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As Energy Prices Rise, Fight Back With Investments

Lately, it seems like every time I turn the TV to news, finance or political programming, you hear consumers and politicians whining about the recent run-up in energy (particularly gasoline) prices. Although this complaining seems to be partially justified, few have answers to the continuous rise in demand and market assessed risk that remain the force behind rising fuel costs. In a capitalist economy, you have to accept the fact that markets set the price. Higher demand and risk mean higher fuel prices. If illegal price gauging activity is present in the marketplace, then by all means Congress and the justice system need to take action. However, in the previous 30 investigations led by the FTC, there has been no conclusion of wrongdoing.

Instead of sitting on your hands, upset about the higher cost of your summer vacation, hedge against fuel price inflation by investing in energy companies. As a sector, energy has performed well this year, especially oil exploration & drilling companies and refiners. These stocks are only beginning their upward summer trends. Baring a significant political or economic change in the industry, energy stocks should continue to increase in price, running up another 50% or more in some cases. Profiting from investments during inflation in energy prices helps to hedge your earnings and protect your wealth and purchasing power. Here are some ideas for investors:

If you are conservative in your stock selections, go with a typical big name driller or refiner. Some names to look at include Valero Energy -VLO- (still extremely undervalued using valuation measures), Marathon Oil -MRO-, Transocean -RIG-, or Exxon Mobil -XOM-.

For investors desiring higher earning potential, I recommend some energy plays abroad. Recently, international oil and gas companies have experienced significant stock price advances. Nevertheless, many of these companies remain undervalued when taking into account their projected earnings and revenue growth rates. Some companies to consider include Buffett-owned Chinese giant PetroChina -PTR- (AKA China National Petroleum Corporation, a stock I will discuss in my China sectorsnap later this week), Argentine emerger Petrobras Energia Participaciones S.A. -PZE-, and the Brazilian integrated Petroleo Brasileiro -PBR-.

Are Biofuels contributing to inflation in the U.S.?

With the steady rise of demand for biofuels due to subsidies and governement regulations, displacement of crops may lead to higher inflation in food prices. According to Shane Romig of the Associate Press, Argentines are not all happy about the government's new ethanol/bio-diesel plan.

Although few would argue against the environmental benefits of ethanol and other crop-based fuels, economic feasibility has long been in question. This article makes an important point in that diversion of crops towards fuel will likely lead to higher food prices. Despite vast differences in wealth, Americans in the lower and bottom middle-class could possibly face drastic changes to their food purchasing habits.

This may go a long way to show that hydrogen fuel-cell and other alternative means such as batteries may ultimately replace Ethanol as the mobile energy for the future.

ARTICLE LINK

U.S. to be free of Middle Eastern Oil by 2012

Last night, Interior secretary Dirk Kempthorne was on CNBC touting a new offshore oil drilling program that would put to work 48 Million Acres in the Gulf of Mexico and off the coasts of Alaska and Virginia.

"Department officials estimated that the entire plan could produce 10 billion barrels of additional oil and 45 trillion cubic feet of additional natural gas over the next 40 years."

This would effectively provide enough energy for the US to completely cease its importing of oil from any Middle Eastern Country according to the Interior Secretary. In addition, they plan to make sure that certain environmental standards are being met:

"The proposal includes measures to protect against damage to coastal areas from oil spills and other accidents. It would not allow drilling within 50 miles of the Virginia shore and would wall off an additional “obstruction zone” near the mouth of Chesapeake Bay."

However, environmentalists are criticizing the plan for not being protective enough:

“The Bush administration is zeroing in on the most environmentally sensitive areas for offshore drilling,” said Richard Charter, a lobbyist for Defenders of Wildlife and co-chairman of the National Outer Continental Shelf Coalition. “These areas that they are characterizing as buffer zones are woefully inadequate when you consider that the Exxon Valdez oil spill traveled hundreds of miles in a matter of weeks.”

My thoughts on this issue are that it would be great for our own economy, hurt the purchasing power of the Middle Eastern countries, lower the price of oil in general and really help create a more energy independent country. The problem is, I do worry about potential oil spills and tend to question the safety of these offshore oil rigs with the oceanic environment. I feel split because nobody can guarantee environmental protection with these oil fields.

SOURCE: Kudlow & Company, New York Times