The flow of money into gold-related funds is, at least in part, driven by good intentions – hedging against dollar debasement, inflation, and systemic risk.  As investors drive the price of gold to record levels, though, they are overlooking an equally compelling commodity hedge, one that the Beverly Hillbillies once dubbed “black gold, Texas tea” – oil, that is.

The case for oil is rooted in its scarcity, which, unlike gold’s, is accelerating because of its commercial use.  Peak oil is the working hypothesis, and it states that the rate of oil extraction eventually reaches a maximum level, after which it recedes into terminal decline as dwindling reserves become increasingly difficult to tap.

Peak oil has been repeatedly observed at the level of individual oil wells and, as logic then dictates, at the country level, where, for example, US production peaked in 1970.  

Nonetheless, peak oil has its disbelievers and detractors; if you are one of them, you are unlikely to agree with what you will read below.   You might, however, find comforting voices in the mainstream media.  In a November 16 New York Times section devoted to energy issues, for example, Clifford Krauss wrote, “Energy experts now predict decades of residential and commercial power at reasonable prices. Simply put, the world of energy has once again been turned upside down.”

Such claims are “unforgivable,” according to Dick Vodra.  Vodra, who is President of Worldview Two Planning in McLean, VA, is perhaps the leading authority on energy issues in the advisory community.    I spoke with him last week.

With Vodra’s help, I will review the arguments pointing to an inevitable decline in oil supply and the corresponding rise in oil prices, and I will then turn to the role of oil-related investments in one’s asset allocation.