Oil Will Only Fall So Far

by: Michael Fitzsimmons

While the peoples of the world settled into their easy chairs to watch the much anticipated opening ceremonies of the Olympic games in Beijing, Vladimir Putin had athletics of a very different sort on his mind. Putin's timing was as perfect as a military invasion of another country can be. I just wish I could have heard the conversation he and Bush had in the bird's nest.

Now, I'm not going to pretend I know the history of the Georgian/Russian relationship, but I do know this much: the invasion had little to do with democracy or separatists and everything to do with the so-called "BTC" pipeline (Baku-Tbilisi-Ceyhan) that carries oil from Azerbaijan and Caspian Sea area to the Turkish port of Ceyhan on the Mediterranean Sea. The BTC is a strategic energy conduit for Europe. I believe there is also a natural gas pipeline along this route, but don't quote me on that.

Faithful SA readers will note during the "Iran debate" I wondered out loud how long Russia and China will look the other way while the US plants troops on top of the largest oil reserves in the world. Think about it: invading Iran would have brought three of the world's largest oil producing nations under the US umbrella (for lack of a better term): Saudi Arabia, Iraq, and Iran. At the same time, the US was backing Georgia's wish to join NATO and planning to install a "missile defense shield" directly on the Russian border in Poland. How could Russia stand by and do nothing, especially when most of this action was much nearer to its own backyard? The answer came on the opening night of the Olympics: no longer will they be passive.

Faithful SA readers will also note my May 18th, 2008 article, "Russian Energy and US Implications", was quite clear in pointing out what is at stake and how US policy was playing right into Russia's hands. Now, all the US can do is watch and talk (similar to Bernanke and Paulson with regard to US monetary policy) while Russia strengthens its stranglehold on European energy supplies. Meanwhile, the US's own soft under-belly is increasingly more exposed because there have been no significant changes in the non-existent US energy policy.

Here again is my own comprehensive long-term energy policy, updated and perfected. I have submitted this twice to the Wall Street Journal. Once, after they printed several of my letters to the editor with respect to energy, and again after Jenkins' pathetic article on the WSJ's "Opinion" page criticizing Boone Pickens' plan while offering no plan of his own. I sent the article in to the "Opinions" editor as requested, but alas, no ink could be spared for the one thing that can save this country going forward: a strategic, comprehensive, long-term energy policy. I say that so much I'm sure I just bore the hell out of all of you. That said, I believe it is the single most important issue facing the United States of America. I mean, don't those idiots in Congress have children or do they only care about under-the-table money?

Meanwhile, the markets continue to act completely insane. The Russian attack on Georgia should have lifted oil, but it didn't. StatOil (NYSE:STO), a critical supplier of European energy should have popped big-time, it didn't. ConocoPhillips (NYSE:COP), Chevron (NYSE:CVX), Exxon (NYSE:XOM) and Petrobras (NYSE:PBR) all recently reported outstanding earnings - and all of them traded down. Even Barron's had to take note and devote some space pointing out that these stocks are trading at 6 and 7 times forward earnings, pay a dividend, and supply the energy with which the world is addicted (note: Barron's came a week after this piece).

Yet, the stocks continued to trade down this week as though no one is reading Barron's any longer. I continue to get emails from around the world questioning my investing intelligence (some just call me an idiot - or worse). Well, sorry folks, I just don't believe oil will get back to $35 or $40/barrel, which is damn near where it would have to go in order to value the energy stocks as they are. Nor is the geopolitical scene calming down - the exact opposite is true. I believe I'll wake up one morning and see oil spike $20 or $30/barrel based on some geopolitical event. I believe on that day the entire energy complex will rise so fast it will be shock and awe of a different kind.

So, why are these energy stocks trading at such bargains today? The dollar strengthening? I don't buy it - the US dollar is the biggest fiat currency in the world today. With no energy policy, huge debt levels, and no energy policy,the long-term case for a strong US dollar is non-existent. Perhaps investors believe financials, retail, automotive, and consumer stocks are the place to be these days. Give me a break, but good luck with that.

One real possibility, in light of recent Bush administration support for nationalizing the mortgage, banking, and financial sectors would be for the US government to take over the US oil majors. That would complete the fascist overthrow of what used to be the wonderful experiment of an American constitutional democracy. If the US people fail to demand its leaders deliver an energy policy, take-over of the energy companies by the military could indeed be a possible endgame in a world in which oil supply will very soon fail to keep up with demand. In that situation, the only card we have to play against Russia (which has the energy we will need), is a superior military. The bad news there is that Russia, of course, has nukes too.

Meanwhile, gold continues to melt down along with oil. I'm buying a lil bit here and there and making the investor's big mistake of averaging down. I like to swim against the tide I suppose (even though I know to swim parallel to shore during rips). Gold going down in this environment makes as much sense as oil going down. So, this way I get to be wrong twice in the same article.

Bottom line for investors: buy COP, XOM, CVX, STO, SLB and PBR. Buy gold coins along with your favorite energy service firms or the ETF. I still believe energy service firms will be the single best long-term investments in the years to come. Good luck!

Disclosure: The author owns every investment recommended in this article.