We Americans love a winner. For the most part there’s nothing wrong with that as long as we don’t let that mentality influence our investing. Time after time investors chase after the latest "hot" sector so they too can be a part of a winner. Tech stocks, real estate, even tulips all grew in popularity and soared in value due to, as Alan Greenspan put it, the "irrational exuberance" of investors. Unfortunately the reality of the underlying economics eventually catches up with the markets and causes these bubbles to burst. You’d think after a while we’d be wise to this game and know better but I’m afraid we’re about to do it again – with oil this time.

Anyone who owns a car or reads or watches the news is keenly aware of what’s happening to the price of oil. It’s up and would appear to be headed a lot higher. It’s tempting to chase this trend by buying oil futures or ETFs but before you do let’s look at some facts. Consider history. I may date myself but I remember back in the 70s oil prices took off due to the efforts of OPEC and our love affair with big gas guzzling cars. By the late 70s oil had more than doubled in price and there was widespread talk of actually running out by the end of the century. Yeah, the end of the last century, 8 years ago. Eventually people shifted to smaller cars, we drove less and fuel efficient technology caught up with the oil market. The result was a rapid drop in oil prices that quickly ruined oil investors and put the economy of Texas in a tailspin.

There are a lot of parallels from them and today. We have a catalyst driving prices higher, just like in the 70s. It’s not OPEC this time it oil speculators and a weak dollar. People are driving big, gas guzzling cars, just like the 70s, only this time it’s SUVs. Congress is pushing to develop new, alternative sources of energy and a push for energy independence is a high priority pursuit, just like the 70s. And most importantly, our consumption of oil in the U.S. has now started to drop, just like in the late 70s. That drop in consumption is the first sign that the end of this bubble may be near.

The three most dangerous words in investing are "it’s different this time" and I don’t think the oil bubble we are now seeing is really that much different than in the 70s. Yes there is more world demand, especially from China, and yes there is a great deal of political instability in oil producing regions, but we also have much better technology to both damp down our demand and also produce more oil from old wells. High efficiency solar power, biofuels and hybrid cars are all relatively new and will help accelerate the drop in demand. Further when the speculators stop buying and eventually sell the price of oil could drop dramatically. In fairness oil may never return to the price levels of a year or two ago but I also would suggest the current high prices aren’t sustainable for much longer either. Think twice before you hop on the oil bubble, it’s only tiny until you lose money.

Randy Gridley