Mother Nature's Revenge

Last week, I told you about the work stoppages at oil extraction sites in Ecuador, Nigeria and elsewhere. Even if most of the facilities survive, the damage from Katrina will make each of those seem puny by comparison.

I don’t want to downplay how serious those are. But the sum total of the damage they caused to production doesn’t compare to the potential production losses in the wake of Hurricane Katrina.

Some vital facts:

·         The Gulf of Mexico normally pumps about 1.5 million barrels per day of crude oil. That’s the equivalent of nearly ALL the extra capacity that OPEC countries have added in recent months in order to help contain world oil prices.

·         The potential impact on U.S. gasoline production is even greater. While the region produces twenty-five percent of U.S. crude oil, its refiners are responsible for FORTY-FIVE percent of U.S. gasoline. Even if many escape serious damage, most are bound to be plagued by power cuts.

·         Just with the seven refineries in the area that were shut down before Katrina made landfall, America‘s total capacity has already been reduced by nearly one tenth. That alone is over three times the impact of America‘s worst refinery accident this year, the Texas City disaster.

If Saudi Arabia or other OPEC countries had the capacity to temporarily pump more oil, offsetting the lost production, we could get by without major price disruptions. But that’s not going to happen.

Or, if the leading non-OPEC oil exporting countries — Russia, Norway, Mexico and the United Kingdom — could jump in, that could also ease the pain. But that’s also not going to happen. This year, non-OPEC countries are set to pump only 675,000 barrels per day of fresh oil, only about half as much as they added last year.

The Only Immediate “Solution”
Is Not a Solution at ALL

Exactly three weeks from today, on September 19, OPEC will be meeting to try and figure this out. But they’ve run out of solutions.

In fact, practically the only “solution” people are talking about right now is a pending decision by President Bush to release some of the U.S. strategic petroleum reserves.

But there’s a very serious flaw embedded in those hopes: The nation’s strategic reserves have nothing to do with production. No matter how many millions of barrels are released, it does nothing to restore the FLOW of oil where it counts — from the source.

Hopes for the release of strategic reserves may have helped contain oil prices momentarily. But the smart money will immediately pounce on any price decline and turn it into a buying opportunity, driving oil prices to new highs.

Mother Nature’s Revenge

In North America, Katrina is already the 11th storm of the Atlantic hurricane season. That’s seven more than usual for this time of year. We know because we count them every year, one by one.

Thirteen years ago, we were lucky. Andrew passed us by and destroyed Homestead instead.

Last year, we were not so lucky.

On September 5th, Hurricane Frances hit our Weiss School, ripping off a section of the roof. Twenty-two days later, Hurricane Jeanne hit again, ripping off a second section of the roof.

Then a leading “professional” roofing company came. They ripped off a third section of the roof. They carelessly left it open over the weekend. And they caused even greater damage than Frances and Jeanne combined.

So I can tell you flatly, from personal experience: KATRINA IS NOT AN ISOLATED EVENT.

The publishers of Sicheres Geld, the German edition of my Safe Money Report, agree. I met them in Baltimore just a few days ago, and they told me about what’s happening in Europe.

Right now, for example, in Austria, Germany, Bulgaria, Romania and Switzerland, vast areas are under water and at least 43 are dead.

Portugal and Spain are a tinderbox, with 11 new fires flaring, despite weeks of desperate firefighting.

And we can see similar patterns in South America, Africa and Asia.

In southern Brazil, for example, my wife’s family farm is so dry, tropical fruit trees — which my father-in-law planted before we were married — are now dying.

But that’s nothing in comparison to what’s happening in Niger, West Africa. Back in the 1970s, my brother, Joe, and his family lived in Niamey, the capital city.

The region was poor but prospering, and the Sahara desert was at a safe distance, miles to the north. Now, its sands have enveloped the entire region, Niger has been plunged into famine, and Joe’s friends, once among the wealthy, have been impoverished.

Before our son Anthony was born, Elisabeth and I lived in Japan for two years. But in those days, all we and our host family worried about was the occasional tremor. Now, their primary concern is the same one we have here in South Florida: storms. They worry of them striking the archipelago with greater fury and greater frequency than anyone can remember.

Never before in my lifetime have I seen so many climactic climate distortions! And never before could I have dreamed that they’d leap from the impartial, distant nightly news to my personal, everyday life!

Swiss Re Warned Us About
This Over One Year Ago.
But No One Listened.

It was one year and five months ago — in March 2004.

That’s when Swiss Re, the world’s second-largest reinsurer, warned us this was going to happen.

Swiss Re is not run by radical environmentalists. Nor is it a company prone to doomsday forecasts. It’s one of the most respected and well established financial institutions in the world. But their conclusions are shocking nonetheless.

Here are the main ones:

·         The cost of natural disasters, aggravated by global warming, threatens to spiral out of control, forcing the human race into a catastrophe of its own making.

·         Altered weather patterns are emerging as a security threat that could be far greater than the threat of terrorism.

·         The economic costs could double to $150 billion per year in ten years, hitting insurers with $30-$40 billion in claims.

·         The situation could careen out of control. Natural and man-made changes could accelerate to such a point that it will become impossible to adapt our socio-economic systems in time.

·         Global warming will trigger increasingly frequent and violent hurricanes, heat waves, flooding, tornadoes, and cyclones while other areas slip into cold or drought.

At the time, their words were ignored, even laughed at. Now, those same words are echoing loudly in the labyrinths of power.

For many, especially those with an ax to grind, it’s often too easy to point to global warming as the root of all evils. I wish it were that simple. It isn’t.

For others, it’s also been too easy to dismiss global warming as something you and I need never worry about. Again, I wish it were that simple. It’s anything but.

Indeed, for many years, scientists had hard data proving that the atmosphere in the tropics was not warming and might even be cooling down.

This data was pivotal. It was the single most important basis for debunking environmentalists who blamed hurricanes, droughts and other weather anomalies on global warming.

But just last month, some of the same scientists who previously were debunking global warming theories, were now recanting.

Reason: They discovered that the pivotal data they were relying on was flat wrong.

It seems that the satellite taking regular temperature readings of the atmosphere had drifted down from its planned orbit.

So instead of measuring the atmospheric temperature during the day, the timing of the readings was shifting gradually toward the night. That made it seem like the atmosphere was cooling, when it was actually heating up.

Hard to believe, isn’t it? But one, small, technical error in outer space has had a dramatic, devastating impact on our life, lulling us into believing that global warming was either too close to a fantasy or too far away in time.

Now, suddenly, even some of the most skeptical of scientists, previously lined up against some of the alarmist of environmentalists, are beginning to acknowledge that:

·         Global warming is a reality. The earth is heating up.

·         No one can prove conclusively whether it’s a naturally occurring phenomenon, man made, or some combination of both.

·         Regardless of what’s causing it, global warming could at least partially be responsible for changes in weather patterns, which, in turn, are related to far more severe droughts and storms.

·         Much more evidence is needed to connect all the dots. But by the time we have that evidence in hand, it could be too late to head off greater disasters.

All this means damage to crops, disruptions to shipping, and reductions to supplies of nearly every commodity imaginable.

Some of these disruptions are man made. Some are not. In either case, the net effect is the same: New surges coming in the price of oil and energy … industrial metals and precious metals … meats and grains … coffee and sugar … lumber and paper.

My Recommendations

Follow these steps:

Step 1. Reduce your exposure to most stocks and bonds. There are exceptions. But you must choose them very carefully.

Step 2. Move most of your money out of harm’s way. My first choice is U.S. Treasury bills. You can buy them directly from the U.S. Treasury Department through their Treasury Direct program. Or you can use a money market fund that invests exclusively in short-term Treasuries and equivalent such as

• American Century Capital Preservation Fund (CPFXX; 800-345-2021)
• Dreyfus 100% U.S. Treasury Fund (DUSXX; 800-645-6561)
• Fidelity Spartan U.S. Treasury Fund (FDLXX; 800-544-8888)
• Vanguard Treasury MMF (VMPXX; 800-662-7447)
• Weiss Treasury Only Money Fund, (WEOXX; 800-814-3045)

Step 3. Allocate a good chunk of your portfolio to “contra-dollar” investments — those that are likely to go up when the dollar goes down. (For more details, see the “Mr. Conservative” portfolio in the Safe Money Report.)

Step 4. That contra-dollar sector of your portfolio should now include a substantial allocation to energy investments. One of my favorites: Enerplus, which has consistently delivered near double-digit dividend yields PLUS double-digit capital appreciation.

Step 5. If you want to be somewhat more aggressive, look at energy service companies, such as those contained in the Oil Services HOLDRs exchange-traded fund. That’s one of Larry’s specialties in his Real Wealth Report.

Step 6. The most aggressive — but still prudent — approach is with call options on energy stocks. Last night, I told you Larry had only 135 charter memberships available in his Energy Options Alert. Now we’re down to 121.

No matter what, please stay safe.

Good luck and God bless!

Martin