How to Play Lower Oil Prices

By Larry Bellehumeur of Covestor.com

It's hard to believe that only a few months ago, U.S. drivers were talking about the possibility of $5 per gallon for gasoline. Now, the average price has fallen to below $2 in most areas and may fall further with the recent drop of 20% in oil in just the past week alone.

The lower price of oil no doubt acts as a form of stimulus to the economy (as it puts more money into cash-strapped consumers' pockets), is it really the best thing for everyone in the long run?

First, only a few months ago, everyone was talking about how they had to conserve energy. While this was mostly in the form of driving less and even downsizing their vehicle, I actually started to hear more about people using low-energy light bulbs and solar power. Recently, such chatter seems to have died down. One has to fear that people really haven't changed their long-term habits when it comes to consuming oil.

Even scarier, however, is that the lower cost is causing the cancellation of many oil sands and off-shore projects. While this will not have any significant effect on the supply of oil over the next year or two, I fear what it might do in the 2012-2015 timeframe.

Many forecasters -- when they were predicting their expected oil supply in those years -- had factored in the continued development of the Canadian oil sands, the Venezuelan oil sands and off the coasts in South America. The reduction in the beginning of these projects, combined with some projects in the North Sea slowing, will likely have a huge impact in three to five years.