Energy Investing in an Election Year


"Where are energy issues in the pecking order of the policy debate? If we can figure that out, we can better lay out our investment plans for the year, too."

As the United States enters the campaign season for the presidency, all 435 members of the House of Representatives, and one-third of the Senate, an important question enters my mind.

Where are energy issues in the pecking order of the policy debate?

After all, if we can figure that out, we can better lay out our investment plans for the year, too.

Energy remains a vital economic topic. Prices alone have a major impact on financial recoveries, company investment plans and employment prospects.

The problem now is that energy—like a number of sectors before it—has become the latest political "football" in a taut ideological standoff.

Two issues are paramount, and both will reverberate in candidate stump speeches from now until the first Tuesday in November.

The first is the genuine bipartisan agreement that we need to import less foreign oil.

However, the second will undermine whatever accord might be gained across the aisle.

Because this one addresses what mixture of fuels will be preferred, and how much that balance will cost.

Actually, these have been the main energy themes in American politics for some time now. Being squarely within an election year only makes it even less likely that they will be resolved.

Expect More Gridlock This Summer

First, lessening imports of oil is always a popular theme.

That's because it translates into a lot of positive talking points about renewing local economies with accelerated drilling, the prospects of adding to the local tax base and generating new domestic jobs.

But it does have a significant downside.

Yes, the U.S. could tap remaining pools of conventional crude oil, but it would need to accelerate development of the unconventional—shale and heavy oil, bitumen, oil sands—to have any real effect in reducing the import stream.

Remember, these sources are more expensive to develop, extract, process and transport. The volume is there, but it's only attainable at a much higher price.

This is the reason why the imports persist. They're cheaper.

Politics tend to confuse two perspectives all the time. . .One is lessening our reliance on nations that don't really like us. The other is the concern over the cost to the American economy.

Developing at home (the "drill, baby, drill" approach) may offset the first.

But relying on additional domestic supply (with added volume from Canada, once we resolve the environmental ruckus over the Keystone XL pipeline) increases the problem with the second—higher overall cost.

(Funny how 30-second sound bites for political commercials never seem to tackle the trade-off problem.)

And Then There Is the Balance Question. . .

Every time the discussion turns to the oil import situation, we focus on non-oil remedies—natural gas, renewables and coal.

Each fuel source has its pros and cons, which place them, once again, at the center of the ideological civil war.

Natural gas in general, but shale gas in particular, is regarded by some as the savior of the American way of life. After all, just the gas that we can extract now, with existing technology, would make us self-sufficient for decades.

Yet the very ability to bring large new volumes to surface runs the risk of undermining the market once it gets here. That's the "gas glut" problem I've talked so much about.

There are also continuing environmental concerns over what hydrofracking actually does, the integrity of aquifers and essential water supply networks, with the occasional drilling-induced seismic tremor in places like Arkansas and eastern Ohio thrown in for good measure.

The water issue alone is a lightning rod in the debate.

The disagreement has intensified following federal and state environmental protection agencies indicating that drilling fluids contaminated water reserves in Wyoming and Pennsylvania.

Extreme Views Drive the Debate

Now there are a number of quite legitimate issues surrounding shale gas that require careful examination and open discussion.

Unfortunately, during an election year they get buried beneath the overly simplistic great divide of the "government is too big and intrusive" crowd, on the one hand, and the "big business doesn't care who they poison to make a buck" gang, on the other.

The same chasm inflicts coal ("too dirty" versus "our deliverance") and renewables ("clean and the future" versus "too expensive and requiring large government subsidies"). Now each of these approaches actually does comprise an element that is part of a necessary and legitimate conversation about what energy balance makes sense moving forward.

The problem is the focus.

The campaign rhetoric ends up not being about energy at all.

Rather, any energy issue is quickly turned into another projectile in the divide between those who see "the other side" as either the big spenders moving us toward European socialism or those pandering to the profits of the 1%.

The U.S. is a republic, and such disagreements are par for the course. They sometimes even bring to light a genuinely important difference that needs to be addressed.

But not usually. . .and especially not in the current animosity.

As we gear up for the heavy political season, therefore, let's keep a few seminal matters in mind.

The guys inside the Beltway are not going to be resolving the energy impasse any time soon.

We know it, and the market knows it too.

The energy position, however, will not change. It is the most important single issue permeating the economy.

Oil costs will continue to increase, as will the price at the pump.

The natural gas glut, fueled by enormous shale deposits, will not be going anywhere.

Solar, wind and geothermal will remain more expensive without government intervention, while nuclear will languish on in a post-Fukushima Daiichi scenario.

There will be serious challenges for the energy investor this year. Elections will resolve little in the sector, while some of the problems will become more acute.

2012 is already shaping up as a year in which volatility, instability and rapid price movements will animate the energy sector. We can hardly rely on candidates or elected officials to solve (or even address) the real energy issues.

Once again, we seem to be by ourselves out here.

So perhaps the best approach for us is to just continue making money.

That's why I've asked James Baldwin, our regular contributor to Oil and Energy Investor, to provide you with one great way to profit in 2012.

He's promised to do so this Wednesday.

Stay tuned. . .

Sincerely, Kent

Kent Moors, Money Morning

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