President Ronald Reagan was credited as being a major benefactor of the financial services sector, with which he and his chief aides had strong ties. President Bill Clinton’s pet sector was technology, a sector that financed both his campaigns and which was on fire throughout the 1990s.

With President George W. Bush coming to power, our assertion a little more than five years ago was that boom times were coming to the energy industry. The president was closely connected with the sector, as were many of his top aides, including Vice President Dick Cheney, the former CEO of HALLIBURTON (NYSE: HAL).

As it turned out, ENRON’S collapse in late 2001 delayed the payoff, but investors have made it up in manifold ways since then. In fact, even factoring in the selloff which began in May, virtually every type of energy company has reaped record returns in recent years, from penny exploration stocks and Canadian trusts to super oils and oil service companies.

Remarkably, energy stocks have done incredibly well during the past few years, almost entirely because of soaring energy prices. Only a handful of producers have been able to maintain levels of production and reserves, let alone increase them over that stretch.

For one thing, producers as a group have been living in fear of a steep fall in prices from the time oil prices first surged to $30 a barrel in the wake of the Iraq invasion. Moreover, credit raters and Wall Street equity analysts have agreed with them, and punished any company making what they deemed to be a risky investment. In fact, both CHEVRON (NYSE: CVX) and CONOCOPHILLIPS (NYSE: COP) continue to trade at big discounts to other super oil stocks, largely because of their respective acquisitions of UNOCAL and BURLINGTON RESOURCES in the past year.

That bearish attitude on the Street remains pronounced to this day, as investors have sold off oil and gas producer stocks to valuations that would be considered cheap even if oil were trading at $40 a barrel. As a result, with few exceptions, most oil and gas producers are still refraining from making significant investments in new output, despite the fact that oil prices reached a new high this week at more than $75 a barrel.

POINTING THE FINGER

In the minds of some--including members of the US Congress who should know better--oil and gas producers are intentionally holding back capital investment in order to keep energy prices and their profits at high levels. In recent months, they’ve threatened all manner of sanctions against oil companies, particularly super oils, ranging from colossal fines to another windfall profits tax of the kind that failed miserably to stem rising energy prices in the ‘70s, even as it drained needed capital away from the industry.

Super oils, of course, are a pretty appealing target in an election year, particularly given their high visibility, recent record profits and lofty executive salaries. Others hate them because of their consistent opposition to regulating CO2 greenhouse gases that are blamed for global warming, or their support of right-wing social policies in the US.

Super oils’ policies, however, have little or nothing to do with today’s high energy prices. That much is clear to anyone without an emotional stake in the argument, largely because super oil companies control only a shrinking percentage of the globe’s supplies that’s somewhere in the mid-teens.

Gone are the days when big US and European oil firms literally owned and operated the world’s most prolific oilfields. Instead, the biggest supplies are in the hands of national companies or even governments, some of which, like Saudi Arabia, bar the super oils from their closest counsels. Super oils generally still provide technical services and may be allowed some investments in facilities such as refineries. But when it comes to making decisions about increasing or decreasing output, they’re generally out of the loop in most regions.

The current balance of power in oil politics away from super oils is most clearly shown by the relationship between the super oils and Venezuela’s President Hugo Chavez. Even in this hemisphere, the big boys have had to bargain to keep their stakes in the country, at the cost of paying higher royalties to the government. Clearly, Chavez still needs their expertise and is willing to pay up for it. But it’s certainly not a free ride for the companies as some US activists might envision.

The world of oil today isn’t what it was in the ‘50s, when US sources accounted for all of our oil needs. It’s not even what it was in the ‘90s, when imports were rising but the supply/demand balance for black gold was squarely in the hands of consumers.

Rather, the balance of power has shifted dramatically to producers.

And just like during the ‘70s, they’re flexing their muscles.

The US economy may have dodged a bullet this week with the apparent victory of a center-right candidate in the Mexican presidential elections. But even if that result holds up in the recount process, the narrow margin and the political strength of his avowedly leftist opponent are a pretty clear sign the sands are shifting, even in a country that’s historically been a close friend and ally.

In fact, we’ve seen it all before. Back in the ‘70s, President Lopez Portillo tried to use Mexico’s oil leverage to extract a range of conditions from President Jimmy Carter. To his credit, Carter didn’t back down and Portillo wound up leaving a preferential supply deal on the table that would have saved Mexicans a great deal of suffering when oil prices finally crashed in the ‘80s. But the result was still a roiling of energy prices, which could happen again.

If we have to worry about Mexico, you can bet things are a lot worse in other places. And that’s clearly the case with the violence in Nigeria, the continuing diplomatic standoff with Iran, the threat of supply interruptions from what’s predicted to be a wicked and long-lived storm season in the Gulf of Mexico, the turmoil in Iraq, the rise of energy nationalism in Bolivia and Ecuador, the resumption of violence in Chad and similar flare-ups in energy producing nations throughout the developing world.

The fact that Russia’s now considered one of the world’s safest places to get oil--even as the government extracts ever-tougher conditions from foreign investors--really says it all. And the trend is clearly for things to get more unstable in coming years, as the world becomes ever-more reliant on dodgy sources for fuel.

Other people--including, again, Congressmen who do know better--blame the Bush administration for intentionally allowing the oil industry for pushing energy prices higher since it came into office. In fact, the Internet is full of bloggers with their own theories on how this was and is being done, and a good portion of the public seems ready to believe them in the conspiracy.

Admittedly, looking at the record, several administration actions have pushed energy prices markedly higher in recent years. We can start with the war in Iraq, which immediately catapulted oil prices to multi-year highs from which they never backed off as post-invasion violence in that country grew. The bungled coup attempt in Venezuela has immeasurably complicated relations with that country, while giving Chavez political cover to extend his term indefinitely. And while these problems continue to fester, utterly ineffective diplomacy with Iran is further roiling oil markets.

Moreover, the administration has steadfastly opposed any major government-led moves to advance new technology to promote conservation in recent years, such as a massive rollout of hybrid cars. They’ve squashed attempts to increase the fuel efficiency standards for automobiles in the US, with the result that we lag even behind China in that regard. And the major achievement of the energy legislation passed last year is overturning a 1935 law governing who can acquire utility companies.

On the other hand, the Bush administration has been remarkably consistent in its support for letting market forces work in the energy industry. And in the long run, that’s the only thing that ultimately will bring down energy prices.

A high oil price is critical when it comes to increasing conservation and switching to alternative fuels, which is needed to permanently reduce demand. It’s the only thing that will spur the search for the industry’s Holy Grail, a new source of conventional oil and gas reserves on a par with the North Sea find of the ‘70s.

And it’s the only possible catalyst for the greater use of nonconventional fuels like Canadian oil sands and biofuels, which have the ability to reduce dependence on imported oil and natural gas.

The fact that we haven’t yet seen significant conservation, new technology or major discoveries doesn’t mean we won’t ever. It just means that energy price cycles are long-term processes with no silver bullets. The high price environment of the ‘70s didn’t end just because people wanted it to or thought it should. Instead, it took a long painful process of adjustment that lasted several years.

Anyone looking for something different this time around is living in fantasyland.

WHAT’S TO BLAME

So, if both super oils and the Bush administration can’t fairly be blamed, what’s at fault for high energy prices? The answer is two

things: Surging demand that continues to strain global supply and a political premium that’s now built into global oil prices. And both factors are inextricably linked.

The fact that the US has serious rivals in the global oil buying market has been broadcast enough in the media for most to be aware of it. China’s demand gets the most press, but India is rapidly becoming a major market as well. Even big producing nations like Russia and Saudi Arabia are rapidly becoming major consumers, raising questions about just how much will be left to export in coming years.

As long as consumption outpaces the discovery of conventional oil and gas supplies, the supply/demand equation will remain off balanced in favor of producers. That will increase producers’ power to impose a political premium on oil prices, and even natural gas as use of liquefied natural gas (LNG) imports grows in major consuming nations.

This is exactly what happened during the ‘70s, as the Arab world twice held the major consuming nations hostage by embargoing needed supply. And the power to impose a political premium continued to hold until the ‘80s, when consumer nations finally regained the upper hand with a combination of conservation, use of alternatives and new supplies from the North Sea.

Some analysts estimate the political premium built into oil prices is now on the order of as much as $30 to $35 a barrel. In other words, if political tensions around the globe cool, they argue oil should trade at $40 to $45 a barrel rather than current levels in the mid-70s.

Despite the current disordered state of many producer countries, oil’s political premium is certain to ebb and flow in the coming years. If, for example, a real rapprochement or diplomatic breakthrough is reached with Iran or Venezuela, the premium could shrink a bit. A tapering off of violence in Iraq or Nigeria could have a similar impact.

Unfortunately, it’s impossible to say how much political premium there is in global oil markets, or what actions would reduce it by what amount. The key again is that producer nations now have the power in this key and utterly essential commodity market. And as long as they do, there will be a political premium for oil prices to compensate for the risk of supply interruptions.

Greater production of nonconventional fuel sources like bitumen from tar sands and ethanol/biofuels can reduce dependence on energy imports. But they’re also only economic with conventional oil and gas prices are high. Increasing their use won’t bring down prices.

Use of nonconventional fuels could conceivably reduce the political premium on oil and gas, to the extent they replace their use.

Unfortunately, these fuels have one major drawback: By definition they’re always more expensive to produce than conventional oil and gas. Because they’re produced here, they may become economic relative to conventional fuels, if the latter’s political premium rises too high, and as such they may keep a lid on the political premium.

Ironically, if the use of these fuels does become widespread, it’s a safe bet they’ll enhance the profitability of super oils, rather than curtail it. That’s because the supers are the only entities with the financial power to roll out a significant increase in output. Chevron, for example, is spending $500 million to dramatically ramp up production of biofuels at a Texas refinery.

That’s an investment a smaller company can ill afford to make, even in a favorable price environment.

STILL A BULL MARKET

The upshot is energy remains in a long-term bull market. And no amount of political posturing or attempts to punish producers is going to change that.

Those who are waiting for the current political premium in oil prices--and increasingly in natural gas prices due to rising imports--to vanish overnight are going to be waiting for a long time. In fact, the example of the ‘70s bull market shows that only when the supply/demand equation shifts back in favor of consumers will the political premium vanish.

Until that happens, energy prices are going to ebb and flow, but always end each mini-cycle on a higher note. The best course for investors will be to continue to accumulate shares of strong energy companies across the spectrum when they dip, and perhaps sell a bit when share prices have risen parabolically.

My view now is we’re a lot closer to a near-term trough than to a high for energy stocks. Super oils like Chevron and ConocoPhillips trade at single-digit multiples to even the most pessimistic Wall Street earnings estimates. Well-run independents like EOG RESOURCES (NYSE: EOG) are off a third from their highs and more.

Only a handful of big dividend paying Canadian royalty and income trusts and US trusts have avoided big meltdowns so far, as investors have cut them slack for their big income streams. And the weaker of both sectors have crashed and burned. Natural gas producer stocks and energy service companies are also flat on their backs.

In short, energy patch stocks appear to be pricing in both a further decline in natural prices--which are already off more than 60 percent from their highs--as well as a major decline in oil prices.

If one occurs, they shouldn’t suffer much more damage. And if prices do start to rebound, there are going to be some explosive gains.

As I wrote above, the odds of a big decline in the political premium are slim. That leaves a catastrophic economic slump--brought on by an overzealous Federal Reserve--as the primary threat. Anything is possible, but it’s clear we’re a long way from that now.

In any case, energy stocks across the board are already pricing in a lot of bad news that hasn’t happened yet. And in my mind, whenever market sentiment runs that far ahead of reality, there’s an opportunity to load up on high quality stocks.