But what might the new administration mean for more traditional – and more reliable –energy sources?

Oil is always the first energy source to spring to mind. But it’s hardly a solo act – coal and nuclear make up the other two-thirds of the top fuel trio. Coal delivers 50% of U.S. electricity needs, and nuclear power brings another 20% to the table.

The cold truth is that demand for energy of all types – and especially electricity – is going to keep advancing, domestically and worldwide. And developing alternatives to coal and nuclear will take time. For instance, tying wind and solar into the existing power grid will be enormously expensive and is likely to pose massive technical and engineering problems.

In fact, according to the International Energy Agency, renewable energy isn’t likely to make a meaningful dent in meeting the world’s energy needs before 2030, if then.

And regardless where the power comes from, our appetite for electricity will continue to skyrocket. Across the planet, overall electricity consumption is expected to double by 2030, increasing by 17 trillion kilowatt hours. While electricity demand will “only” increase by 50% in the U.S. market by 2030, demand will increase 400% in China and six-fold in India.

Our research indicates that President Obama will have very little flexibility in solving our short-term energy problems once he’s sworn into office next month. While he may prefer the environmentally friendly alternatives, most of those replacements are far from fully developed.

The bottom line: Obama’s apparent preference for renewable energy aside, coal and nuclear power are fully deployed, and in widespread use, meaning they’ll remain the backbone of our energy sector in the New Year – and for years to come.

Even so, it’s well worth factoring in all the possible players as we examine energy-sector outlook – and the accompanying potential profit plays – for the next 12 months.

King Coal Reigns Supreme

When it comes to future energy profits for investors, coal and nuclear will continue to be the “dream team” for years to come. Coal will provide the answer to our short-term and intermediate energy needs.  It’s plentiful, it’s cheaper than other available alternatives, and a big percentage of the world’s power plants burn it.

Nuclear power offers a long-term solution to energy shortages and a clean solution to global warming, as well. Uranium-fueled nuclear plants are cheap to operate, can run for long periods without refueling, and cause little pollution.

While there is widespread distaste for coal-fired power plants that spew billions of tons of carbon dioxide and other pollutants into the air, there’s no doubt coal will continue to be the dominant player in the electricity game for some time to come.

A full 50% of the electricity U.S. consumers use is generated by coal, and coal is king in the rest of the world, as well. According to the IEA, coal accounted for 42% of all worldwide electricity consumption in 2005.
But get this – the agency predicts coal use will explode by 73% over the next 20 years. That’s the largest projected percentage increase of all energy sources.
As you might suspect, China and India use 45% of world’s coal and will be responsible for 80% of that increase. China, alone, uses more coal than the United States, Japan and Europe combined.  China is utterly dependent on coal to run its factories and assembly plants, with coal supplying 80% of its electricity. The Red Dragon also is the world’s top producer of steel, a process that’s also a big burner of coal.

But while China is coal’s largest consumer and producer, the United States controls 27% of the world’s proven reserves, the biggest-single percentage on the planet.  That puts this country front and center on the worldwide coal stage, and President-elect Obama’s energy policy in the spotlight.

The president plays a pivotal role in shaping the nation’s energy policy, naming top officials at the U.S. Environmental Protection Agency (EPA), the Office of Surface Mining Reclamation and Enforcement and the U.S. Army Corps of Engineers.

Obama has proposed an economy-wide cap-and-trade system to reduce carbon emissions by 80% by 2050.  His system – which would set an overall emissions limit, then require polluters to buy allowances at public auction – would increase electricity rates and discourage coal consumption in the U.S. market. President-elect Obama even has stated that any utilities building coal-fired plants could go bankrupt buying pollution allowances.

And on Capitol Hill, newly emboldened Democrats recently tackled global warming and other environmental problems by choosing Sen. Henry Waxman, D-Calif., to head the House of Representative’s Energy and Commerce panel.  Waxman has already signed onto legislation that would ban any new coal-fired power plants that aren’t built using new technologies that capture carbon dioxide and store it underground, a key part of the Obama energy plan.

Luke Popovich, a spokesman for the National Mining Association, said he believes Obama will be pragmatic about the need to keep coal in the nation’s energy mix.

“He presumably would be sensitive to the impacts of energy policies given the perilous state of the economy,” Popovich said.

But while U.S. utilities may eventually be forced to tighten emissions rules and increase rates, Obama’s renewable energy plans will have very little impact on U.S. coal producers in the near future.

The world needs coal. We have it. And we’re going to sell it.

In the first half of 2008, U.S. coal exports increased by 13 million short tons, or 50%, over first-half 2007 shipments, according to the IEA.  Strong global demand for coal, combined with supply disruptions in several key coal exporting countries (Australia, South Africa and China), were the primary factors behind the increase.

But lately, coal prices, along with the prices of other fossil fuels, have suffered from the global economic crisis, and from a resurgent U.S. dollar. An 80% decline in global shipping rates has also fostered competition from other exporters, like Australia, which can now ship farther and compete with U.S. exporters.

As a result, the price of Appalachian Coal on the New York Mercantile Exchange (CME) has fallen to less than $80 a ton from $143 in July.

This will have a negative impact on coal producers until the world economy is able to gather itself back up and build up a new head of steam.

But don’t expect the slump to last long.  China’s economy is getting a shot in the arm from a gigantic $586 billion stimulus package, cementing growth expectations for 2009.  Expect U.S.exports to accelerate when that kicks in, probably in the second half of 2009.

Since the stock market usually leads economic indicators by six-to-nine months, right now is a good time to be looking at candidates for your investing dollar. But you should be cautious about pulling the trigger.  Watch construction activity in China – especially steel demand in the late spring – for the first signs of a rebound in coal prices.

When you think things are ready to take off, Peabody Energy Corp. (BTU) and Arch Coal Inc. (ACI) – the largest U.S. producers – are worth a look. For those who like to play a basket of shares, the Market Vectors Coal exchange traded fund (KOL), or ETF, provides the desired diversification. All three securities are trading at discounts of at least 80% from their July highs, and currently trade at bargain basement multiples.

If you want a coal play that bets directly on China, Money Morning Investment Director Keith Fitz-Gerald likes Yanzhou Coal Mining Co. Ltd. (ADR: YZC), one of China’s biggest coal suppliers. It produces lots of high-grade, low-sulfur coal, which burns cleaner and therefore fetches a premium price. The company boasts profit margins of 22%, when the industry averages half that.  The company profits are up a blistering 364% in the year’s first three quarters, compared with a year ago.  The stock trades at only three times earnings and has a dividend yield of 4.3%.

Nuclear Power: It Struggles in the U.S., but Thrives Abroad

Nuclear power is attractive to the energy industry because it produces electricity on a predictable, 24-hour basis – earning it the industry sobriquet of “base load” power. Coal and hydroelectric plants are the only other power sources that also rate that label. Such alternatives as wind, solar or biofuels do not.

During its term, the Bush administration tried to spark a “renaissance” in the construction of nuclear power plants.  And during his presidential campaign, Sen. John McCain stood firmly behind the industry’s hopes of building 45 new reactors by 2030.

Interest in new types of reactors seemed to hint at least at the beginnings of a new start. But President-elect Obama has been lukewarm on nuclear.  He acknowledges that nuclear is one of several viable components of the nation’s energy portfolio – the current 104-plant fleet provides 20% of America’s electricity – but has questioned its safety while emphasizing a need to diversify the nation’s energy mix with more wind, solar and other renewable sources.

“That’s sort of like my wife saying she’d support divorce under certain situations,” says William Kovacs, the U.S. Chamber of Commerce’s vice president of environment, technology, and public affairs.

In fact, the Barack Obama/Joe Biden New Energy for America Plan, while recognizing that nukes provide 70% of our non-carbon-generated electricity, says that “before an expansion of nuclear power is considered, key issues must be addressed including: security of nuclear fuel and waste, waste storage and proliferation.”  It goes on to say that the team of President-elect Obama and incoming Vice President Joe Biden “do not believe that Yucca Mountain is a suitable site as a long-term repository for spent nuclear designed for long-term storage.  In any case, the earliest the storage site could open would be 2017, and that was before Republicans lost control of the Senate.

With Senate Majority Leader Harry Reid, D-Nev., firmly opposed to nuclear waste storage in his home state – and with the Obama administration ready to hold the industry’s feet to the regulatory fire – any plans to expand the nuclear industry in the United States now face a high hurdle.

But nuclear proponents are hardly impotent.  The Nuclear Energy Institute, the industry’s most powerful lobbying group, helped craft the Energy Policy Act of 2005 with more than $12 billion in subsidies for nukes.

Maintaining nuclear energy’s current 20% share of generation would require building three reactors every two years starting in 2016, based on U.S. Department of Energy forecasts.  Right now, some 17 companies and consortia are pursuing licenses for more than 30 nuclear power plants with the Nuclear Regulatory Commission.

But the last operating license for a nuclear plant in the United States was issued in 1978, and the approval process takes a minimum of 24 months after site approval, which can take years.  Expect lots of public comment and infighting in Washington, as applications wind their way through the approval process at the NRC.

Meanwhile, the rest of the world is racing ahead with plans to up the ante in the nuclear power game. There are currently 440 nuclear reactors in 31 countries that generate about 16% of the world’s electricity.

Uranium-fueled nuclear energy is rapidly gaining global acceptance as a clean, reliable alternative to such dirty-burning fossil fuels as coal and oil. In a twin bid to combat global warming and keep up with soaring demand for electricity, countries are rushing to build nuclear power plants. Under current projections, 630 reactors will be operating in 55 countries by 2030.

It’s the new technologies those reactors are designed around that are aimed at allaying the public’s perception about the safety of nuclear power.  Toshiba Plant & System Services, which has built 112 plants in the past 12 years (more than any other company), is working on a “mininuke,” according to Forbes magazine. Called the “4S” (short for Super-Safe, Small and Simple), it uses a bath of molten sodium to produce steam twice as hot as steam from water-cooled reactors.  The 4S can crank out as much as 50 megawatts of power, easily enough to fire up a small factory, or to service an entire town that’s located off the main power grid.

On top of that, the mininuke can go 30 years without refueling, as opposed to typical reactors, which must be fed every 18 months. And the 4S will be safer, because the reactor core is deep underground, well protected against a terrorist attack or earthquakes.

China and South Africa are working on so-called “pebble-bed reactors,” one version of which is filled with 100,000 billiard-ball-sized spheres of coated uranium that are cooled by helium. That eliminates the need for enormous pressurized water-cooling systems and million-dollar containment domes, making them virtually meltdown-proof.

U.S. firms are also on the trail of smaller and safer designs. A Santa Fe, NM company called Hyperion Power Generation Inc., is working on a hot-tub sized design, which eliminates the need for the notoriously unstable uranium control rods. U.S. giant General Electric Co. (GE) is working on new, more efficient designs, as well.

No matter how you slice it, the fuel for the reactors in those plants all depend on a scarce commodity – uranium.  Flat out, there’s just not enough “yellow cake” to go around.  It takes seven to 10 years to transform a uranium discovery into a fully operational mine. With that kind of lag time, it’s clearly almost impossible for supply to keep up with demand.

Until recently, the market reflected the scarcity, rising as high as $137 a pound in 2007. But lately, despite the global shortages, uranium prices – in sympathy with other commodity prices – have nosedived.

Prices have fallen 40% this year, leading to a sharp decline in the share prices of mining companies, and eviscerating the financing for extraction projects. In the last month alone, six uranium mines in western Colorado and Utah were either put on hold or closed.

Some experts lay the blame for this current credit squeeze squarely at the feet of hedge funds – who they blame for buying up uranium – and banks no longer willing to lend money.

“Hedge funds were selling off their uranium to raise cash, and the prices just plunged,” said George E.L. Glasier, chief executive officer of Energy Fuels Inc., a Canadian junior miner that recently put a Colorado mine project on hold as part of a “capital preservation” strategy brought on by the credit crunch.

Uranium prices fell to $75 early this year, and fell as low as $44 this fall.  The spot price now is $55.

With the worldwide growth in the industry – and a classic supply/demand imbalance in the making – someone is eventually going to have to pay the price.  History shows when uranium prices move higher, uranium stocks almost always hitch a ride North. So when uranium prices advance – most likely to new highs – expect mining stocks to rise in virtual lock step.

But notwithstanding global growth – for now, at least – Obama’s energy plan and the mothballing of mines makes any uranium play a long-term proposition.

Besides Toshiba (PINK:TOSBF), the stocks to consider include Cameco Corp. (CCJ), the largest U.S. producer; and General Electric, which has a presence in the commercial nuclear power market here and overseas. Also, take a look at Rio Tinto PLC (RTP) and BHP Billiton Ltd. (BHP), huge international mining firms with large uranium deposits.  Each of these firms would stand to reap substantial profits from a resurgent price in yellow cake.

Outlook 2009 – and Beyond

However, regardless of what uranium does, coal is still the 800-pound gorilla in the energy world. In the United States, no matter how lofty our environmental intentions may be, it’s unlikely coal will be regulated out of existence anytime soon. That’s especially true overseas, where coal is playing a crucial role, fueling the transformation of such countries as China and India from “emerging markets” into first-order powerhouse economies. Given that, the world market simply can’t replace coal anytime soon, either.

As for nuclear power, safety improvements and other technological solutions make nuclear energy a viable energy source for the long term, eventually grabbing a bigger piece of the energy pie – especially overseas.

The bottom line: The economic outlook for both coal and nuclear power is upbeat.  Investors might look at both energy plays when considering how to allocate their portfolio – for the New Year and beyond.

Source: Surprise! Coal & Nuclear Power are Keys to Obama’s Energy Plan

Shares in leading German solar stocks rose substantially on expectations that other big players, including oil groups, are on the prowl in a market that grew to €6.6bn last year and is forecast to top €18bn by 2020.

Germany is by far the world’s biggest solar energy market thanks to its “feed-in” tariffs, which pay a government-guaranteed premium of up to €0.47 a kilowatt hour for power produced by photovoltaic panels. It is expected to continue to grow despite government plans to cut subsidies by 8% or 9% in 2009 and 2010.

“The richest investment opportunities can be found in the fast-emerging alternative energy sector,” says Mike Burnick in The Offshore A-Letter.

“That’s where oilman T. Boone Pickens is putting his money – his company Mesa Power just placed an order for US$2 billion in wind turbines. And there’s much more profit potential in other parts of the alternative energy sector too – especially alternative fuel.

“The market for ALL alternative energy sources grew 40% last year alone to US$77.3 billion and will explode into a US$250 billion industry within 10 years.

“Bio-fuel grew to a US$25.4 billion market last with more than 15 billion gallons of ethanol and biodiesel produced globally – more than double the output of just four years ago. The worldwide Bio-fuel industry will continue to enjoy explosive growth for years to come – expanding into a US$81 billion business within the next 10-years!”

“The richest investment opportunities can be found in the fast-emerging alternative energy sector,” says Mike Burnick in The Offshore A-Letter.

“That’s where oilman T. Boone Pickens is putting his money – his company Mesa Power just placed an order for US$2 billion in wind turbines. And there’s much more profit potential in other parts of the alternative energy sector too – especially alternative fuel.

“The market for ALL alternative energy sources grew 40% last year alone to US$77.3 billion and will explode into a US$250 billion industry within 10 years.

“Bio-fuel grew to a US$25.4 billion market last with more than 15 billion gallons of ethanol and biodiesel produced globally – more than double the output of just four years ago. The worldwide Bio-fuel industry will continue to enjoy explosive growth for years to come – expanding into a US$81 billion business within the next 10-years!”

“The days of meeting an unchecked demand for energy through monolithic carbon intensive power stations are coming to an end. Increasingly the emphasis will be on energy efficiency, renewables, cleaned up fossil fuel plant and micro generation,” the company said in a statement accompanying its full-year results, according to Britain’s The Guardian newspaper.

SSE, which currently gets 15% of its energy from nuclear suppliers, said it believed “one more tranche of nuclear power stations will be necessary, but that the deployment of such power stations should be minimised through the maximum exploitation of renewable energy sources.”

“The richest investment opportunities can be found in the fast-emerging alternative energy sector,” says Mike Burnick in The Offshore A-Letter.

“That’s where oilman T. Boone Pickens is putting his money – his company Mesa Power just placed an order for US$2 billion in wind turbines. And there’s much more profit potential in other parts of the alternative energy sector too – especially alternative fuel.

“The market for ALL alternative energy sources grew 40% last year alone to US$77.3 billion and will explode into a US$250 billion industry within 10 years.

“Bio-fuel grew to a US$25.4 billion market last with more than 15 billion gallons of ethanol and biodiesel produced globally – more than double the output of just four years ago. The worldwide Bio-fuel industry will continue to enjoy explosive growth for years to come – expanding into a US$81 billion business within the next 10-years!”

Floyd Brown in Investment U looks at another alternative energy source: the Fischer-Tropsch process, used to create synthetic fuels.

“The process works like this: Coal is broken into its components by subjecting it to high temperature and pressure, using steam and measured amounts of oxygen. This leads to the production of synthetic gas.

“In the United States, a small firm provides technology to produce ultra-clean synthetic fuels and chemicals. It licenses its proprietary derivative process from the Fischer-Tropsch method.

“It converts synthesis gas derived from coal, petroleum coke, biomass, natural gas, or municipal solid waste into liquid hydrocarbon products. This includes ultra clean diesel fuel, jet fuel, naphtha, specialty chemicals and other fuel products. It also manufactures anhydrous ammonia, UAN, nitric acid, carbon dioxide and granular and liquid urea.”

Read on here to find out Floyd’s cashing in on this conventional energy alternative.

I have been extensively researching the global energy crisis that’s now underway. My research is uncovering some very interesting investment candidates with lots of profit potential. The interesting thing is…NONE of these firms are traditional big oil & gas firms that investors are so fond of.

Crude oil soared as high as US$135 a barrel last week – more than double the price of a year ago. But big oil firms like ExxonMobil WILL NOT be cashing in on the next phase of the energy boom.

Instead, the richest investment opportunities can be found in the fast-emerging alternative energy sector.

That’s where oilman T. Boone Pickens is putting his money – his company Mesa Power just placed an order for US$2 billion in wind turbines. And there’s much more profit potential in other parts of the alternative energy sector too – especially alternative fuel.

• The market for ALL alternative energy sources grew 40% last year alone to US$77.3 billion and will explode into a US$250 billion industry within 10 years.
• Bio-fuel grew to a US$25.4 billion market last with more than 15 billion gallons of ethanol and biodiesel produced globally – more than double the output of just four years ago.
• The worldwide Bio-fuel industry will continue to enjoy explosive growth for years to come – expanding into a US$81 billion business within the next 10-years!

But you don’t have to wait two decades or even two years to start making serious money from this energy-sector market shock…

Fossil fuels are dead – the future belongs to alternative energy. Vast fortunes will be made in the “great fuel revolution!”

MIKE BURNICK, Senior Editor & Global Markets Analyst

P.S. I’m pulling the trigger on my first market-shock recommendations to take advantage of the great fuel revolution. My first pick is a renegade oil firm that develops “HemiCell-190″, which already powers 2.6 million cars. My second selection is a “giant killer” that just scooped-up gold-mine in alternative energy assets that ExxonMobil threw away. Subscribers to my signature research investment service Market Shock Trader will be hearing from me about even more ways to profit. Very soon, I’ll be sending them specific rifle-shot plays to cash in on alternative energy!

Source: Legendary Oil Man Turns Back on Oil

Of course this is NO news flash to regular readers of the A-Letter. My colleagues and I have been talking about skyrocketing agricultural commodity prices for months now. In fact, our investment director Eric Roseman dedicated a whole series of articles to the global food crisis just last week. If you missed them, you owe it to your portfolio to catch up. You can review Eric’s comments from last Wednesday, Thursday and Friday right now.

Your Food Prices Leap 83% in Three Short Years

According to data from the World Bank “Surging commodity prices have pushed global food prices up 83% in the past three years.”

Officials singled out U.S. corn-based ethanol production and other bio-fuels as a contributing factor to the rise in food prices. Corn prices have soared 56% in the past 12 months alone. About 30% of the entire U.S. crop is being diverted from kitchen tables to ethanol production.

But there’s another crisis looming too, in case the IMF hasn’t noticed…a global energy crisis! With conventional energy prices soaring, it’s no surprise that more money is being diverted into alternative energy, including bio-fuel.

Crude oil has skyrocketed over 400% since 2001 – topping US$112 a barrel last week. Coal, once considered a cheap and abundant source of energy, is now running in short supply as well. The cost of coal has soared nearly 60% this year – to US$63 per ton – and has doubled since July 2003.

So in addition to a global food crisis, the IMF should add the global energy crisis to its list of things to “officially” worry about.

One thing is crystal clear, with fossil fuel prices skyrocketing as supply continues to fall short of rising global demand, alternative energy sources are back in the spotlight and here to stay. These alternatives are more cost effective solutions to the energy crisis than ever before.

Alternative Energy is a Fast Growing Market

The market for alternative energy – including solar, wind, bio-fuels and fuel cells power – grew a whopping 40% last year alone! Alternative energy grew into a US$77 billion industry by the end of 2007, according to industry data from Clean Edge.

But that’s just the tip of the iceberg. The alternative energy sector is set to explode into a US$255 billion market within the next 10 years! The data supporting this miraculous growth is simply staggering. For instance:

• Global production of bio-fuels will grow to US$81 billion within the next 10-years, up from US$25.4 billion last year.
• Spending on solar power generation will expand from US$20.3 billion in 2007 – to US$74 billion by 2017.
• Wind power is projected to grow to US$83.4 billion over the next 10 years, up from US$30 billion in 2007.

Solar and wind power have both enjoyed phenomenal 30% compound annual growth rates over the past 10 years. That growth is set to accelerate in the future as both of these alternative energy sources go mainstream.

The commercial costs of solar and wind power are falling rapidly, making these clean energy sources more cost effective than ever before. In fact, with the soaring cost of fossil fuels, solar and wind power technologies are even cheaper than conventional energy sources in some applications.

Last year global wind power installations reached a record 20,000 megawatts (MW), of power generating capacity. That’s equivalent to the output of 20 conventional coal-fired power plants.

Advances in solar-power technology are bringing costs per megawatt down considerably. As a result, spending on solar photovoltaic systems exceeded US$20 billion in 2007. Obviously, this alternative energy technology has a very bright future.

Almost 800 cities in the U.S. alone have pledged to meet Kyoto targets for reducing greenhouse gas emissions through a greater commitment to renewable energy resources. The European Union has even more ambitious targets.

Emerging Asia is in desperate need of new power generating capacity. Rising fossil fuel costs are putting the squeeze on countries such as China and Japan, leading to more alternative energy investment sources.

Smart Money Pours into Alternative Energy

The huge growth potential offered by the expanding alternative energy sector has notgone unnoticed by well-heeled investors either.

In fact, some of the very same smart-money investors who were early to profit from the 1990’s technology boom - namely savvy venture capitalists – are now just beginning to pour billions into clean energy technology. Investment in the alternative energy sector surged 60% last year to US$148 billion in 2007.

Once again, this is just scratching the surface of the true investment potential in alternative energy today. In fact, the International Energy Agency estimates that “US$16 trillion needs to be invested by 2030 (or about US$600 billion per year) to meet the growth in projected demand for new electricity and fuel sources worldwide.”

You can bet that an increasing share of this spending will find its way into promising alternative energy technologies.

The Best Way to Invest in Alternative Energy

Alternative energy covers a lot of ground. It includes everything from ethanol to solar energy, wind to hydro-electric power. Even fuel cells and high-yield battery technologies are included in the alternative energy sector. That’s why it’s so difficult to choose specific sub-sectors to target – let alone pick the best stocks.

Perhaps one of the easiest ways to invest in the vast growth potential in alternative energy is by making a broad, sector-wide investment. There are a number of exchange traded funds that offer instant diversification among dozens of profitable companies in just one single investment.

I recently recommended one such ETF to my Global Market Investor subscribers. This ETF holds 30 leading alternative energy firms from all over the world. In fact, 65% of the stocks in this fund are listed outside the United States. This gives you the added bonus of diversifying your investment outside the falling buck and slumping U.S. stock markets.

The bottom line here is that growth in alternative energy is an undeniable long-term trend. In fact, this industry hasn’t even scratched the surface of its long-run growth potential, which means this is still a great time to buy.

MIKE BURNICK, Senior Editor & Global Markets Analyst

EDITOR’S NOTE: With ETFs, you truly have the holy grail of offshore investments right here at home. You can diversify in far off regions like Japan, Taiwan, Brazil and Singapore, and still invest right on the NYSE, with your regular stock brokerage account. This May 14 -17, Mike will introduce you to the most exciting ETFs on the planet at our Total Wealth Symposium in Panama. It’s not just ETFs. Mike will be joined by over a dozen investment experts from around the world. These experts will give you their favorite options, currencies, commodities and funds to beat the credit crunch in 2008 and beyond. Still interested in joining us this year? Seats are filling up. So please click here to reserve your seat before we sell out.

While the recent decline is somewhat steeper than the five 20% -30% corrections experienced since 2001 (when the current bull market in oil began), I feel that this pullback no more signals the arrival of a bear market than any of those previous dips.

While the current pullback may be more substantial and longer lasting than prior corrections, the long-term up trend remains intact. In fact, a drop to around $47 would put the market right onto its long-term trend line. While the momentum may well cause oil prices to test this trend-line, I’m convinced that it will hold.

Remember, more so than at any other time in the past, short-term market movements are being driven by the more than 9,000 hedge funds, many of which have highly leveraged positions in the oil markets. Clearly many momentum players are closing their long position, while others are initiating new short positions. This type of speculative trading exaggerates the severity of corrections, but is also sows the seeds for an equally dramatic rally.

Leverage is a two-edged sword. When real physical demand finally turns the market, those shorting into this decline will be forced to cover. Finding few real sellers at these depressed prices, this added demand will send prices sharply higher.

In addition, these sharp price declines do a lot more then shake out weak longs and sucker in the shorts; they create a stronger foundation upon which much higher prices can ultimately be built. First, fearful that a return to sub $30 prices will eviscerate return assumptions, oil producers will become increasingly reluctant to undertake costly exploration and development projects. Second, lower oil prices will discourage investment in alternative energy sources. And last, the anticipation of lower prices will discourage consumers from using alternative fuel sources, investing in fuel saving devices, or purchasing more fuel efficient vehicles. The result is that future demand will be higher and future supply will be lower.

One of the reasons behind the sudden change of psychology has been the unseasonably mild winter in the Northeast (On the first Saturday in January, my son and I ran barefoot on a crowded beach in Greenwich, Connecticut). No doubt there were several oil traders who enjoyed the 70 degree weather with us and who used it as an excuse to sell. Given the fixation on the weather, I would not be surprised if the NYMEX were to set up a live video feed in Punxsutawney, PA on Groundhog Day (February 2) so that traders could ascertain if Phil sees his shadow. In any event, much of this sentiment is likely to dissipate when real winter weather finally arrives.

Of course the disproportioned impact that U.S. demand has on global oil prices will fade as the dollar continues to fall. By making oil much more expensive for Americans while simultaneously making it much cheaper for everyone else, a dollar collapse will dramatically reduce demand in America while increasing it abroad. As Americans are increasingly priced out of the global oil market, our local weather patterns will be far less relevant in determining prices. Sorry Phil.

Source: How Low Can Oil Prices Go?