This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

When the Oil Boom Turns to Bust

Environmentalists may smile over this, but there's an economic knock-on effect as well. When prices fall permanently, it means the value of "proven reserves" goes down. That makes production loans harder to get. People start losing money. There's a negative wealth effect across the oil patch. That was what I saw in my 1984 visit to Houston.

There was a price collapse quite recently in the natural gas market, although through careful management -- and no small amount of flaring in the Bakken -- the crash in prices there was reversed last year. Prices are now approaching $4/mcf, and CME Group( CME ) futures contracts show this firming through year's end.

The oil industry has found many ways to manage falling prices over the last few years, but once the value of reserves starts to drop the retreat could become a rout.

If what's in the ground is seen by a banker as being worth less than what you're pumping now, you're going to want to pump now. New fields in countries that haven't seen an oil boom before are going to be exploited, regardless of price.

All this will take careful political and financial management, over several years, to work through. That time will be called a recession.

But when I returned from my Houston trip in 1984, I found that my new home in Atlanta was seeing a great economic improvement, a real recovery based on its status as a trading center and airline transfer point.

For investors, this means you shouldn't become wedded to your energy investments, especially in U.S. exploration companies that based their valuation, in part, on proven reserves. Make sure you're diversified, even if your oil profits are gushing today. Don't get caught out when the boom inevitably turns to bust.

At the time of publication the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $95.01 0.00%
FB $99.75 0.00%
GOOG $682.74 0.00%
TSLA $147.99 0.00%
YHOO $27.05 0.00%


Chart of I:DJI
DOW 16,027.05 -177.92 -1.10%
S&P 500 1,853.44 -26.61 -1.42%
NASDAQ 4,283.7530 -79.3910 -1.82%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs