Where Oil Prices Are Headed In the Face of the Fiscal Cliff

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You have heard all the stories of what will happen when the U.S. economy falls over the fiscal cliff.

As I write this, it appears that will happen--at least on paper.

Of course, it will take some time for the tax increases to kick in, while the automatic spending cuts may take a month or longer.

That may make it easier for some Members of Congress to act. Since the taxes will have technically increased, it will be easier for them to vote for an artificial tax cut.

I consider this the pinnacle of absurdity.

Subjecting most Americans to this charade-making them vulnerable to cuts in paychecks, dividends, and social security benefits merely to make some political brownie points-is the height of travesty.

But here we are.

Even if there is a this weekend or Monday, nobody will know what that means for several weeks. This will drag the drama on for a while longer as the precocious children inside the Beltway refuse to play on the same ball field.

Now we all know how this will end. There will be a stopgap measure rather quickly (probably around the time most receive that first paycheck of the New Year) to prolong the process into the first quarter - right into yet another showdown on increasing the debt ceiling.

Isn't there anybody else out there as sick of this as I am?

But in the end, we are interested in what the shenanigans mean for the energy sector.

Oddly enough, gas and oil prices have acted as if the cliff were an ant hill.

Oil Prices Trade on Market Forces, Not Hysteria

Strangely enough, the price of crude oil has been rising over the past week to prices higher than at any point since mid-October. Natural gas prices have been declining, with a reversal now expected with the first major series of winter storms pummeling the East Coast.

Both have been reacting to market forces, not to political hype.

Company shares in the energy sector, on the other hand, have exhibited a different reaction. While the sector as a whole remains rather stable, the pressing concern centers on anticipated demand levels should a deal not materialize.

And that is the most direct way this escalating political travesty will play out. The causal chain is rather simple, at least among the simple minds on TV spinning the yarn: fiscal cliff → increased taxes and lower expenditures → recession → lower demand for energy → declines in the value of energy shares.

Now there will be no evidence of this for at least a quarter after the tax increases and spending cuts kick in. But the market, according to this scenario, will begin reacting before then.

And the losses will mount until the market finds a new equilibrium. Where that level is (i.e., how far the decline is) will depend on how long it takes before our elected officials stop posturing for the cameras and get down to business.

Time to End the Blame Game

I certainly know whom I hold responsible for 80% of this mess. But let's also get this much straight. Spending time deciding who should take the blame will help here as much as it did on the bridge of the Titanic.

But we do have one thing in our favor. We are just about as far away from the next election as possible. That makes compromise (that essential ingredient for a democracy) a little easier.

We have already witnessed some retreat in stock values, but the prevailing approach remains the assumption that a partial "putting the thumb in the dike" will transpire before the axe hits. This has also been the case with energy shares.

That I am sitting and writing this as the sun goes down over a beach here in the Bahamas, I suppose makes it a little easier to take. But as you read this, I will be paying close to $7 a gallon for "petrol," prodding me back to reality. That and remembering to drive on the wrong side of the road.

We will know whether a deal is in the works early next week. If it is, it will still take us into 2014 to iron out an approach. There is no advantage for either political party to prolong this into the next Congress, although the actual voting on whatever package is decided upon will certainly take place there.

Either way, investors require strategies on which energy stocks to buy, which ones to ride out, and which ones to dump as this standoff in Washington drags on.

I will begin to explain how that is done here in Money Morning startingnext week.

Because in all the furor over the fiscal cliff and the political flack surrounding it, one very basic truth has been lost.

In the energy sector at least, there is money to be made whether there is a cliff to jump off or not.

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About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle

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