This from Investor’s Daily Edge:

In early June, CNN Radio called and asked me about gas prices and autos. The first question was more like a statement. The radio host said that people were forsaking big cars and flocking to smaller models. And wasn’t that great? He added that the American consumer should be congratulated for being so willing to save on energy.

He couldn’t see me shaking my head in disagreement. I told him we haven’t turned into a nation of tree-huggers yet. And congratulations are a little early. Consumers are simply responding to price. When gas goes up, smaller cars look more attractive.

I told him it works in the other direction too. When gas goes down, bigger cars start looking better.

Since then, gas prices have fallen by more than half in most parts of the country. So what has happened?

People have begun buying pickups and SUVs again. You couldn’t give them away earlier in the year. See more of my thoughts on this in the IDE issue from December 9, “Can It Really Get Worse Than This?”.

The economics of buying a hybrid no longer makes sense. You’d have to keep your car for about 10 years to make up the extra money you spent on the car.

The ones buying these cars now are really tree-huggers.

So should auto companies spend tens of millions of dollars on R&D for cars that nobody is buying right now? Or should they keep making the bigger cars that Americans seem to love?

First off, it’s not a question of doing one or the other. It’s more a question of how fast U.S. auto makers should reduce their reliance on bigger vehicles.

A so-called “car-Tsar” would quicken the process.

Putting a “car-Tsar” in charge of the auto industry would put the government in the driver’s seat. The auto industry would be effectively nationalized. Say good-bye to the free market. It’s road kill.

But the triumph of the government didn’t happen overnight. The current auto crisis may have cemented the government’s victory. But the government has been telling the auto industry what to do for a long time.

Safety regulations date back decades. As do the Corporate Average Fuel Economy (CAFE) regulations.

CAFE regulations are already forcing auto makers to make more fuel-efficient cars. They call for auto companies to make vehicles that get at least 35 mpg by 2020. And every couple of years between now and then, U.S. auto makers will have to produce cars with better mileage.

So by 2018, for example, to reach 35 mpg will only require a small jump.

Will the American consumer want more fuel-efficient cars or not? It doesn’t matter. They don’t get to decide. The decision has already been made for them.

A nationalized auto industry may not be good for the economy. It may not be good for the auto industry. But it’s a gift from the government to you as an investor.

Markets are hard to predict. Government policy isn’t. Government policy is literally an open book.  You want to know what the government is thinking? Go look it up.

As investors, what more can you ask for?

So this is what I can say about the future of the auto industry with complete confidence…

• Cars are on the fast track to going hybrid
• By 2020 nearly all cars will be hybrids
• The dominant hybrid technology will be lithium-ion batteries.

Why lithium-ion? They have two times the capacity of the currently used nickel-cadmium batteries. They have half the weight. And, unlike nickel-cadmium batteries, they perform superbly in very hot or cold weather.

The problem is nobody is making them. And companies that are planning to make them will need at least two years to achieve full-scale production.

But, actually, there is one company making them right now. They are already supplying a European car maker with these batteries under a $70 million contract.

The company I’m talking about is Ener1 (AMEX:HEV). And while the S&P 500 lost almost 20 percent over the past year, Ener1 gained 40 percent.

It’s a small company. Its market cap is $750 million. Once finished, its facilities could generate revenue of over $300 million.

Ener1 is talking to about 30 car companies interested in their battery technology. The company has an awesome future. And it’s practically guaranteed by the U.S. government. That is why HEV is my top stock pick for 2009.

Source: The Future of the Auto Industry Is Already Written

This from Money Morning:

Many of my neighbors here in Oregon are enjoying the big decline in gasoline prices, particularly those who still own SUVs, pickup trucks or any of the other fire-breathing, piston-clanking monstrosities I’ve seen on the road recently.

And no wonder. Gasoline prices in our neck of the woods have fallen between 60% and 70% since July, when oil closed at a peak price of $145.29 a barrel. Here in Oregon, that means that my wife and I don’t feel like we’ve been mugged every time we fill up.

But what happens when the prices start going up again? Global demand for oil will fall this year for the first time since 1983 as the world financial crisis saps demand, the International Energy Agency said a week ago. That has some people believing that prices will remain low.
But I wouldn’t bet on it – at least not for long.

The Organization of Petroleum Exporting Countries (OPEC) is making loud noises that it wants to see $75 a barrel again soon, which would represent a 70% increase from the $43.60 a barrel where oil closed yesterday (Tuesday). OPEC, supplier of more than 40% of the world’s oil, is ready to make a “big” cut in supplies when it meets in Oran, Algeria, today (Wednesday), Venezuelan Oil Minister Rafael Ramirez told journalists.

How much of a production cut we’ll see is anybody’s guess, depending on who does the cutting and who actually abides by the agreement over time. But we’ll know very shortly.

Russia recently announced, after years of going it alone, that it wants to actually join OPEC. Now OPEC has asked Russia to cut oil output by between 200,000 and 300,000 barrels a day to help revive prices, OAO Lukoil Chief Executive Officer Vagit Alekperov said in Moscow on Monday. And Russia may well do just that.

A price of $60 to $80 a barrel would be consistent with a global production cut of about 2.5 million barrels, and that’s a figure apparently supported by OPEC representatives we spoke to.   Leonid Fedun, OAO Lukoil’s deputy chief executive officer, noted in a recent Bloomberg News report that “there is a consensus [among members] to reduce production.”

This highlights something that’s often missed in the Western media, where the price of oil is typically associated with the price of gasoline and how that price impacts driving habits. According to CNN, MSNBC and a whole host of others, evidently that’s what matters to us.

But in OPEC-producing countries, it’s a different story. There the price of oil is more typically associated with external trade relationships and hard currency requirements that are policy level decisions often made at the expense of individual concerns. And I don’t have to remind you that most OPEC member countries don’t exactly specialize in freedom of choice, so the odds are high that what the energy ministers want, the energy ministers will get … but that’s a story for another time.

Here’s one other point to consider: With all the media’s focus on OPEC, there’s been little mention of China, India and the whole host of emerging markets that are still experiencing double-digit growth in oil demand. That’s not going away.

The bottom line here is that it would behoove interested investors (and people who like to drive less fuel efficient cars) to hedge any potential future rise in gasoline prices sooner rather than later. Here’s one quick and dirty way to do it.

If you drive 20,000 miles a year and your car gets 30 miles to the gallon at a time when fuel costs $1.75 a gallon, you are looking at an annual fuel bill of $1,166.67. If OPEC gets its wish and oil rises by 70%, gas prices may rise in tandem. Therefore, buying the equivalent share value of your projected annual fuel expenditure in such exchange-traded funds (ETFs) as the United States Oil Fund LP (NYSE:USO), the iPath S&P GSCI Crude Oil Total Return Fund (NYSE:OIL) or the United States Gasoline Fund LP (NYSE:UGA) could be just the ticket.

As prices rise, so, too, will the value of your investments. If prices fall further, you’ll obviously lose money, but you’ll be paying less at the pump at the same time.

Granted, what I am proposing is not a perfect hedge. Among other things, there are potential capital gains to contend with when you sell 12 months from now – taxes, transaction costs and a whole host of other variables that could come into play. At the same time, you could simply alter your driving habits, which, of course, would change the value of your calculations midstream.

None of that really is material, though. Hedges are never perfect.

But they do offer you a chance of “being in the neighborhood” when it comes to protecting your wallet from what could be vastly higher oil prices to come.

Source: Pledge to Hedge: Three Ways to Lock in Low Gas Prices Right Now

My little brother dropped in to visit last weekend. It was his first trip to Northern Nevada, so I gave him the full Monty. To balance out the downtown Reno blackjack-and-greasy spoon experience, we had Sunday brunch at the Lone Eagle Grill.

The Lone Eagle is a chalet-inspired lodge and restaurant on the north shore of Lake Tahoe. (I used to be a two-minute drive from the place; now it’s about 25 minutes.) Everything in the Lone Eagle is pine and cedar and crystal, with giant stone fireplaces and exposed wooden beams in the 20-foot high ceilings. One might call it rustic opulence.

On this day, Lake Tahoe was particularly gorgeous, in full view from the floor-to-ceiling windows on our right. The boats were out, sails unfurled; the water was a deep serene blue as far as the eye could see. An outline of the distant Sierra Nevadas completed the picture, the last of the winter snow pack still visible above the tree line.

An inspired scene such as this (complete with lobster, champagne and tiramisu) invites many thoughts. One wouldn’t, however, expect to be pondering the price of oil in such a place.

And yet that was the topic du jour for a well-to-do foursome seated near our table. All looked comfortably retired, with the casual air of Tahoe locals. With my brother off roaming in search of the dessert table, I couldn’t help overhearing their banter.

“It’s just crazy to think of oil over $100,” one snowy-haired gentleman said. “It will be interesting to see what happens when it goes to $150.”

“Yes,” the woman across from him agreed. “And my gosh, just think of what’s happening in the Middle East. With the presidential election coming up, there’s no telling what could happen next.”

They went on in that vein for another minute or two, which I found fascinating. Not so much for the content of the conversation, but rather the time, the place and the participants.

It’s long been the case that “normal” people don’t talk about this kind of thing. Big-picture thinking has always been something of a quirky pursuit. When someone brought up the gold standard in the poker room a few weeks ago, I thought it was a one-off… But if two data points make a trend, perhaps the public is waking up.

I had some further thoughts on the implications of $100 oil — what it means, where to look for profit, and so on — but Adam Lass beat me to the punch in his excellent piece below.

Adam does a great job pointing out the folly of the pundits who rejoice in oil’s short-term pullback (a topic we touched on recently, but which benefits from further exploration). Better still, Adam lays out the case for why $100 oil “changes everything.” Take a look.

Warm Regards,

JL

$100 Oil Still Changes Everything

by Adam Lass, Senior Editor, WaveStrength Options Weekly

“Oil is falling, oil is falling!”

So what?

Oh, it’s true enough by and of itself. Over the past few trading sessions, we have indeed seen crude oil futures fall some $11 off the all-time high of $135.09 a barrel set a fortnight back.

It’s almost comical how the all the Wall Street analysts and their talking-head stooges are tripping over each other to point out this new record low. Why, this is the lowest price since May 15!

Don’t Celebrate Just Yet…

But don’t break out that bottle of cold duck you’ve had stashed in the back of the company fridge just yet. Because in this case, “down” is definitely a relative concept. And the reasons for even this modest drop may be nothing to cheer about.

Two years back, if a pundit wanted to throw out a real bomb, he or she would predict $100 oil. Everyone would gasp at the sheer audacity or mere stupidity of such a claim. Didn’t they know that the price supply and price demand curves would prevent that from ever happening?

You see, there are several things that are supposed to happen when oil prices climb. First of all, the supply of oil magically increases.

Marginal Oil Goes Mainstream

In reality, it isn’t quite that simple. Much trumpeted “alternative” oil sources aren’t quite as magical as commonly assumed. Different crude oil sources have radically different prices associated with extracting them and making use of them.

When a fresh field is so ripe that the oil simply oozes up out of the ground, the cost to deliver to market is pretty darned cheap. Work that field’s reserves down for 20 years or so, and now you must (at great cost) pump in water and steam in order to get half of what you used to scoop up with a child’s sand bucket. And when those easy to find reserves are clapped out, you must look farther and farther afield to find ever more expensive fresh supplies.

Modern geophysical science can guide us to more raw oil then ever before. So after a fashion, the supply appears theoretically elastic (at least within our lifetimes). Marginal crude that would have been unprofitable to fetch out when the cost of crude was a mere $50 a barrel, becomes intriguing at $65 and damned attractive at $75.