Welcome to my latest video interview. The article below is a condensed transcript.

The oil and gas industry occupies center stage in the financial world, so now’s a good time for me to pose questions to my colleague Robert Rapier, a long-time expert in energy. Robert is the chief investment strategist of our premium publications, Utility Forecaster and Rapier’s Income Accelerator. My questions are in bold. (The video contains additional details and charts.)

Crude oil prices, and accordingly gasoline prices, have been soaring. We’re hearing a lot of falsehoods and myths about the reasons for skyrocketing energy prices. Set us straight. What are the real reasons?

Just before the COVID-19 pandemic, U.S. oil production hit an all-time high of about 13 million barrels per day (BPD). As the pandemic unfolded, demand for oil collapsed, and production followed. By May 2020, oil production had dropped by more than 3 million BPD to 9.7 million BPD.

When the pandemic crushed oil demand in 2020, some oil companies went out of business. Some small stripper wells, which account for a respectable amount of U.S. oil production, were permanently capped because of the bleak outlook. Some workers left the oil industry. As people went back to work, demand began to bounce back, but production lagged.

Following the production collapse of 2020, the U.S. has been playing catch up as demand recovered. Rising oil prices, in response to insufficient supplies, are the predominant reason for the surge in gasoline prices.

What will it take to bring down crude oil prices and when might that start to happen?

We are already getting some relief from the spike that happened following the ban on Russian imports. That was never sustainable because those barrels will find a home.

However, to find relief from the kind of prices we have seen over the past year, it’s just going to require a combination of more drilling and more conservation. U.S. drilling rigs are up 60% over the past year, but it takes some time for that to translate to production.

Crude oil tends to get most of the attention, but let’s discuss natural gas. The price of natural gas also has been rising, which is a particularly acute problem for Europe. What’s driving natural gas prices right now?

Russian gas coming out of the global mix is a far bigger problem than the loss of Russian oil, because it isn’t as easy to redirect those supplies. The U.S. can get some additional natural gas into Europe, although there are logistical bottlenecks. But that extra demand is helping drive up natural gas prices.

The other factor is that a lot of natural gas is a byproduct of oil production, and therefore natural gas supplies fell when oil supplies fell. That helped drive prices higher.

As oil and gas prices spike, energy-linked investments have been thriving. But generally, they’ve gotten pricey. Are there still pockets of value in the energy sector that investors should currently consider?

I have voiced concern about the lofty heights of oil producers. However, the midstream sector has a lot more value. I will add that oil producers recently sold off as oil prices fell back below $100/bbl.

I’m seeing a lot more investment value in the energy sector than there was a month ago. And as I said, the midstream sector looks particularly appealing.

You’re also an expert in the utilities sector, a safe haven favored by conservative income investors. How are these energy trends affecting utilities stocks?

The biggest factor there is utilities that are dependent on natural gas. A lot of electric utilities have switched from coal to natural gas, and spiking gas prices has hurt them.

Natural gas utilities may also be sensitive to gas price spikes, as it is sometimes difficult to maintain margins in an environment where prices are rising. However, any natural gas utilities that also have some exposure to natural gas production should thrive in this climate.

The Federal Reserve has started its tightening cycle. What are the ramifications for utilities stocks?

There will be some competition between utilities and interest-bearing investment vehicles. We may see some outflows from the utility sector into bonds, for example. Utilities are also capital intensive to operate. Anytime interest rates are rising, it increases the cost of business for utilities.

What are your favorite inflation hedges?

My personal favorite has always been energy stocks. They have been one of the most reliable inflation hedges

Again, some of these energy stocks are overpriced right now, so you should watch for pullbacks in oil prices, which would make them more reasonably priced. But then again, if there’s a pullback in oil prices, inflation will diminish. Energy prices have been the major driver of inflation over the last year.

Editor’s Note: To hedge against inflation, your portfolio also needs gold. The value of gold tends to increase as the purchasing power of the dollar declines. My preferred way to profit from increases in gold prices is through small-cap miners that can put corporate operating leverage to work.

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John Persinos is the editorial director of Investing Daily.

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