The world continues to suffer from America's addiction to foreign oil and its inability to craft a strategic long-term comprehensive energy policy to reduce consumption of foreign oil. In the recent past the world has witnessed $148/barrel oil and an oil war in Iraq. The unrest in Egypt is the latest result of American oil dependency. Is this an absurd statement? Before you vent your disagreements in the comment section following the article, please let me explain.
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The Price of Oil: As it goes up, American wealth evaporates
Glancing at the oil price chart above, is it any wonder the S&P500 has done practically nothing in the last decade? Meantime, is it any wonder many oil stocks have doubled or more in that same time span? Of course not.
But is it true that America's addiction to foreign oil can cause unrest in Egypt?
America spends around $1 billion dollars per day on foreign oil. Oil is by far the largest component of the foreign trade deficit. As a result, America's wealth is being steadily and increasingly sucked out of the country and sent to foreign oil producers. These are not opinions and a PhD in economics is not required to understand such a basic concept. These are facts. Now, in order to make up for this dependency on foreign oil (and the U.S. government's inability to acknowledge the problem and enact logical policy fixes) the United States long ago decided to reject the gold standard and allow the Federal Reserve to print money out of thin air. And this is exactly what the Fed has been doing - printing money out of thin air and devaluing the U.S. dollar.
Printing money out of thin air is enabling America to "fund" the oil war in Iraq. It allows the U.S. to "fund" its military so it can act as "policemen of the world". It allows the U.S. government to "fund" deficit spending. And it enables China to take an increasingly large ownership stake in America by virtue of their huge holdings in U.S. Treasury bonds. Most recently, the Fed has attempted to "re-inflate" the stagnate U.S. economy by implementing a $600 billion dollar "QE2" program. As I have written before, this $600 billion dollars might buy us, at most, 600 days of "economic prosperity" (remember, oil imports are about $1 billion per day). Although the U.S. dollar has not dropped as much as I expected the result of such misguided and illogical policy is to inflate commodity prices - specifically oil and food. As such, we have seen investors flock to commodities including oil, gold, wheat, corn, and other foodstuffs. [ I should mention here, the only reason the U.S. dollar has not depreciated further is because it is the least bad currency out there. Once the Chinese figure out they cannot solve their inflation problem without letting the Yuan appreciate, you will see a substantial move lower in the U.S. dollar. ]
So: "QE2" --> higher oil prices --> more $'s leaving the U.S. --> need more "QE"
(or, as we say in engineering, thermal runaway ...)
Making things even worse is American policymakers' support and expansion of the idiotic ethanol mandates. As I have written many times before this is a seriously misguided policy which merely causes huge dislocations in the food markets. Supposedly this policy is because Iowa is such an important state when it comes to Presidential elections. However, the good farmers in Iowa will one find out that they too are part of the U.S.A. and spend the same greenbacks as do citizens in every other state. A serious devaluation of the U.S. dollar will affect all Americans - even farmers in Iowa. So I repeat myself yet again: Ethanol is simply a tool by government and oil industry lobbyists to keep Americans addicted to liquid gasoline (i.e. foreign oil) when we should be transitioning to cheaper, cleaner, and domestic gaseous fuels (i.e. natural gas and hydrogen).
My readers already know I support natural gas transportation as the focal point of a strategic long-term comprehensive energy policy to reduce foreign oil imports and the need to print money out of thin air to "fund" this addiction. However, nothing is more a testament to pathetic U.S. energy policy than was an article last week's Wall Street Journal titled "Gas Exports Fuel Debate." The article discusses how Freeport LNG Development and Cheniere Energy (LNG) are making plans to export American natural gas. Think about this for a second or two. Our country is going to export a clean and cheap domestic fuel (natural gas) so that we can import an expensive and dirty foreign fuel (oil)! This ranks right up there with the oxymoronic "clean coal" initiative as how dumb American energy policymakers must appear to the rest of the world. So, as countries like Brazil, Pakistan, Singapore, Iran, Italy and even China are adopting natural gas transportation, the U.S. continues to ignore it even as the cost of our domestic natural gas is less than half what most of these countries are paying. This is unacceptable.
But to sum things up: Ben Bernanke's implementation of "QE2" has directly led to food inflation across the world. In many developing and poor countries (i.e. Egypt and elsewhere) food makes up a much larger percentage of an individual's income and is felt much more severely than in the U.S. That's my theory and I am sticking to it. What do you think?
But what are investors to do? The oil stocks I have been recommending for years are beginning to soar (again). Conoco Philips (COP), Marathon Oil (MRO), Exxon Mobil (XOM), Chevron (CVX), and Suncore (SU) have all made nice moves and are trading at or near yearly highs. COP announced excellent earnings this week and continues to refine (pun intended) its operations and assets. MRO is finally splitting up into two companies (basically upstream and downstream) and this has and will unlock value. Both these stocks have further room to run and are my favorites. Suncore jumped bigtime today (oil was up over $3/barrel) as a friendly Canadian oil supplier suddenly seems like a smart investment. Chevron announced excellent earnings today and is a strong buy under $90. Exxon's earnings will be coming out Monday but it has already had a great run from the upper $50's. Petrobras (Pbr) has lagged and has been a big disappointment, so I apologize for that recommendation. That said, if you still have it - don't sell it! So, speaking of printing money ... these oil companies will be doing exactly that! However, when the music stops (i.e. "QE2") somewhere around June, hold onto your knickers.
Gold and silver have sold off recently, but bounced back today even as the U.S. dollar strengthened. No doubt the Egyptian unrest played a big role in this action. I continue to like gold and silver, and will never suggest selling unless I see the U.S. adopt natural gas transportation to reduce the foreign oil imports that are at the root of U.S. economic decline.
Disclosure: I am long COP, PBR, SU, MRO.