How to Play Oil's Swan Song

Editor's note: On Friday, crude oil futures set a record high closing price of $140.21 a barrel.

If recent pronouncements about energy policy by the presidential candidates are any indication, America has a long way to go in understanding where we are, and where we're heading.

Senator McCain and President Bush have both recently changed their minds about opening ANWR and the continental offshore to new drilling. McCain also wants to build 100 new nuclear reactors and make a big push for so-called "clean coal."

Senator Obama opposes drilling in areas where it is now prohibited and has dismissed McCain's call for a summertime "gas tax holiday," but supports a windfall profits tax for the oil industry and favors massive investment in renewable energy.

Meanwhile, the world waits with bated breath to see if the latest announcement on OPEC oil production will take down oil prices, even though the market responded to the last several production increases by bidding up oil even higher.

A fine example of this was the emergency summit meeting convened unilaterally by Saudi Arabia last Sunday to try to assuage the oil markets. Many had hoped for a 500,000 barrel per day (bpd) increase. In fact, we got a promise for another 200,000 bpd of production -- that's an increase of 0.2%, yes, one-fifth of one percent. But that wouldn't even make up for the loss last week of 320,000 bpd of Nigerian production due to bold militant attacks on a Shell(RDS.A) offshore platform and a Chevron (CVX) pipeline network. Consequently, the price of oil rose another 1% on Monday.

It seems as though hardly anyone understands the facts about oil, and about energy in general. The prevailing debate suggests that most people think the perceived problems and their solutions are essentially political, and that we could make our energy problems go away and jump back in our Hummers if only we put the right policies into place, or jawboned the right suppliers.

Nothing could be further from the truth.

Simple Math, Simple Answers

Once one understands the most current data and their trends, all of these questions are easy enough to answer.

Are we at the peak of global oil production? Probably, yes, but the right answer is, "We're close enough that we need to do something about it, pronto."

Drill offshore and ANWR as soon as possible? Bad idea. I say this not for environmental reasons, but simply from an investing perspective. It won't help very much or for very long, it will take decades to come to market and it will only put us farther out on the limb of fossil fuel dependency. It makes far more financial sense to burn somebody else's oil for as long as possible, and save some of our own for a rainy day, when it will be in much greater demand and much more valuable. Judging from the gathering storm clouds of unstoppable oil prices and declining global oil exports, that rainy day is most certainly coming.

A hundred new nuclear reactors? Never going to happen. We're going to be lucky to replace the existing ones, many of which are nearing the ends of their planned life spans.