Bernanke’s comments were in stark contrast to the usually opaque pronouncements of his predecessor, and the general reaction was one of derision. But even Alan Greenspan weighed in this week on the energy price question, charging that they presented a threat to low inflation and economic growth.

With so much brimming concern about commodity prices and inflation from the country’s leading monetary authorities, it’s intensely ironic that the market has chosen now to become deathly worried about the exact opposite--a decline of epic proportions, particularly in the price of oil. For example, companies like CHEVRON (NYSE: CVX) and CONOCOPHILLIPS (NYSE: COP) are financially stronger than most countries. But they trade at single-digit multiples even to the most pessimistic forecasts for their future earnings.

Energy stocks across the board were hit hard this week on concerns that the political premium in oil prices was about to fall sharply.

Especially wrecked have been oil service stocks, the companies that provide on-site services, logistics and rigs to oil and gas producers. These stocks are considered especially leveraged to energy prices, since profits are determined by the drilling plans of producers. That makes their performance an excellent indicator of investors’ view of where energy prices are headed.

The broad-based Philadelphia Oil Service Index, or OSX, is now down nearly 20 percent from its highs this year. Moreover, open interest on the index’ put options (bets these stocks will fall) is more than twice that of call options (bets they’ll rise). The pessimism is thick enough to cut with a knife, both for oil service stocks and for energy prices as well.

At the heart of the bears’ case is the buildup in inventories over the past several months. Storage facilities have now stock piled especially large quantities of oil, gasoline, natural gas and other derivative products. That’s in large part a consequence of very weak demand this winter, which was caused by a combination of record mild weather and high prices in the wake of hurricanes Katrina and Rita that encouraged conservation.

The stockpiles have continued to mount throughout the spring season, traditionally a period of very slack demand. That’s made the market for all these products very dependent on strong summer demand to soak up the supply in time for the slack fall season. If not, the supply/demand equation will remain strongly in favor of another dip in prices.

Natural gas prices have already come down by nearly two-thirds from the post-hurricane highs, with most of the decline coming in the first quarter. As a result, the fuel has become very cheap in terms of energy produced, relative to oil. It also remains the primary fuel for the peaking plants that are needed to meet demand for electricity. Gas-fired capacity is likely to be particularly important for the Southwest in coming months, where units of the giant Palo Verde nuclear plant have been idled for long stretches.

As long as oil prices remain high, therefore, natural gas isn’t likely to fall much further from where it is now. In fact, any burst of hot weather that pushes up demand for power, and therefore natural gas, is likely to trigger a mighty rebound. And that’s not including the potential for supply disruptions as hurricane season gets under way.

Should oil prices fall, however, it could be a far different story, and we could well see natural gas break to $5 or lower per million British thermal units (MMBtu). In fact, oil prices the key to the equation for all energy investments. If they hold near current levels, the selloff we’re seeing now in energy stocks is sooner or later going to reverse with a vengeance. If they fall, there could well be more damage ahead, despite the very low valuations in the sector.

The outcome for oil in the coming months boils down to two things: geopolitical concerns particularly in oil producing nations, and how the current round of monetary tightening by the Federal Reserve and other central banks winds up impacting the global economy.

A lessening of political tensions is by far the more benign way to bring down prices, and there’s cause for at least some optimism. The apparent death of the chief Al Qaeda operative in Iraq has again revived hopes that the country may be ready to return to order, and begin unlocking its massive oil wealth. Others are encouraged by the victory of Alan Garcia to lead Peru over an ally of Venezuelan President Hugo Chavez, on the grounds that it may mark a peak of the latter’s influence in the region. And still others are hopeful about the compromise in the works between the Bush administration and Iran over the latter’s alleged plans to produce nuclear weapons.

These developments may have initially had an impact on the oil market this week, and they could well signal a move toward lessened global tensions regarding oil. But those expecting some kind of waterfall decline on the news have been sadly disappointed, implying that the political premium for energy is not only high, but extremely entrenched.

In other words, it’s going to take more than a few favorable developments to reduce oil’s political risk premium in any meaningful way. And as the brazen roundup and kidnapping of some 50 Iraqis in downtown Baghdad by phony policemen just a few days ago indicates, there’s still plenty of bad news to justify a steep political premium.

Chavez’ Venezuela, for example, has become increasingly militaristic of late, holding Cuban-style drills to “prepare the people” for fighting off a prospective US military invasion of the country. And with leftists leading polls in upcoming Mexican elections, he may soon have a like-minded and equally oil-rich neighbor.

Eventually, the political premium backing oil prices will diminish, as has been the case with every energy price cycle. But as the example of the last bull market in the 1970s clearly showed, these premiums are only possible because market power lies in the hands of producers, rather than consumers of oil. Simply, global supplies are far tighter than in the 1990s, making every disruption in an area of major production a threat to send prices surging. And that’s not likely to change, particularly with Americans fighting in Iraq and provoking the ire of the public in virtually every Middle East and Islamic nation--where most of the world’s oil supply currently is.

That leaves the more malign way oil prices can come down: A severe slowdown in the global economy. Unfortunately, if the world’s stock markets are leading indicators for growth, then this is becoming a major risk. Emerging market after emerging market around the globe has tumbled, and the selling has spread to the most established markets as well like Japan.

The good news is we’re not there yet. And as growth continues to chug ahead in most countries, oil prices aren’t going to come down in a meaningful way either. Stocks, however, have already reacted to the trend, which is definitely moving in that direction given central bank actions.

HOW TO PLAY IT

The most important thing to remember about energy is that current action has nothing to do with the long-term future of energy prices.

The energy bull market of the 1970s didn’t end until the world (Americans in particular) made a dramatic switch to smaller cars, abandoning the gas guzzlers that dominated the ‘50s and ‘60s.

We also saw a massive move to nuclear power for generate electricity, which reduced oil demand for that purpose. The discovery of the North Sea oil and gas bonanza broke the power of OPEC on supply by creating a powerful new source of conventional oil and gas supplies. Finally, we saw a global recession brought on by dramatic action by central banks to crush then double-digit inflation, which resulted in the collapse of demand in many countries, particularly in the developing world.

All commodity price cycles ebb and flow. Back in the ‘70s, many intelligent people forecast permanent shortages of commodities, particularly energy. They were proven wrong, but only after the global economy including the US made historic changes that were both slow and painful.

Just as there was no magic bullet that brought down energy prices painlessly the last time around, there’s not one this time either.

Instead, we’re going to have to see at least some combination of the factors that ended the ‘70s bull market, before we can have a reasonable expectation for the end of this energy bull trend that began with oil scraping $10 per barrel in the late ‘90s.

At this point, there’s little evidence people are switching to cars that consume appreciably less fuel. New nuclear plants are at least a decade off in the US. And even though wind power is surging as a fuel source, it’s not even beginning to replace dependence on the 100 gigawatts of natural gas-fired electricity production capacity that was built in the late ‘90s and early in the 21st century.

As for new sources of energy, the only thing significant is from unconventional supplies, particularly Canadian oil sands and federally subsidized ethanol. As I pointed out last week, however, neither is economic unless conventional oil and gas is trading at very high levels. Any major drop in oil and gas prices will force producers to cut output. And the more important they become for energy supplies, the greater impact cutting output will have on pushing energy prices back up.

Only significant new conventional supplies of oil and gas can bring down prices permanently. And we haven’t seen one emerge since the North Sea did back in the ‘70s.

A crushing global recession is, unfortunately, a greater possibility. But without conservation, alternatives and new supplies, a decline in prices due to slower growth will always reverse by increasing demand and ultimately lead to higher highs.

The bottom line is that the long-term picture for energy has not changed. That means, despite the volatility we’re seeing now, the wise course for most investors is going to be to hold on to positions and wait it out. In fact, it’s not a bad idea to pick up high-quality plays as they come down.

There are a few pockets of vulnerability that should be avoided. One is Canadian and US oil and gas royalty trusts, which seem to have acquired a reputation of being bulletproof, when actually the precise opposite is true. The most gas dependent are already cutting dividends, and the oil dependent will do the same if black gold takes even a temporary respite from current levels.

That’s to be expected in these investments. The problem is many investors are holding under the false impression that distributions can hold up even if energy prices fall, and they’re in for a rude awakening. If they panic--as many did with the tanker stocks last year--the results could be ugly.

I would also avoid any of the heavily promoted penny energy stocks.

Regardless of what hook they’re using, they’re trading on hype alone and will crash and burn if there’s even a temporary shift in market psychology. In fact, I’d avoid any energy company that’s not earning money now.

A portfolio of solid, yield-generating energy stocks remains one of the best investments you can have for coming years. It won’t always go up. But in an environment of tight energy supplies that will only alleviate after the world has made painful adjustments, downside is temporary and every cycle will only end higher.

That’s often hard to remember in a volatile market where many investors’ attention spans are no longer than the next item on CNBC. And no one likes to see red ink in their portfolios, or to see a juicy profit erode. The time to take money off the table, however, is after prices have surged, not when they’ve already come off hard.

As long as you stick with quality, your portfolio will weather whatever the market winds up throwing at it now. And you’ll be in there for the inevitable recovery.