The Oil Price & the Fed Rate Cut Spell a Bull Market for Energy Stocks & Precious Metals

The oil price has climbed to a record-high $82 per barrel. Why is the price rising?

The Peak Oil paradigm is beginning to gain traction. I have taken quite a bit of heat for this view – from many quarters – but I have stood with the concept through thick and thin.

And now, if you still don’t want to hear it from me, no less an authority than America’s first Secretary of Energy and former Director of Central Intelligence James Schlesinger recently noted at an international conference on the subject of energy, “The battle is over, Peak Oil is now accepted as inevitable, and the debate only becomes as to when.”

This is a remarkable statement, coming from one of the most “inside” of U.S. political insiders. Here are the long-term trends that you should expect to see:

• Oil prices will generally remain high, and trend higher
• There will be little to no growth in exports, outside of the former Soviet Union, and even Russian oil will be more expensive and problematic, for numerous political reasons.
• Oil supplies will be precarious and subject to disruption by weather events, natural disasters and fourth-generation warfare aimed at “systemic disruption” (e.g., ongoing sabotage to Mexican pipelines or Nigerian petroleum infrastructure)
• New discoveries will trail consumption. The global oil industry will extract at least three barrels of oil equivalent for every “new” barrel it finds via discovery or reserve growth.

So looking ahead, oil and natural gas in the ground, as booked reserves or realistic and exploitable resources, is more and more valuable. It also means that oil service companies with a lock on technology and the operational skills to create technological systems for extracting hydrocarbons are also more and more valuable.

At the same time, some alternative energy plays have also done well in recent months. That is because in the coming energy environment, in which traditional forms of hydrocarbon energy are scarce and expensive, things like wind and geothermal power will offer more and more relative value.

Recently, the gold price jumped to a new 27-year high of $740 per ounce, as the dollar flirted with new all-time lows. Gold’s strength highlights the ongoing decline in the value of the U.S. dollar via chronic, gross and ought-to-be-criminal monetary mismanagement. For example, on Tuesday, Sept. 18, the U.S. Federal Reserve cut its key federal funds interest rate by 0.5%, as if the big problem of the U.S. economy in recent years has been not enough cheap credit.

The Fed rate cut, as expected, made many Wall Street traders happy and goosed the stock market indexes. According to the Fed, “Developments in financial markets since the committee’s last regular meeting have increased the uncertainty surrounding the economic outlook.”

Signaling that it might cut rates more if necessary in months ahead, the Fed announced that the central bank would “continue to assess” the economic outlook and “act as needed to foster price stability and sustainable economic growth.”

But the Fed action also caused an immediate spike in the prices for gold, silver and the price of oil futures. So evidently, some savvy players understand that temporarily cheaper dollars are not necessarily good for the long-term health of the U.S. currency or economy, and this understanding is reflected in things with intrinsic value like precious metals and energy fuels.

Even former Fed Chairman Alan Greenspan has stated that he believes that we will see double-digit interest rates at some time in the future in order to salvage the long-term value of the dollar. Too bad he did not take some of his own medicine while he was running the show. In other words, the great challenge to the U.S. economy going forward will not be how to encourage more indebtedness. The great challenge to the U.S. economy will be to maintain some overall level of solvency within the broad economy and avoid widespread national insolvency in an era of unprecedented levels of debt.

Beware the false prophets of the conventional media who tell you that everything is fine and that there is plenty of oil and oil prices will stay low (”if only we would drill in such-and-such locale,” goes the refrain), or that the dollar is sound. You need to understand that the energy supply of Australia, the U.S. — and the rest of the developed world — is in a precarious state. We cannot just drill our way out of it. And you need to know that the situation with the U.S. dollar, the world’s reserve currency, is quite tenuous. We cannot just borrow and spend our way out of it. The government and monetary authorities, the “leviathan” of Thomas Hobbes, have overplayed their hands, abused their powers and are slowly but surely wrecking the long-term value of the dollar.

Sure, things may just drift along for a while. But sooner or later, the trends will manifest themselves and you will be glad that you have a portfolio filled with energy stocks and precious metals.

Byron King
for The Daily Reckoning Australia

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