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-.

(Chile)ng Economic Trials

In a recent Wall Street Journal column, a reporter chronicled the upcoming problems the Chilean economy faces. Like several other developing nations, Chile's economy seems to have become over-reliant on a single industry. In this specific case, Chile's recent economic boom has been fueled largely by mining commodities, especially considering how copper has tripled in the past 5 years or so.

However, Chile is dissimilar in the methods it has taken to combat the volatility derived from commodity markets by using investment techniques on a percentage of revenue generated from taxes on the economy. With tax revenues higher during years of commodity price increases, Chile has been able to develop a system that invests a percentage of taxes during this period into foreign investments such as government bonds. Although it would generally be wiser of them to place this money in equities, I applaud the finance and economics ministries for even coming up with such an idea that generates guaranteed return on money they don't need to spend.

By hedging against these fluctuations in Chile's economy, stability and long-term upward growth can more easily be secured. Many of the dividends and repayment of these funds will be invested into innovation so that the country becomes competitive in other sectors such as Technology, Financial Services and Consumer Products. All too often, developing countries focus on short-term profits, economic growth and end up spending instead of accruing or building their wealth. You will be hard pressed to find any country that has a better long-term economic strategy and focus on innovation and techonological improvement then Chile.

As with any government, the diffulty to balance the budget always poses a threat and concern among politicians and citizens. Chile's comprehension of the peaks and valleys associated with commodity dependence help create barriers against recession or stagflation. There are always issues and programs that need financial support, but tighter spending leads to a more balanced budget and higher levels of fiscal responsibility. Maybe US Politicians can learn something from our Chilean allies.



Note: GDP for Chile rises significantly after 2002.

China learning well from U.S. Economists

As one of the fastest growing economies in the world and one of the largest, China could easily be arrogant, unresponsive and even disrepectful to the U.S., a former Cold War nemesis. That does not seem to be the case however, considering the trend of decisions made by the Chinese version of the FED, with counsel from U.S. bankers and economists.

The Wall Street Journal reported today that China lifted bank reserves in an attempt to help control growth. Although growth in double digits seems very appealing to most investors, the Chinese Central Bank and U.S. economists realize it may actually pose a huge recession threat down the road. With a lesson learned from the U.S. housing bubble, created by Alan Greenspan's flawed monetary policy, China is attempting to prepare itself and provide a soft-landing to the world's second largest economy (GDP using PPP).

Though the graph suggests no recession problems, you can be sure that growth will be tough to sustain at such a high rate. If China can curb its growth now at 8-9%, it will be able to sustain it for a much longer period of time with less volatility, such as the graph suggests. However, if they continue growing by double digits, the threat of a bubble burst is likely, one that could ultimately ruin the economy or set Chinese progress back severeal years.