Reasons for a Sweeter Scenario in 2007

But that's the long term. (And that's why I think energy stocks are the best long-term investment.)

In the short term, though, I think we could well see a lull -- not a big pullback -- in energy prices. That would be good news for a U.S. economy facing serious challenges in 2007. It would be good news for consumers, who could certainly use a break from relentlessly rising energy prices. And it would be good news for stocks.

Transportation, Energy Could Profit

I'm not yet ready to commit money to a lower-oil-prices-in-2007 scenario, but I can tell you where I'll be looking for potential candidates to profit from such a scenario:

• Airlines stocks would offer the biggest bang for a falling-oil-prices buck (and the most risk if oil prices rise) because their costs are so closely tied to the price of jet fuel.
• Trucking stocks offer a more balanced combination of risk and reward.
• Railroad stocks are a relatively low-risk way to play this scenario because they are likely to keep collecting fuel surcharges even when the price of fuel falls.
• Oil and gas producers will keep generating rivers of cash, even at $60 a barrel, so I don't see any reason for investors to abandon long-term bets in the sector. In this scenario, shares of oil and gas companies that are adding reserves and growing production, however, are likely to do relatively better than shares of those that have been solely riding the appreciation of already discovered assets.
• Finally, because oil and gas companies will still generate substantial cash flow, I'd expect they will continue to invest in capital projects that increase reserves and production, or that deliver supplies to underserved end markets. Energy infrastructure companies, in other words, will do surprisingly well even if oil prices take a pause in 2007.