Gil’s Musings

Oil Politics and Energy Prices

energy prices

It is surely apparent by now that a confluence of events is causing energy prices to spike like none seen before. In 2008, when oil prices breached $140, the recession that followed quickly brought it crashing back down to the $30s. Prices today would need to be $200+ to match 2008 in inflation-adjusted terms. 

Rising Energy Prices

I should also note that rising energy costs only partly caused the recession in 2008. Excess mortgage speculation was the real culprit. However, rising energy prices have caused many such events before and will again.

It is a shame that the current administration seems hellbent on keeping the pain coming. All that green campaign rhetoric and energy-hostile words surely leave a bitter aftertaste today and the oil industry would be justified in letting Mr. Biden sleep in the bed of his making. He must now choose whom to alienate: the struggling public with the tripling of pump prices, or the powerful progressive wing of his party. I’m guessing he ultimately sides with public opinion since 70% of recent respondents say domestic drilling is a better option than $5 gas. Having made the energy industry a political punching bag, Mr. Biden has made enemies of those he now needs most. Worse, politicking on permits and pipelines closed doors that are impossible to reopen quickly. Mr. Biden already played the hand of dumping from the strategic reserve to suppress prices, but he promptly found he was just spitting in the ocean.

Stock Prices

Recessions are notoriously hard on stock prices. This leads many to believe they should sell it all and buy it back lower. This is a treacherous game, only compounded by taxes. Preserving unrealized gain is actually more important to long-term strategy than any success in navigating the downside. However, stockpiling fresh cash and raising cash by reallocating losing positions can make a ton of sense. It’s also wise to consider big charitable gifts of low-cost stock thus preserving cash for buying more stock during bouts of volatility. Remember to maintain perspective; what happens next is not as important as what happens in the end. The end game has always been higher stock prices later. You cannot navigate a ship looking at the next wave. Stay focused on the North Star.

Since late 2020, the Segment Tax-Efficient Rising Dividend and Segment ETF strategies have maintained about a 2x market-weighting to energy stocks; having held almost zero since 2014. However, the risk of sudden peace makes us nervous and may lead us to cut back our energy positions into any vertical price moves. A protracted war seems unsustainable, and reversals can be brutal, making larger stacked bets in energy at this time unwise.

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