DIG/DUG and all that oil jazz.
Posted on July 20, 2008
There is an increasing number of discussions and recommendations about being short or long oil. A number of innovative ETF vehicles have been springing up to provide ways of playing oil long or short, even leveraged in either direction. At the same time the usual suspects are out there encouraging individuals to try their hand in the futures market.
To be up-front we are long DUG which is a leveraged short on a number of oil and gas related stocks. A fair number of people have come out and questioned this as an "investment." In the short-term of course it is not. Nobody can be right in the short-term without inside information or luck. (We’re up 20% in DUG but that’s just luck, see below for the true long-term story.) But if one is looking out a few years and running a diversified portfolio vehicles like DUG and others can come in very handy.
First of all they are a hedge. If you don’t have something to hedge against falling oil prices then don’t pretend this is a reason to be involved. We invest fairly actively in next-generation energy technologies from batteries, to new power generation to infrastructure. These investments are all qualified for our portfolio on oil at $150, or $100, or even $70.
However if oil goes down sharply we have seen that everything goes down with it; solar, wind, power management, and so on. By being short "old" energy and long "new" energy we can insulate a bit during short-term swings.
Long-term we do think that being short oil here is an investment. There’s a 100+ year data set on our ability to adjust to any high commodity price over time and drive it inexorably lower (on an inflation-adjusted basis) time after time. Oil will be no different. It’s beyond the scope of a blog post but those interested should certainly pick a copy of The Ultimate Resource by Julian Simon. We also don’t yet publish much of our energy work to individuals but for now can highly recommend the work that Tom Konrad the team does over at altenergystocks.com.
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