The situation in Ukraine continues to captivate the world’s attention. How can a country as economically small as Russia and Ukraine cause such headaches? Ukraine contributes around 0.25% of the world’s total economic production (GDP). Surprisingly, the mighty Russian economy only accounts for about 2% of the world’s GDP, not even in the top ten in the world. Combined, the economies of Russia and Ukraine would equal the size of New York City or half of California. And much like New York City, their importance can’t be limited to an economic data point. Given their location, Ukraine and Russia’s power lies in commodities like oil, natural gas, wheat, and metals. Which leaves Europe and parts of the world quite vulnerable, particularly in oil and natural gas. Suddenly we are witnessing an energy crisis not seen since the 70s. The black gold that is the lifeblood of the global economy is back to all-time highs.

Energy crises, unfortunately, aren’t uncommon. The oil crisis in the 1970s is the most scarring for investors. We’ve had a few smaller shocks since then, though. The first Gulf War (1990) was scary but quick. How about in 2000-2001 when California’s deregulation went haywire thanks in part to “smartest guys in the room” at Enron. More recently, when oil first hit $100 a barrel in 2006 and when oil went negative in 2020.

While it might seem like the obvious trade here is to invest in oil companies, hedge against this oil shock. But investing in events like a crisis is tremendously difficult. Think about how investing in all the COVID plays turned out. COVID darlings like Peloton (PTON), Zoom (ZM), and Moderna (MRNA). The trade worked for a bit, but with COVID in our rearview mirror, we saw their shares get crushed; down around 70% from the highs.

Investing in commodities, in particular, is a difficult task. Unless you have a warehouse to store some oil barrels, trading oil futures (like bitcoin futures) poses its own headaches. Energy companies, even the best-run ones, are sensitive to many geopolitical forces they can’t control. And much like the implosion of the COVID trade, the energy trade from the 1970s also faced difficulties. After the 1979 crisis, oil prices began a secular decline for 20 years. From 1980 through the rest of the millennium, oil prices saw a slow decline and never regained their high.

Oil resurgence in 2008 saw a much quicker reversal. Even as the real estate crisis spread, oil demand was strong, and oil prices hit $140 a barrel over the summer. Those high prices wouldn’t last too long. Before the end of the year, oil was back under $40 a barrel. If the Ukraine situation gets better (and hopefully it does), energy prices should come down. I’d hate to be rooting for the situation to get worse.

The past might not be a prelude in this situation, but it does show you how investing in energy seems more of a trade. Thematic investing isn’t really investing. It’s more like Thematic day trading. Something that requires an investor to get in and out quickly. That just isn’t Apriem’s style. So, if your time frame is measured in days or months, okay, trade accordingly. If your time frame is years, then invest.

– Ben

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