Energy's Vicious Circle

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The old joke that asks, "What's round and goes 'Grrrrr?' " is beginning to make itself felt in the nation's economy. Of course, the answer is "a vicious circle," and the relationship of crude prices to inflation and back to crude prices is, indeed, sometimes a circular phenomenon.

On Friday, the Labor Department reported that its Consumer Price Index rose 0.8% in November, the biggest hike in more than two years. The major culprit there was a 9.3% jump in the price of gasoline during the month. That increase followed a year-long run in oil prices. However, that news in turn drove light sweet crude prices down nearly a dollar on the New York Mercantile Exchange, as traders worried that this bubbling inflation would reduce gasoline demand.

And they just might, but this isn't anywhere near a sufficient reason for Fools to phone in sell orders on their shares in the likes of oil majors ExxonMobil (NYSE: XOM) or ConocoPhillips (NYSE: COP), or oilfield service players like Schlumberger (NYSE: SLB) and Halliburton (NYSE: HAL). Here's why:

Both the Paris-based International Energy Agency and the Organization of Petroleum Exporting Countries have recently boosted their predictions for world crude demand. And while some traders are skeptical of the revisions, maintaining that demand is actually falling, my feeling is that they're being far too U.S.-centric. The economies of most of the rest of the world are cooking along nicely, generally raising demand for petroleum.

• While global demand has continued to rise, production levels for a number of the world's big fields have continued to slide.
• Crude prices would have to fall a long way for the businesses of the oilfield services companies, in particular, to be affected. Deepwater drillers Transocean (NYSE: RIG) and Diamond Offshore (NYSE: DO), for instance, are more and more drilling under term contracts in locations around the world. They're not going to pull their drill strings and head home on the basis of a $5, $10, or even $30 dip in the price of crude.
• One month's -- or even one quarter's -- inflation figures are insufficient for Fools to use as a basis for any real energy investment decisions. I'd submit that it matters far more that the energy predictors all agree that we'll need to raise global oil production by as much as 40% in the next couple of decades, and, as I've argued to my Foolish friends, we may not be able to come anywhere close to meeting that growing demand.

So, Fools, I urge you to study the energy sector carefully and maintain at least an equal weighting in the group. Over time, your portfolio will thank you for doing so.

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