On Pollution, Dollar Devaluation… and A Reassurance
Thought I would start the week answering a few more questions and comments from your fellow Oil & Energy subscribers.
As always, I encourage you to write to me at firstname.lastname@example.org. I can’t offer any personalized investment advice, but I can address your questions and comments in future broadcasts.
Let’s get started…
Q: With the U.S. dollar breaking through a 30-year support level, how would an outright collapse of our currency impact the energy markets? With the potential of severe dollar devaluation in the near future, how can a U.S. investor hedge against this risk? In particular, how would a currency devaluation of the dollar affect energy prices and stock prices of U.S.-based companies? ~ Carol F.
A: First off, Carol, aside from Hollywood script writers, there is no chance of a collapse in the dollar.
Remember, the use of dollar-denominated assets is a matter of global concern. A collapse in the dollar’s value or a severe dollar devaluation (which, depending on the range, may be the same thing) would prompt a contraction worldwide.
Central banks would not allow it – especially the Chinese, who would lose considerable value from their surplus holdings.
In short, if the dollar demonstrated significantly accelerating weakness, it is in the interest of the rest of the world to support it. The weakness will come from domestic policy decisions in Washington, not from any concerted currency attack from abroad.
Currency baskets used to determine exchange rates in many countries are being revised to lessen the dollar percentage. However – and this is the important point – the dollar remains the dominant single currency in the mix.
The dollar may, some day, cease to be the primary international trading currency, but that will not happen anytime in the next several decades.
When it comes to the relationship between the dollar’s effective value and energy investments, the discussion begins and ends with oil and gas.
Throughout the world, trades in both commodities remain overwhelmingly denominated in dollars. As the dollar weakens, it takes more of them to buy the same barrel of oil.
That means a U.S. company producing oil obtains its valuation not from where it is located… but from what it does.
Now, a continued decline in the value of the dollar moves trading interest into commodities, such as oil, that have their own positions as financial assets (as well as raw materials).
Bottom line for the individual investor is this: U.S. domestically produced energy, especially natural gas and alternatives, will offset the pressures to raise prices for electricity and (in the case of gas) for petrochemical feeder stock. For the remainder of the market, as long as oil prices increase, so will the valuation of U.S. companies producing it.
The primary hedge here is to use exchange-traded funds (ETFs) reflecting companies in specific market sectors (medium-sized U.S. oil producers, for example, or Canadian oil sands, or alternative energies) and allowing a play of that sector without a complicated portfolio.
For the commodity itself, there are several ETFs reflecting the futures trading markets in New York, London and the relationship between them.
[Editor’s Note: Kent’s successful Energy Advantage portfolio does exactly this, and his subscribers are already profiting. To find out more, just click here.]
Q: Everything I have been reading about the new techniques for recovery of oil and natural gas claims that they could result in bigger “pollution” problems than the current problem of auto pollution. ~ B.J.
A: All drilling is invasive. And when applied to unconventional production – such as shale oil and gas, tight gas, coal bed methane, heavy oil, bitumen, and oil sands – the traditional techniques of drilling and processing do have a greater adverse impact on the environment.
The further steps required to upgrade that synthetic oil to allow refining is also a concern.
However, the environmental protection equipment and procedures are now improving. Negative impacts have been significantly declining for in situ production, horizontal drilling, hydrofracking, steam-assisted gravity drainage (SAGD), and mining techniques for oil sand deposits.
Still, problems remain, especially in concerns over the longer-term effects of fracking and our ability to protect water sources.
In addition, the deeper and longer the horizontal drilling stages, the greater horsepower requirements are in the machinery running the operation from up top. That machinery primarily runs on diesel. So the greater the horsepower, the more likely there will be diesel spills on the surface.
Yet for all of this, regulations currently exist, and technical advances are coming into the market to meet new emerging problems on a regular basis.
And as for the auto pollution comparison – if the energy is natural gas, the auto emissions would actually be less than current levels when the fuel reaches consumer use.
Q: We need reassurance again that when the stock market tanks (as it surely will), the recommendations you have given us will not participate. We are on the edge of something most people will not like. Please tell us one more time why our investments are headed on the upper path. ~W.P.
A: Sounds like somebody needs a hug!
There are no certainties in investing. But as the track records of both Energy Advantage and The Energy Inside Circle portfolios indicate, we are doing just fine.
Both portfolios are performing considerably above market. And it’s due to the rationale I provided when they were introduced.
Remember, we are moving into a period of high volatility in energy pricing, where the instability will make traditional analysis very difficult. Both portfolios are structured to take advantage of the volatility and to provide early indications of changes impacting on our holdings.
In the final analysis, the only measurement is performance. And on that score, we are doing extremely well.