The result was a spike in oil well north of $70 per barrel and a surge in natural gas prices past $15 per million Btu (MMBtu). As winter approached and the mercury dropped, speculation of $20 or better was rampant and gas surged again to its autumn highs.

Then came record high temperatures in January for much of the US, followed by an exceedingly mild February. At the same time, Gulf producers were working over time to get their output to market to take advantage of the high prices. The result: record inventory builds for natural gas and, ultimately, the steepest price drop since the aftermath of the Enron crisis. Today, natural gas is back roughly where it traded a year ago, as if the last 12 months had never happened.

Typically, such a move in gas would have been mirrored by a move in oil. Technological advance has made oil and gas nearly perfect substitutes in industry and power generation, allowing users to substitute one for the other. It stands to reason that prices move together.

This time, however, black gold has stubbornly refused to follow gas lower. The reason: political risk. Oil supplies are stretched thin globally and the risk of a major disruption has grown dramatically in several major producing nations. The thwarted attack on a major Saudi facility in February was just one of several major threats to wells around the world, for example West Africa.

Welcome to the new era of energy prices, where North America's natural gas supplies are stretched so thin that a hot summer, a cold winter or major storm can set off a dramatic spike to new all-time highs in a matter of weeks-or where a mild winter/summer can trigger the kind of price decline that used to only occur during a major economic collapse. Here oil and gas prices don't necessarily track each other, and even the price of electricity in many markets is constantly in a violent flux. Power in many states is set to track the price of the natural gas, the fuel for which the vast majority of plants built in the last decade were designed.

The good news for investors is that oil and gas producers-particularly Canadian royalty trusts that produce gas-are going to make a lot of money in coming years. The primary reason is that, despite recent price fluctuations, all the fundamental underpinnings of the past seven years' energy price surge are still in place.

We haven't seen anything close to the kind of conservation effort or move to alternative energies that took place in the 1970s and '80s and ultimately ended that energy bull market. In fact, most people still seem to take every drop in prices as an excuse to go right back to sleep.

Last year we saw oil and gas producers make a serious effort to boost production for the first time. Yet there were no new major discoveries. Of the super majors, only ExxonMobil actually replaced the reserves it produced from in 2005. Chevron boosted reserves only thanks to its purchase of Unocal, while ConocoPhillips did so because of its stake in Russia's Lukoil.

There's no hint of a future conventional reserves bonanza approaching the magnitude of the North Sea in the '70s. And the only companies posting significant production growth from their reserves in 2005 were relative small companies, like Southwestern Energy, which have little real impact on global supplies.

As for talk about a global recession, for every bit of evidence suggesting global growth is slowing, there's another broadcasting loud and clear that consumers keep spending, factories continue pumping out products, banks are lending money, people are building houses and businesses are hiring people.

In short, we've seen none of the factors that crunched demand and pushed up supply in the '70s and early '80s to end that energy bull market. In fact, the ongoing drop in natural gas prices is likely to have precisely the opposite effect, discouraging companies from aggressive development (most won't need much convincing) and encouraging consumers to use rather than conserve energy.

Unless there's a permanent change in underlying demand and supply fundamentals, it's hard to see what's going to hold back gas and oil prices long term. The near term, however, is an entirely different matter.

While I discount speculation that energy prices have topped out for the cycle, it's indisputable that prices of energy investments across the board are slipping, with the exception of oil prices. In fact, there's a lot of momentum right now for prices to head even lower.

Many investors I talk to say they believe in energy for the long haul and don't care about the short term. Unfortunately, energy bull markets are fundamentally different animals than bull markets in stocks, such as we saw during the '90s. It boils down to volatility:

The peaks and valleys of an energy bull market are far more severe.

If you happen to buy at a peak, it can take a long time to come out of the valley to get back into the black. No matter how bullish energy may look for the long haul, it does pay to pull in your horns at times.

The Truth About Oil And Gas Trusts

Even if oil and gas went back to their late '90s lows of $10 a barrel and less than $2 per MMBtu, respectively, ExxonMobil would still pay its dividend, maintain its AAA credit rating and have plenty of money left over to buy whatever oil and gas reserves it wanted.

The story, unfortunately, would be far different for Canadian oil and gas producing trusts. A handful of the strongest-including ARC Energy (AET.UN, AETUF), Enerplus (ERF.UN, NYSE: ERF), Penn West (PWT.UN, PWTFF) and Vermilion Energy (VET.UN, VETMF)-would be able to run their businesses, but even they wouldn't be able to maintain their distributions at current levels.

As the oldest and strongest of the trusts, Enerplus was obviously not in danger of going out of business during this time, despite extreme volatility in oil and gas prices and some major lows.

But its share price did quite a few flips and twists. And those who bought on the oil spike in autumn 1990-triggered by Saddam Hussein's invasion of Kuwait-had to wait until the end of 2003 to get back into the black. In fact, at one point in the late '90s, they would have been down nearly 75 percent.

If even the biggest and best trusts can get walloped like this, the vast majority of trusts would fare far worse. In fact, most would find it impossible to survive, let alone pay anything close to current dividend levels. The reason: Oil and gas producing trusts make their money from selling oil and gas. There is literally nothing else to support them. If oil and gas prices fall, so will their cash flow and they'll have to either stop development or cut distributions.

In the case of the weakest and smallest, distributions would be jettisoned quickly in order to save capital. But given the recent rise in operating costs, it wouldn't be long before they'd have no choice but to sell themselves at any price or else close their doors, wiping out shareholders.

Happily, only a real end to the energy bull market would pull oil and gas prices back to late '90s levels. And we won't see that until there's a lot more conservation, alternatives, new supplies of conventional reserves-oil sands and switch grass ethanol don't count because they need high energy prices to be economic-and probably a major demand-killing global recession.

While we can rule out such a catastrophic decline, we do need to be prepared for a greater drop in energy prices in the coming months.

That means taking another hard look at the oil and gas trusts you own and asking: Are these the trusts you'd want to own if energy prices did slip further?

The Case Against Canadian Trusts
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