One of our more recent arguments this late spring and early summer was that oil and energy were cheap and could do well if our broader point about the stronger-than-expected US economy held true.

The brutal truth is this "late breaking developing theme" hasn't worked great.....until maybe now.

If you are interested, here are our previous pieces on this subject over the last 3 months: late April and late June where we broached this thesis and theme.

If you are interested in why this is finally changing, read on below.

For an example of why it might be changing. Here is a graph of US gasoline prices this year:

The national average price of gasoline has risen to $3.73 per gallon, a leap of 17 cents from last week. That is the fastest weekly rise in over a year.

So, gas prices are not just rising, they are rising quickly. That behavior of surging forward is usually a sign of a dislocation between demand and supply.

Regardless of why it is happening, it is happening:

The US West Texas oil benchmark is now over $80 a barrel which is around $15-20 higher than when we started discussing this potential risk. We think that prices could go higher still and, even if they don't, they should level off on a new and higher plateau around this $80-90 level.

Let us deal with this phenomenon two ways:

• First, what has happened in the recent past and why did it occur?

• Second, what is happening now and more importantly, why does it matter?

Why were oil/gas prices so tranquil over the last 3 months?

As we say frequently, it is always very tough to time the market but we have still been very surprised by how weak energy has been over the last few months.

The reason for our surprise is simply that everything underlying our "oil should go higher" thesis came true. The US economy was not just avoiding recession but in fact it appeared to be strengthening.

Further, Americans were still being hired in very larger numbers and those same workers were also consuming as only red-blooded Americans can: they were driving, flying, consuming and partying like Americans are famous for, only it was happening at a record pace.

This left us puzzled. Being wrong is one thing. That will happen. Being right but not seeing the follow through was peculiar. In the end we decided to try and stay patient. That is always difficult.

The answer for why oil stayed so quiet for so long was probably that oil traders either didn't believe that the strength would continue or that weakness elsewhere in the global economy.

i.e.: China's economy was just not doing what people expected as it emerged from its "Zero Dynamic Covid" lockdowns.

Why does rising energy prices matter so much?

Two big reasons:

1. The first is that falling energy over the last year has been a huge disinflationary force.

2. The second is that these higher oil prices are revealing some of the downsides of Western energy policies.

Falling energy prices are not the only reason that inflation has come down but they have helped tremendously. Conversely, rising energy prices could undo a lot of that progress and so should be watched like a hawk.

That is one way to think about buying energy stocks or the energy sector that we have also mentioned before:

It is a hedge to higher inflation.

That is still true today. And unlike the last time we wrote about this topic, you can now actually use our App to either go overweight the energy sector or heck, you could even exclude these companies if you didn't agree with us or simply do not want to own a lot of oil and gas stocks.

The choice is yours! That is why we built this company: so you can do what you want, for your own reasons and do it with the confidence that it won't break your bank.

The second point is more problematic and not just for the US economy or your portfolio. This chart does a better job than we could ever do:

​The world is using a record amount of oil.​

We have not just erased the Covid-19 induced gap but are now using more oil than ever - an all time global record.

This is obviously terrible news for the climate and underlines a point that we have made from the outset in these pages:

The math on the energy transition and oil usage doesn't add up.

i.e.: under most scenarios we are still going to use lots of energy and even lots of fossil fuels for years to come.

And so trying to limit Western (or Western energy companies) exploration and production needs to be done very precisely and very, very carefully.

Why?

Well for two reasons:

1. The first is, as we are now discovering, is if you limit exploration you get the demand without the supply which leads to higher prices.

2. The second is: if you have high energy prices you risk all sorts of negative externalities. The biggest being high(er) inflation.

The latter isn't happening yet but while $80 a barrel isn't a problem it is starting to get uncomfortable as those filling up their cars this week are about to discover when they realize gas has jumped significantly overnight.

We would suggest that you keep an eye on oil prices and energy stocks. The better they do, the greater the risk grows. And, as we have argued since Easter, there is a downside to a resilient US economy which is it may be harder to get inflation to do what we want which is drop further and then STAY DOWN. It is that latter point that might be unappreciated at the moment. And just because this risk hasn't been realized as of yet doesn't mean it has gone anywhere, rather it is becoming more likely.

Lastly, if you are interested we also have a cool theme based on Big Oil companies.​

You have two options with them. As we mentioned earlier, you could buy them as a hedge to this "higher inflation via energy prices" risk. They will do great if higher energy prices and the associated inflation do come to pass.

Or, if you hate oil companies and all that they stand for and think oil will go down over the long term then you could exclude them from your portfolio.

Western oil companies aren't the only beneficiaries from rising energy prices though....

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Have questions? Care to find out more? Feel free to Download our App (!!) or reach out at contact@pebble.finance or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome.