Oil prices remain a concern heading into Spring, and most of the folks we hear from are pretty unhappy. Nobody likes paying more for gas, right? So higher oil prices are bad, yes? It turns out that the reality is a fair bit more complicated than what some of us may think. Recent news has gotten me to thinking in more global terms, and while there may be some positive aspects to this, I’m also quickly coming to the conclusion that the idea of “energy independence” may be an illusion. (More on that in a bit.)

But first, back to one of the opportunities I mentioned. In general, you don’t want to pay more at the pump, but if you talk to some of the financial wizards in the world of economics, every dark cloud has a silver lining. Higher oil prices, it seems, can provide opportunities for investors if the conditions are right. Economist Joe Weisenthal of Business Insider explains:

In its most recent ‘Weekly Kickstart’ note, Goldman Sachs has a page devoted to, what else, oil, and what specifically the firm is saying to clients regarding the potential impact on the economy and investing.

Here are the key bulletpoints, summarized by us:

  • Investors should overweight allocation to energy stocks.
  • The rise in oil prices is consistent with robust, demand. It will slow growth, but it’s not enough for the firm to start chopping its S&P earnings estimate.
  • Global supply/demand is very tight. Inventories have not risen. Saudi Arabia is producing as much oil as it has in 30 years.
  • It matters whether the surge in oil is demand or supply driven. So far it’s demand driven, which is good.
  • When there’s a supply shock, defensive sectors outperform.
  • Energy stocks remain cheap based on historical patterns with the price of oil.

So far, there’s no reason to knock down S&P earnings estimates, in part because some sectors within the index will benefit significantly from higher prices. However, the firm will start cutting in a sustained move higher.

At the link, Joe has a chart of oil prices vs. “cyclical” stocks which should prove informative.

The other aspect of the oil price issue which I mentioned above is a bit more depressing. It deals with the entire concept of American “energy independence” in terms of liquid petroleum based fuel supplies and their effect on both our national security and the price we pay for everything from the gas in your tank to the cost of heating your homes. What we’re learning is that, first of all, we’re actually producing a lot of oil in America right now, augmented by increasing supplies from our partners in Canada. (We can and should be producing a lot more, obviously, and Washington’s current policies need to change in order to make that happen.) Here’s where we stand on that.

But even if we ramp up production significantly, will it really change the conditions here on the home front all that much? We previously looked at a conspiracy theory regarding evil oil companies shipping all of the Keystone XL oil overseas and not letting us use it at home. That’s nonsense, of course, but it does teach us another important lesson. Oil is traded in a global market without distinction as to the nationality of the person writing the checks. While the energy industry provides a huge boost to the United States in terms of GDP, jobs and investment profits, they are not in this game for the purpose of driving down prices at home by flooding the domestic market with product.

Think of it this way: let’s say that our national consumption rate is “x” number of barrels of oil per year. If we (along with Canada) are producing X + one million barrels, you might think that all is well. Prices should be dropping and we can thumb our collective noses at the Saudis, right? Not really.

Even we produce above and beyond our needs, China still produces very little and has a massive thirst for oil. (They’re hardly the only ones, either.) The more we make, the more will be sold around the globe. Producers aren’t going to sell at cut rate prices and sit on millions of barrels waiting for us to order it at home. There will always be a buyer somewhere and prices will be whatever the market will bear. Yes, with a drastically increased production rate we can help swing the global equation a bit, but we’re never going to produce so much that we swamp the global market and drive prices into the dirt.

With that in mind, as I noted above, it may be time to do away with the concept of “energy independence” as a political stalking horse. (And yes, I’m fully aware that I’m one of the people who has been screaming the loudest about needing to achieve this largely mythical state for the last couple of years.) The oil companies are not agencies of the federal government working to fill up our private reserves. They are in business to make money and their customer base covers the globe.