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Take your pick. Either one is going to make you money. Oil was up over $10 on Thursday and Friday, setting records for both its high price and its US dollar move. In response, the US stock market tanked on Friday and the S&P500 is now down 6.5% for the year.

Reports say US citizens' net worth fell in the first quarter for the second quarter in a row. Talk from Israel about bombing Iran didn't help. If this happens and Iran responds by bottling up the Straits of Hormuz, well then $200/barrel oil will look like a nice bargain and a very severe recession, if not depression, will begin. Of course Israel is on track with Project Better Place to switch over to electric cars. Perhaps the Israelis will wait until their transition to electric cars is complete so they won't be affected by the high price of oil. If that is the case, I suppose we have a year or two before the bombs start dropping.

Regardless of any Israeli action, oil will go to $200/barrel and higher. The inconvenient truth is that worldwide oil supply is simply not keeping pace with worldwide oil demand. The speculators are getting a lot of the blame, but I can't blame them. Are there any rational policies coming from the largest consumer and importer of oil (the US)? Is there any reason to believe that China, India, Russia, and the Middle East will slow down their growth in consumption? Exxon (XOM), Chevron (CVX), and ConocoPhillips (COP) all reported less oil production in 2007 than in 2006 - this in a time when oil prices doubled. That can't be a good sign.

Countries around the world are nationalizing their oil reserves, cutting off needed investment and reducing production capability. The US dollar remains weak, and appears to be headed for another leg down despite all the rhetoric. Because that is all it is, rhetoric. Who can blame the speculators for pushing up the price of crude? I can't. In fact, oil over $200/barrel is exactly what the US needs as it is probably the only thing that will prod the government into action (but don't hold your breath).

Speaking of government policy, just what has been the response of the US government to high oil prices? A lot of talk, no action. There is talk of windfall profits taxes. Well, we all know that doesn't work, as the oil company's lawful responsibility to shareholders means they will simply cut back on exploration and production budgets to keep their profit margins. This will result in LESS crude oil and exacerbate the problem. They also talk about suing OPEC members, which is so laughable I won't spend any print on it. Gas tax holiday? Sure, let's encourage gasoline usage at a time when oil prices are high - that makes a lot of sense [not]. It is exactly the opposite to what we should be doing (raising taxes on gasoline to fund non-oil energy projects like wind, solar, nuclear, and LNG). Any talk of drilling in Alaska or off the continental shelf in the lower-48? Of course not.


Even more worrisome is the US dollar policy. Bernanke talked a good game, but everyone knows he can't do anything but print more dollars: the banking sector is in shambles, the US consumer is loaded with debt (credit cards, home, auto), the US savings rate is a disgrace, and the fiscal and trade deficits out of control. The US imports 60% of its oil and is sending $650 billion dollars out of the country every year, and that number is rising with the price of oil.

What does the President have to say? Well, on Friday, a day when oil was up nearly $8 to a record high and the US dollar was weak (again), President Bush made yet another urgent plea to make his tax cuts permanent (!). In his mind, it is more important to give tax cuts to those making hundreds of millions of dollars every year than it is to acknowledge the role that deficit spending has had on the weak US dollar and therefore the price of oil! Amazing. If that is the government's policy, then why stop at $600 rebate checks? Why not just print $6000 rebate checks? Or even $60,000 checks? I mean, once the currency is not defended, what exactly is the end game here? Do the uber-wealthy making hundreds of millions of dollars every year simply find another country to make their homes once the US currency goes to zero? This is insanity at its highest level.
Click this link to read a REAL energy policy.


People wonder why I mix politics and economics. Well, here is the answer: the US dollar. Don't think for a minute that politics are not related to the US dollar! Look at the S&P500 return for the last 10 years - less than 3.5% and less than inflation. Meanwhile, the value of the US dollar has dropped by 50% in that time period.

Speaking of inflation, just wait til Dow Chemical's (DOW) 20-30% price increases ripple through to Wal Mart (WMT). Did you hear the comments made by Dow's CEO? He railed on the US government for the lack of an comprehensive energy policy. Similar comments made by Jim Mulva, CEO of ConocoPhillips, likewise went unheard by the government. I thought the Republican administration was supposed to listen to business. Why aren't they?

Ok, back to investments. Gold had a huge rise on Friday and will be heading higher along with oil, the weak dollar, and rising inflation. Buy GLD and just hold it. Buy Fidelity Select Gold (FSAGX) and just hold it. Buy some gold bullion and bury it in the backyard.

What is up with the oil stocks? On Friday, they jumped early in the morning following crude oil and then sold off. Why? Many oil stocks are trading at PE's less than the market average! Why? Sure, some oil stocks get margins crimped on their refined gasoline, but good-gracious, many produce oil and gas out of the ground and are going to make TONS of money! Lukoil (OTCPK:LUKOY) kicked some serious butt with their profit report, yet ConocoPhillips doesn't move? Give me a break. Buy these stocks, funds, and ETFs funds as oil and gas are going higher:

  • GLD (Gold ETF)
  • Fidelity Select Gold (FSAGX)
  • Vanguard Precious Metals (VGPMX)
  • USO (Oil ETF)
  • ConocoPhillips (COP)
  • StatOil (STO)
  • Schlumberger (SLB)
  • Nabors (NBR)
  • Fidelity Select Energy Services (FSESX)
  • Fidleity Select Natural Gas (FSNGX)

Any one see the Lehman report about the oil company's planned spending budgets? If not, here it is (Reuters).This is yet another reason oil services are the single best investment theme in the market today.

Disclosure: The author is long all of the investments listed above except, unfortunately, USO.






Source: Black Gold or Yellow Gold?