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$100 Oil and the Risk Premium

Weighing the Real Risks in Oil's New Triple-Digit Price

Written by Brian Hicks
Posted January 2, 2008

Oil hit $100 a barrel in spot trading Wednesday, zooming by nearly two bucks on the second day of the year. Traders are calling this jump a reflection of the risk premium, but I know those words aren't all bad.

Premium toilet paper is your most soothing choice, and in Spanish premio means prize. Similarly, $100 oil is a welcome milestone for energy investors worldwide.

Consider the Canadian tar sands and oil shale. Who in their right minds would cook soil to get oil? Well, no one would when black gold was at $20 per barrel. But now investors are eager to get in on this fossil fuel technology, despite questions as to the subsidy regime stimulating the tar sands boom up north and how profitable that goo will really get .

Of course, renewable energies like wind, wave energy, biofuel and solar energy are getting their day in the sun, and Green Chip Stocks has been right there to capitalize. Just before year's end, Energy and Capital and Green Chip editor Nick Hodge pointed out the Wilderhill Clean Energy Index (^ECO) and NASDAQ Clean Edge Index (^CLEN), and how they crushed the Dow by over 50% during 2007/

That momentum is set to continue, as the risk premium in $100 oil delivers whopping rewards to alternative energy investors. While it's a less direct competitor to fossil fuel than ethanol, solar energy's allure has rocketed stocks like China's Suntech Power Holdings Co., Ltd. (NYSE:STP) to full doubles in share price in the past year:

Based in Beijing, Suntech's rise reflects the international nature of oil's uptick and the worldwide energy squeeze that demands higher prices.



Market observers who have been in the energy industry for half a century say that speculation on China's energy appetite has fueled much of the past year's oil rally (a near double), yet they also add that according to supply and demand we would legitimately be at or around $65 today.

But the Boone Pickenses of the world know that supply and demand don't exist in a vacuum. Whether it's Turkish incursions into Iraqi Kurdish territory (very near Iraq's first oil discoveries at Kirkuk) or Pakistani turmoil where the worst-case scenario could find a reinvigorated Taliban or al Qaeda with nuclear weaponry, oil is now in triple digits.

Though $100 a barrel oil is top news, it's no news to us.  Just last week, EAC publisher Brian Hicks told CNBC viewers that we would soon hit the century mark and stay above it in 2008.  We've been guiding investors for this eventuality for years.

Now's the time to keep your portfolio flush with opportunities in this overall energy bull market as crude prices stimulate all sorts of market moves for us.

At such a key point, the biggest risk is doing nothing.

Regards,

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Sam Hopkins

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