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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  1. A.M.Deist | December 29, 2012

    I have to agree totally with your analyses. With recession or cuts in spending comes lower demand, which will increase supply and lower prices. What is yet unknown is how a recession in the United States will affect China and the Eurozone. It certainly won't be positive, and could result in bringing down stock markets as well.

  2. george tyree | December 29, 2012

    Economic issues throughout the world are the "waste " of economist studies and applications administered by higher learning institiutions from the same mold.
    Amusing, one cannot see the generations of wealth revolve around the world and the many who literally "support " this financial avalanche with their human remains.
    The use of a symbol representing value in a product or service has played a part in the demise of human cultural, and improvements of the same, but not of equal benefit.
    So again, human kind,the 99 %, will not share in the wealth that circles this earth.This one is called the "cliff". Is there a real good economic model we haven't tried yet ? Maybe hidden in some thesis?
    Energy, of course will benefit from every economic strike out, there is no competition in that mammoth ball of money, collecting every penny from the next kids piggy bank.
    I suggest thee,your bar tab be $7 a drink, equal your gas bill. The bank account for the world suppliers can pay for this round.

  3. Wayne Staaleson | December 29, 2012

    Did you know that Obummer gave all those deadbeats in Washington a Raise,all the crap they have
    laid on the American people and what they have done to our country makes me sick.I will buy stocks in the energy so I can make some money,I like your News letter! Thanks for the Info.

  4. H. Craig Bradley | December 29, 2012

    THE EVER ELUSIVE "REAL DEAL"

    There probably is not going to be a "real deal" that resolves deep Party differences and is magnified by the personalities involved ( Boehner, Reid, and Obama). Perhaps a cosmetic agreement might emerge in the coming weeks, but certainly no resolution. So, all the uncertainty that some have said held back the stock market in 2012 might just continue in 2013, but with some additional volatility.

    Continued fiscal uncertainty in Europe and America means higher volatility and some roller-coaster stock market rides in the coming New Year. Even with no recession, it will still be difficult to make better returns than found in 2012. Poor political leadership in the Western Developed countries is not a friend of business or investors anywhere.

    Public confidence is further eroding each time these stooges put on another act on capital hill. Its still up in the air as to if they will actually "get down to business" in 2013. I certainly don't see it happening as far as tax reform or spending reductions. President Obama really does not care if we go over the Cliff or not. Either way, he gets the tax increases he wants.

  5. mehdi | December 30, 2012

    is the price of the gold will rise
    if oil price rise

  6. mehdi | December 30, 2012

    what it would happen to gold price if fiscal cliff gos down

  7. larry peaden | December 31, 2012

    need not not to worry there are at least12 to 15 things or a combination that will will bring on turmoil and absoulate terror for billions world wide and 280 million in US that will leave 35-38 million ,some who tried to prepare and the the elite in goverment and military. there is no hope of any way to avoid this. If you can surive for 6-18 months 80% wil start a tough and hard life BUT ALL BETS ARE OFF IF NUKES ARE USED. I dont belive this I know IT I pray that I am wrong

    • Ed Invests | January 1, 2013

      Flash back. I was born in 44, and lived through the fear of Russia and nukes. It is far more likely today that, even in the worst case, nothing like we we worried about then will happen. Cheer up and worry more about the price of oil in your life and investments, and less about the armegeddon you imagine. Of course, you can stockpile more weapons and keep digging that bunker. Good for a tornado, I guess, but your money should be in oil. High div oil and infrastructure in oil. If I am right, you lost money and if you are right it won't matter to either of us. I pick oil investments.

  8. Ed Invests | January 1, 2013

    I think you shoud address the possibility that oil plummets in value, but US demand remains stable. In any case, I prefer MLPs that will get paid regardless. I have seen charts that show world demand below forecast production, so a drop in oil would not surprise me. I have most in areas that don't care about oil price. I trust not a soul to really forecast oil costs because of the way they are speculated on. Find an area that doesn't really care.

  9. mark leary | January 2, 2013

    Stop paying the GOV. and paramilitaries to go to war.

    • mark leary | January 2, 2013

      Let army guys waste our tax money, not paramilitary ops

    • chuck baretta | January 3, 2013

      its not about war its about how you fight the war, the biggest war going on right now is the economic war, cheap wages, etc. the us dollar is being beseiged and may no longer be the world standard by which business is conducted, if you lose an economic war it will be worst than losing a military war, so dont worry about a military war so much as the economic war we are losing

  10. chuck baretta | January 3, 2013

    I am 75 yrs of age and have seen a lot and experienced a lot re: economic turmoil. When I get up in the morning I go about my business to make money, I do what I have to do not because of govt. but inspite of govt. Draw a circle around you and figure out who belongs in that circle, then dont worry about anyone outside of that circle. Make a balance sheet on yourself and make sure there is very little debt on it unless you can borrow the money very cheaply and have reserves to cover the debt, cash will be king and so will rental property if it is purchased with cheap money. People wil always need a place to live even if the govt. ends up paying you the rent. Learn to do without, you dont need everything that is advertised, learn to go back to gods nature for peace and relaxation. stay calm, as there will be a lot of opportunites to make money, become a local pawn shop. I just purchase a one million dollar piece of real estate for 290,000 with a rental on it.

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