Profits over Politics.

Anyone who knows me likely knows my opinions on the issues of the day. But rest assured, as I mentioned when I started this blog, I will never place politics over profits. Currently there is one industry where one can make some serious money by playing the political angle. I noted this in a posting earlier this week when I posted some changes in my holdings and that a new holding would become on Monday April 18 my largest position.

The oil industry is on the receiving end of punitive tax and fee treatment, not only in the US, but lately in the United Kingdom. The UK raised the oil industry supplementary charge from 20% to 32% last month. That is on top of the already sizable 26% corporate tax , so that means a combined rate of about 58% on oil companies. Makes me wonder why any oil company would base operations in the UK. Maybe that is why the oil recovery rate in the North Sea is dropping quickly.

In the US we continue to see what is for all intents and purposes the Obama administration led shutdown in Gulf of Mexico oil drilling and not only does that limit current and future supply, but places thousands of workers out of jobs. Add in that many drillers are taking their deep sea drilling platforms to other more friendly areas of the world. Just last month President Obama assured Brazil that oil pumped from their deep sea discoveries would be welcomed in the US. Makes no sense, but that adds to your profit opportunities.

The new discoveries of oil in North Dakota and the huge and growing oil finds in Canada can not get to refineries and into use in the US market since the Obama administration refuses to allow a pipeline to be build from the current terminal in Oklahoma to Texas and Louisiana where refineries are located. Again makes no sense, new pipelines add jobs and help keep down oil prices, but adds to your profit opportunities.

All of these actions and the punitive taxes in the United Kingdom and threatened punitive tax in the US just pushes up prices for current and long term contracts for oil. The unrest in the Middle East also adds a premium on the price of oil.

Monetary policy in the US, lots of deficit spending by the current administration and uncontrolled printing of money by the Federal Reserve also adds a premium to oil prices. Deficit spending puts money in the pockets of many people who go out and buy gas . The continue printing of money inflates the value of oil on the market as more dollars chase limited supply. Oil suppliers across the globe see the dollar declining in value and thus keep oil prices high and pushing higher to earn the same value for more dollars.

One more point here is President Obama has stated that he wants gas at the pump prices to go up. He believes that would encourage less consumption, but that unfortunately that makes prices for goods that must be transported by truck go up as well.

Frankly I do not see any of these policies ending anytime soon and as an investor one would be foolish not to take advantage. Higher oil price per barrel means additional profit for oil drillers and companies who possess oil in the ground.

The only risk to investing in oil currently would be an all out world recession and right now that will not happen as long as the Feds keep printing money. Growth of the economy will be stagnant, but that too works in your favor as stagflation only enhances oil in the ground value. The other risk is for a change in political control and that can not happen until November 2012. So if you invest in oil and want continued and increasing profits in oil one would prefer the current administration to stay on past 2012, one would even prefer Congress to revert to Democratic control which would increase the chances for punitive taxes that would increase at pump prices and add to oil company profits. Out of US oil companies profit even more highly when the US punishes domestic oil, being able the pocket the difference in tax as profits.

Of course somewhere along the current upward trajectory of oil and gas prices the US economy will not be able to handle the higher price and the economy would sink. That risk is there, but current deficit spending keeps that at bay by encouraging out of work people to keep buying high priced gas.

Being no fool here I am willing to profit, and profit handsomely, from the other person doing foolish things. So I would encourage you to highly consider oil company investing. I currently own a significant position in Enerplus (ERF), a Canadian oil driller and supplier. I also will have Monday morning a put option on ERF to build an even larger position should the price decline. They pay a 7% dividend and pay it in monthly installments. They have a large and growing footprint in Canada and the US oil basins. They also are, in my opinion, undervalued. Note that the dividend is taxed 15% Canadian tax before you get it, but that tax can be used against your tax liability with the IRS. What's not to like, low valuation, high dividend, Canadian based company that the current administration can not touch, and a friendly oil driller government in Canada.

Now with all of this said, note as a purchaser of gas at the pump, the current administration is not your friend. But frankly as an oil investor you can more than make up for the increaed gas price with profits from your investments.

Finally if would encourage one, if buying for a long position, to wait for a pullback to initiate a position here. Wait for some market sell-off to buy in. I am doing that with the put option. One note of caution Goldman Sachs, the largest financial brokerage house in the US, suggested that their clients dump their oil based holdings last week. I do not agree with that, but it is info you need to know. Goldman Sachs also talked down municipal bonds all last year, while building positions there. As I said it is smart to take advanatge of foolish moves by the other person.