Gloom and doom about the collapse of oil prices may reign in the energy industry these days, but don't be fooled: The current deep downturn is not the new normal.
After all, the world has not hit peak demand or peak supply for petroleum; the global economy is still growing; many oil-producing regions in the U.S. are more diversified today than during the mid-1980s bust. Higher petroleum prices are very likely to return.
The question of when, of course, remains open.
It's impossible to know if now is the absolute bottom in oil prices, or if it's going to happen one month from now -- no one does. But some investment in energy at the moment would make sense for anyone who has a long-term perspective, if they can sit tight for at least a year.
Master limited partnerships, in particular, may be worth the time to research. I wouldn't recommend buying the group, or the ETF. But there are some interesting investments in that sector, if you look carefully.
Investors must be cognizant, though, of the balance sheets of all the energy-related companies and make sure they have staying power. Bankruptcies will undoubtedly occur, but it will be likely limited to the smaller, more speculative companies, many of whom relied on junk bonds for financing.
Although the newer oil shale regions, especially in North Dakota, have been hard hit economically by the fall in oil prices. More established parts of the U.S., such as Texas and the Denver area, are sanguine on the sector's recent fortunes. Both areas have established tech sectors today to help the weather the downturn.
And U.S. consumers, of course, have reason to cheer oil prices falling; oil hit $27 a barrel today, incidentally. Some will use the savings at the gas pump, which could amount to hundreds of dollars a year, to pay down debt or top off IRAs. Others might just buy more cappuccinos at Starbucks. Either way, it can be good for the economy.
Looking Around the World
The cause for a lot of the negativity surrounding the energy sector stems from media noise and a fear that the world is about to enter a global recession. This is not true. The world may be declining in terms of economic output, but still growing at 3%. Any downturn would need to be sustained for a long time -- more than a few months -- to lead to contagion to banks and the wider economy.
China may be declining, too. But it still growing at 5% or 6%. The U.S. will grow this year at about a 2% rate. Don't expect a domestic recession this year, either.
More specifically, the decline in oil prices stems from the supply glut created by Saudi Arabia, which seems to want to put everyone else out of business by crashing prices and is willing to live with the short-term domestic economic consequences, and Iranian oil production coming online again after the lifting of U.S.-led economic sanctions.
In the end, though, it's all about supply -- not demand, although that's still rising, too.
The glut won't last forever, however. So, think long-term, if you are an investor. Let the traders worry about what happens tomorrow, next week or next month.
This article is commentary by an independent contributor. Debra Silversmith is the chief investment officer at First Western Trust in Denver. At the time of publication, the author held no positions in the stocks mentioned.