On Monday, Martin told about Mother Nature’s revenge. Now, let me tell you about Mother Earth’s inflation.
For decades, we’ve been flattening millions of square miles of the planet’s surface, building new concrete jungles at an ever faster pace, sucking precious blood out of the earth’s veins.
Now we’re going to have to start paying the price — through greater scarcity and more inflation.
Watching the dreadful, unfortunate pictures come in from Katrina this week, I can’t help but remember that enduring reality. And I can’t help but recognize the inevitability of inflation — both past and future.
Around the time my parents got married, a gallon of gasoline at full-service stations cost 18 cents. Today it’s $2.60 for self-service: That’s at least 1,344% inflation.
In 1959, when I was in grade school, the average price of a new house was $14,900; today it’s $274,000 — 1,739% inflation.
A postage stamp in the 1950s cost 3 cents; today, it’s 37 cents — 1,133% inflation.
A dental crown used to cost $40; I just went to the dentist and paid $900, 2,150% inflation.
In 2003, copper cost $.68 per pound; today it’s $1.62 per pound. That’s a 138% increase — in just two years.
We could fill a 10,000-page encyclopedia with examples of inflation. And we’d still have to leave many blank pages for new examples of future inflation, as prices escalate even higher.
Among the immediate reasons:
Katrina’s Damage to Oil and Gas:
Many Times Worse Than Ivan’s
Look at the latest commentary just in from an oil industry insider …
“There are MANY production platforms missing (as in not visible from the air). This means they have been totally lost. I am talking about tens of platforms, not single digit numbers. Each platform can have from 4 to 100+ wells on it. Most larger ones have 20-30 wells in this area, with numerous caisson wells. They are on their sides, on the bottom of the gulf — they will likely be left as reef material, provided we can get permission.
“90% of the stand-alone wells in the storm path are bent over, rendering them a total loss … There are more or less 15 HUBS missing.
“In short … the damage numbers you have gotten from the government and analysts are, in my opinion, much too low. We are looking at YEARS to return to the production levels we had prior to the storm.”
The implications are clear:
Katrina’s damage to oil and gas is MANY times worse than Ivan’s.
Katrina has opened up a great wound in our nation’s oil and gas industry that will not heal for a long time.
Katrina is going to continue to drive energy prices higher, along with all the other reasons I’ve been reciting: Hardly any oil left in the world … soaring demand … and our blatant failure to invest in alternative energies when we had the chance. Now we’re going to pay the price, dearly.
Why The Oil Market Is a Skelton Closet
Full Of New Shocks and Surprises
Here are just a few of the bullish surprises I see coming in the energy markets …
Surprise #1. Companies that are hedging against falling oil prices will lose out.
You’d think with sky-high oil prices, ALL oil companies would be making money hand over fist. You could throw darts at a list of energy companies and make a killing no matter which one you hit.
Companies that have hedged their oil — by selling off their future oil production at much lower prices — will NOT do well. In falling or stable markets, that may be a prudent strategy.
But when prices rise, as they have for months, companies that have hedged have given up their extra revenues they could have collected from rising oil prices. That’s bad enough. If, on top of that, their costs are rising, they could wind up in the red.
These companies could even end up contributing to the massive energy crisis that’s developing.
Reason: They stand to lose so much money on their hedging operations that they won’t have the capital for new exploration, or to invest in new technologies that can help increase refining and production.
Surprise #2. Expect a slew of announcements from companies who have overestimated their oil and gas reserves.
Last year Shell Oil already admitted that it overestimated its reserves by nearly 5.5 BILLION barrels. El Paso Corp. slashed its reserve estimates by 43%. And Forest Oil slashed its reserves by 83%.
I doubt these were isolated incidents. As time goes on, I suspect we’ll hear that other companies don’t have as much oil as they say they do.
This may be temporarily bearish for the particular company that admits an overstatement. But it’s long-term bullish for oil — and for the industry — as a whole. Less supply triggers higher prices, and higher prices bring higher revenues.
Surprise #3. OPEC countries themselves will admit they don’t have as much oil as they currently say they do.
We’re already seeing the beginning of this. Early this year — before Katrina — OPEC President Purnomo Yusgiantoro started begging the
to release some of its Strategic Petroleum Reserves.
Question: If OPEC has so much oil, why would it ask the
to release strategic oil reserves onto the market?
Answer: OPEC doesn’t have nearly as much as it says, and it’s already pumping oil at full capacity.
Question: Despite the obvious devastation caused by Katrina, why did President Bush hesitate to release some of the reserves?
Answer: Because the reserves are very limited. Even if Washington released every single drop of oil in its reserves, it would barely be enough to last the
a meager 35 days!
Overall, the world’s oil shortages are far more severe than virtually anyone in the industry is willing to admit. In this situation, you should treat any price dips in oil and gas as mere temporary weakness, and as opportunities to BUY.
That’s what subscribers to my Energy Options Alert have been doing. In just the last few weeks they’ve booked gains like 48% … 52% … and 161%, in less than two weeks.
During the last price dip in oil, just before Katrina struck, I was able to get them into some new positions that are now showing gains of as much as 89%.
Dollar Ready to Split Apart — Again!
When I was in school, physics was not my favorite subject. I was more interested in history, social sciences, finance, accounting, and other classes that wove together the study of man with the economy and the markets.
But despite my dislike of physics, I did manage to take a few nuggets out of Physics 101. One of them is the power of the atom. As long as its structure stays intact, it’s nature’s building block for all things. But once it’s shattered, the consequences are explosive, and potentially, disastrous.
Right now, I think we have a similar situation in the financial markets. I’m talking about the value of the U.S. dollar.
The U.S. dollar is the nucleus of an atom. And rotating around the nucleus are electrons — stocks, bonds and other financial assets that are denominated in dollars.
They are all dependent in some way upon the value of the dollar remaining stable. If the atom is shattered, there are bound to be vast implications for other financial markets.
This week, the nucleus — the U.S. dollar — started splitting apart again at an accelerated pace.
The dollar rallied steadily from March through July. But then, the rally ran out of steam. And in recent weeks, it has begun to reverse.
Now, the greenback has broken below a critical uptrend line … retested it from below … and, most recently … has started plunging anew.
This is a very bearish chart formation for the dollar. If the dollar is starting to split apart again, as I expect it will, it means even higher energy prices. Reason: Oil and gas are priced in dollars.
I can’t help but think that a major financial crisis is brewing. Oil and gas prices are soaring, and will continue higher. Real estate prices are starting to soften and could collapse. The dollar is sliding and is about to plunge. Stocks are bouncing around like crazy, indicating a large move — probably down — is waiting in the wings.
Batten down the hatches. Your best safe havens: Keep the bulk of your funds in safe, short-term Treasury bills or the equivalent money market fund.
For your investment capital allocated to the stock market, hold or buy only the strongest, least vulnerable stocks. Namely, gold, oil, and other natural resource companies.
For your speculative capital, remember, I have only 60 Charter Memberships remaining in Energy Options Alert. They’ll likely be sold out by Labor Day at the latest. To become a Charter Member and get your second year free, be sure to join now.
Best wishes for your health and wealth,
Larry Edelson
Editor, Real Wealth Report
Energy Options Alert
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
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