investment Trusts. But when the oil indicator is negative (when the price of oil is skyrocketing) the danger of an economic slowdown looms because the price of doing business becomes more expensive for just about everybody in our oil-dependant economy. In such times, deflation is the danger. Therefore, your portfolio should be heavy into things like zero coupon bonds and "cash"--cash being treasuries, triple A corporate bonds, or other super safe instruments. This book is the trade paperback edition of the original hardcover book copyrighted in 2004. This is essentially the same book that Stephen and Donna Leeb wrote in 2002, but with a new introduction. The reason for this edition is that the Leebs were especially prescient in their predictions. Oil has shot up to over sixty dollars a barrel, and inflation is on the rise while the Fed has continued to raise interest rates in an attempt to slow things down. Prognosticators that are right tend to gain readers. What sets this apart from many investor-guides that I have read over the years is the authors' lack of even the barest hint of political bias, and the fine justification and reasoning for their portfolio recommendations. The fact that they have been right so far is to their credit, but there are always prognosticators that are right and prognosticators that are wrong. The fact that someone is prescient a time or two or three means little in my opinion. It is the strength of their reasoning that counts, not their past record. To appreciate

Authors Stephen and Donna Leeb present a compelling futuristic investment scenario that leaves you thinking, "You know, they just may be right." Their approach avoids the sky-is-falling, bus-rushing-toward-the-precipice breathlessness that is common to many books that predict impending doom and gloom. The authors escape slipping on that particular patch of oil by basing their conclusions on established facts and keen analysis. For example, they rely on the widely accepted principle of Hubbert's Law when they assert that worldwide oil production will soon begin to decline. That's hardly news, but they take it a step further. They predict rising oil prices will spur inflation and the Fed will be unable to jack up interest rates to dampen it. High consumer indebtedness and the profound need to keep home values high (which props up consumer spending - the real engine that fuels American prosperity) will render the vaunted Fed feckless. Is it true? Well, about once a decade an Armageddon-is-coming book emerges that ought to be read by every investor, if only so that you know enough about what might happen to dodge it. We say this may be the one. One thing is clear regarding the global economic engine: it's time to check the oil.

It is said that Stone Age did not come to an end due to shortage of stones. But the age of oil, the world's largest commodity, is likely to end, thanks to its limited supplies. Many books have been published about the impending oil crisis that is likely to hit us within the next decade. Implications of the excessive use of fossil fuels, its impact on the environment and our health is also another important topic. Economies dependant on oil will find it hard to cope with the skyrocketing oil prices if King Hubbert's theory and forecast that our demand has already exceeded what the global reserves can supply, happens during this decade. The crisis occurs not when the last drop of oil has been pumped out, but when we have crossed the half way mark in exhausting the supplies. Another unfortunate dimension to this situation is the fact that most of the remaining known reserves lie in not so politically stable countries, not to talk of the religious divide. Some of these countries have suddenly increased their estimates of reserves. The authors feel that is due to OPEC's quota fixing formula and some countries have overstated their reserves to get a higher quota of production. Lies, damn lies and statistics and perhaps we can add middle east oil reserve estimates to this list.The next decade, the authors forecast, will be a decade of oil at $ 100+ a barrel. Turbulent times await us, economically. The book discusses the impact of rising oil prices on the economy, a brief overview of alternate and supplementary energy sources along with steps for conservation. It also takes into account the various macro economic realities like today's housing boom, expansion in consumer credit, low interest rates and employment scenario. Many other books have ended here. But Stephen and Donna Leeb steer us clear through turbulent times, helping us understand the economic impact and harness the forces beneficially through prudent investment decisions. Two things come to my mind while looking at this approach. The forces of nature were never conquered, but utilized by mankind beneficially by harnessing them instead of attempting to change or fight them. Secondly , our success in various fields was possible due to simplification of complex phenomena into elegant theories. This book is a winner on both these counts. The Oil Indicator described in simple terms by the authors, if successful, will be acknowledged as one of the most important principles in financial and portfolio management by the middle of the next decade.The book also contains a suggestive portfolio of investments and the share of each segment depending on what the oil indicator suggests periodically. Keep shuffling the mix, to maximize gains instead of the conventional buy and hold strategy suggest the authors. Their industry analysis and choice of stocks is interesting, though at times I felt that it lacks depth. But the authors, given their background, can be safely given the benefit of doubt of having don

There are many excellent books on the approaching peak of oil extraction (by Deffeyes, Heinberg, Goodstein, Youngquist, to name a few), but none of the books on this subject so far addressed the consequences of a permanently declining world oil production for the financial markets. The book under review is the first book to explore this topic in greater detail. In the first part, the book reviews the geological constraints underlying the coming peak of oil production (expected to hit the world within the next 6 years). A review of alternative energy sources (from natural gas and coal to fusion and solar energy) follows ending in the conclusion that no real substitute for oil seem to exist. The authors then explain why the economy needs to grow in the future in order to be able to service the huge debt loads dominating the world economies. Taken together, they conclude that inflation is the inevitable fate of the world economy. In the second part of the book, the authors discuss various investment strategies designed to take advantage of these trends. Overall this is a very important book which should be welcomed by all investors who are concerned about the long term safety of their retirement savings. I see its main value not in the specific portfolio recommendations given in the second part, but in the more general speculations (outlined in the first part of the book) about the forces shaping our economic future. The book is not perfect but I give it 5 stars mainly because this extremely important subject is not discussed in any other investment book. I am quite sure that many more books on this subject will be published in the coming years. This book is the first one in a long series of books to come.

To paraphrase an ad, "just buy it." I'm a pretty sophisticated investor, and I read all the financial papers and have read a slew of investment books. Most of them have been disappointing; they stress the obvious, they're misleading, or they're just not very informative. This book is totally different; it's one of a kind. It contains an amazing amount of relevant information, boiled down so as to be completely understandable without being overwhelming. The Leebs point out a key reality that should have been obvious but that investors and analysts largely ignored in the 1990's tech boom: energy is the key to our economy, and the energy we've depended on, oil and natural gas, is finite - and production of it is going to be slowing down. This will lead to a sustained uptrend in oil prices. The Leebs explain what this means to investors - specifically, buy not just energy stocks, but gold, defense stocks, and other industries that benefit from inflation. They also explain how to protect yourself against deflation and why that's so important. And there's no hype in the book, no effort to create some easy-to-sell but unreal doom and gloom scenario - just a patient outlining of what really counts. As I said, just buy it.