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A trader friend from the West Coast who has taken a couple month away from trading recent told me that he was back in one position in oil. He agrees with me that oil will go up ("see #1 from my piece "Ten Post Election Predictions") after the mid-term elections but states clearly a reason I thought but didn't want to say.

He says, "I think that the price of oil is being driven down by Bush [and his allies] before the midterm elections. After the Republicans are soundly defeated, the writing will be on the wall and the price will rise back up for around a year then maybe come back down."

I know this sounds like a bit of conspiracy theory but it does benefit the most flexible oil producing nation in the world (Saudi Arabia) to keep the Republicans in office. However, I also think that unwinding speculation is really what has done most of the work for Aramco (Saudi National Oil Company) in term of lower oil prices.

My buddy is playing the rise through a combination of options on both oil futures and the oil service sector exchange traded fund, OIH. I prefer to play this turnaround not through options but through exceedingly cheap oil producers. I have two reasons for this:

1. I don't' know exactly how long it will take oil to go back up.
2. The cheapness of my oil stock basket gives me some downside protection.

All the companies have P/E's well below or around 10. My basket consists of : COP, OXY, CVX, STO, APC and BP. I also own several oil royalty trusts but am in the process of selling them and feel the best way to play oil is through the integrated oil producers.

In the long run though, America will more and more be held hostage by foreign oil. I like the 12-step program for America encouraged by Rain Forest Action Network. And while I'm on the subject of oil, security and very long term effects, I'd like to mention peak oil, the idea that oil production has peaked and is in decline. This is probably true - the planet likely is running out of cheap energy.

I like the market-based reality approach explained at the Freakonomics blog. At $25 a gallon there will be plenty of gasoline but people might not like the transportation and conservation choices. Humanity and the US economy can adjust. That is why governments around the world are taxing gasoline, creating public transportation and why both government and private industry are researching energy alternatives.

Disclosure: I own oil companies: COP, OXY, CVX, STO, APC and BP. I own oil royalty trusts: LRT, MTR and HGT. I have yet to find a cheaply priced, well run alternative energy company. For now, I'll own big oil and hope to have a small influence by voting my shares at shareholder resolutions.

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Source: Oil Prices Headed Back Up After the Midterm Election