Oil is what powers our cars, lubricates machines all over the world and is a key ingredient in many of the items we use every day. But oil is also an investment. Everybody from the largest multi-billion dollar investment firms all the way down to the individual stock trader can invest in oil through ETFs, futures contracts and individual stocks. (Find out how this commodity's fluctuating price affects more than just how much you pay at the pump. Check out How Does Crude Oil Affect Gas Prices?)

TUTORIAL: Managing Risk And Diversification

Most investors don't take delivery of oil. Instead, they invest using sometimes complicated contracts that cause artificial rises and falls in the price of oil. In fact, it is estimated that up to 70% of all oil futures contracts, a contract used to lock in the price of oil for delivery at a later date, are held not by people who are physically delivering the oil but by speculators who are buying and selling the contracts to make short term gains. In 2009, for every 27 barrels of oil traded by speculators, only one of those was actually being consumed.

As buying and selling of investment products has become efficient, this new breed of speculators has emerged to cause a great upset in the global price of oil. In the oil crisis of the 1970s, prices became higher because of another fact about oil that is buried deep. Oil is a political tool. So what can we learn from the previous oil crisis?

Oil Is Political
In 1973, OPEC, an alliance of Arab nations, issued an oil embargo against western nations as a way to punish them for their support of Israel during the Yom Kippur War. Because of this, and the amount of money being spent on the Vietnam conflict, the United States ultimately ended up with gas prices rising from 25 cents per gallon to one dollar in just a few months.

This embargo taught the world a valuable lesson: the Arab nations realized that their oil was an effective political bargaining chip. With other nations consuming oil without regard to its cost or where it comes from, they became dependent on oil. They had to have it to keep their countries running regardless of the cost.

Oil Isn't Unlimited
The United States and other western nations knew that the days of cheap, unlimited oil were over and a nation's economic and national security could not remain in the hands of other nations. If we had no oil, our military couldn't fly the aircraft, drive the tanks or power the bases that protect us. This had to change.

After the oil embargo, the United States set out to lessen its dependence on foreign oil. The modern day speed limit was instituted as an attempt to use less gasoline. Americans bought smaller cars and gas stations willingly closed on Sunday and would only sell a maximum of 10 gallons of gasoline to a customer. As a result, we decreased our oil consumption by 20% for a brief period and set out to find an alternative source of power - coal.

We Are Still Dependent on Oil
Although lowering our dependence on foreign oil may seem like a new idea, it's actually more than 35 years old. It has been argued by some that America has learned very little from our dysfunctional relationship with oil. In 2009, 63% of the crude oil processed in United States refinery came from foreign sources. In 1970, only a few years before we were faced with a national security as well as economic crisis due to our dependence on foreign oil, we only imported 24% of our oil. Today, $475 billion is spent on foreign oil. That's money that is being sent to other countries instead of being spent in our own country according to famous oil man, T. Boone Pickens. He and others argue that we've learned very little from the oil scares of the past and, if oil is once again used as leverage for political or military gain, the United States is more vulnerable than ever in its history.

Add to that the new presence of speculators and other investors who artificially inflate the price of oil, and the situation looks even bleaker. This is why T. Boone Pickens believes that it is vitally important to find an alternative energy source. His plan is to harness the power of wind turbines, natural gas and solar energy.

Alternative Energy Isn't Viable Yet
Even in Washington, there is very little disagreement about our energy problems. However, the problem is partially based on the lack of infrastructure. There are very few companies who are involved in the transmission of natural gas and the amount of pipelines and other transportation infrastructure would cost a staggering amount of money. Although the technology exists to run automobiles on natural gas, a large scale migration to natural gas fueled vehicles isn't practical for many Americans until the infrastructure exists.

TUTORIAL: Stock Oscillators And Indicators

The Bottom Line
With Americans once again paying $4 at the pumps, our alleged overuse of foreign oil has taken center stage once more. If history is any guide, when the price of oil again drops, our energy consumption worries will fade away until the next crisis. Sometime, maybe not far in to the future according to T. Boone Pickens, a global event may take place that forces us to finally learn from the mistakes of the past. (When the price of oil goes up, don't worry about how much gas is going to cost; get even by making a play on the Canadian dollar. See Canada's Commodity Currency: Oil And The Loonie.)

Related Articles
  1. Economics

    3 Oil Towns That Could Go Bankrupt With a $30/Barrel Oil Price

    Learn why $30 per barrel oil may be good for consumers, but it is extremely bad for the economies of certain cities, such as Williston, North Dakota.
  2. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  3. Investing News

    Is It Time To Sell Technology Stocks? (LNKD, AAPL)

    Technology stocks have taken a drubbing in recent days. Is it time to sell them?
  4. Economics

    3 Reasons Iran is Important in 2016

    Learn about how the global economy and Iran will be affected by the recently lifted trade embargo and sanctions from Iran, and what it means for 2016.
  5. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  6. Stock Analysis

    The Top 5 Oil and Gas Stocks for 2016 (XOM, BP)

    Read detailed analyses of the top five oil and gas stocks, and learn why they may be poised to rise in 2016 after a dismal 2015.
  7. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  8. Investing News

    5 Stocks to Buy Before Oil Rebounds

    Here are five oil related stocks that you might want to own before oil rebounds.
  9. Options & Futures

    What Does Quadruple Witching Mean?

    In a financial context, quadruple witching refers to the day on which contracts for stock index futures, index options, and single stock futures expire.
  10. Options & Futures

    4 Equity Derivatives And How They Work

    Equity derivatives offer retail investors opportunities to benefit from an underlying security without owning the security itself.
RELATED FAQS
  1. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  2. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  3. Is Norway a developed country?

    Norway is a highly developed country, and typically has a world GDP ranking in the top 30, with a 2014 GDP at $500 million ... Read Full Answer >>
  4. Is Qatar a developed country?

    Qatar is a developing country, according to the United Nations. However, as the country with the highest gross domestic product ... Read Full Answer >>
  5. Why do some oil refineries get tax exemptions?

    Oil refineries normally receive tax exemptions due to tax loopholes. The extracted fuel exemption, for example, one of the ... Read Full Answer >>
  6. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
Hot Definitions
  1. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  2. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  3. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  4. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  5. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
Trading Center