Last year, when Larry predicted $3.50 for gas at the pump, none of us dreamed it would happen so soon.
And ten days ago, when I sent you my Money and Markets e-mail with the subject “Greatest Energy Crisis of Modern Times,†I had no idea the crisis would explode before Labor Day, as it’s doing right now.
But to me, the biggest shock of all is how quickly the forecast I gave you in that e-mail has come to fruition. Here’s what I wrote:
“The world’s distribution network for gasoline is tight as a drum, vulnerable to even the smallest of disruptions. If there is any MAJOR interruption of supply flows, expect pandemonium at the gas pumps …â€
And here’s what’s actually happening:
First, the nation’s energy distribution network is beginning to sink into chaos.
The port of New Orleans, a major hub for imports, is shut down.
Major pipelines, which snake from the New Orleans region, through the Appalachians and up to the northeast, are backed up.
Major distribution arteries for crude oil, natural gas, gasoline and heating oil are clogged.
Many importers are talking about shifting to other ports, and they may do just that. The problem is it will only serve to spread out the mess more evenly to areas west of the Mississippi and into Canada.
I assume things will return to normal at some point, hopefully sooner than later. But right now, we’re still in the early phases of this crisis — the phase in which bottlenecks are growing rather than shrinking.
When there’s an accident on a busy highway, you see the same phenomenon: Initially, hundreds of motorists, still unaware of what’s going on, continue streaming into the area, merely adding to the confusion.
That’s what’s happening now in our nation’s distribution network for energy and other products. No single central planning authority has gained a firm handle on what’s really going on — let alone how to manage it. Nor have prices risen to a level at which they might visibly suppress demand.
Until at least one of these changes takes place, distribution systems around the nation will continue to back up.
Second, spot shortages are spreading — not just for energy, but for other commodities.
The New York Times describes it as a “national distribution system brought to its knees†— hundreds of barges with grains and other products are stranded in the Mississippi … more than 700,000 bags of coffee are stuck in New Orleans storage … heating oil tanks with no heating oil … consumers beginning to buy more in anticipation of shortages.
Sure, with time, Americans can adapt. They can change their purchasing habits. They can modify their driving habits. Right now, though, there’s no time for that. Everyone has to be somewhere, and they’re going to want all the gas they need to get them there, regardless of the immediate cost.
Result: We now have a head-on collision between:
|
(a) |
Die-hard demand — the “gimme-gas-at-any-price†posture of most American drivers. |
|
(b) |
Virtually non-existent supplies, due to a distribution system that’s broken at key hubs and beginning to choke throughout the nation. |
Third, this collision is literally driving prices through the roof.
On the New York Mercantile Exchange, while the price of oil has held near its all-time highs, the price of unleaded gasoline has blasted off like a rocket.
On Monday, it exploded, slashing cleanly through its mid-August peaks. On Tuesday, it surged by over 40 cents a gallon — in just a matter of hours. And it has continued to surge nearly all week.
This has easily been the worst single price spike since the oil shock of the 1970s.
Naturally, the government isn’t going to just sit there and watch this crisis unfold. They’re going to continue to announce emergency measures which supposedly address the shortages. These announcements, in turn, will temporarily help ease prices a bit, much as they’ve done this morning.
But beware: Any and all government measures that do not address the fundamental problem — under-investment, under-production and over-consumption — are bound to backfire.
Fourth, the shortages and price hikes are just beginning to reach American consumers.
Yesterday, news reports highlighted a gas station in Atlanta charging nearly $6 per gallon for premium gasoline. That was an anomaly and officials promptly wrote it off.
What they can’t write off, however, are the high prices being charged routinely by dozens of other gas stations in the Atlanta area.
They can’t write off the $3.99 per gallon of regular unleaded being charged by Shell stations in Roswell and Sharpsburg … by a Marathon station in Atlanta-West … and by Exxon stations in Woodstock and Atlanta-North.
Nor can they pooh-pooh the $3.95 being charged by the Chevron station in Alpharetta … and many, many more.
Of course, there are also gas stations in the Atlanta suburbs that are charging much less. The trick is finding them when you need them.
Ten days ago, remember the gas shortages I told you about in Hawaii, Alabama and even China? And do you see how those were a sneak preview of what we’re witnessing today? Well, in a very similar way, these near-$4-per-gallon prices you’re seeing in Atlanta today are a sneak preview of what’s ahead nationally in the not-too-distant future.
Fifth, the common stocks of energy companies, especially the energy service company I’ve been highlighting here in Money and Markets, have just busted to new highs.
This week, as you’ll recall, I showed you a series of buying opportunities in the Oil Services HOLDRs exchange-trade fund (OIH). And I told you it was getting ready to blast off again.
That’s precisely what’s happened. OIH is at new highs and currently in another blast-off phase. It reached 121.87 yesterday and closed at 120.98.
But, just as I explained the last time this happened, back in July, it’s not the end of the move.
Far from it. The chain reaction — starting with supply disruptions … then price surges … and then bigger revenues for these companies — has just begun to unfold. So it’s going to take time to fully play itself out and reach a crescendo, even if there are no further supply disruptions this year.
Sixth, the call options on these stocks are going ballistic, and if you choose the right ones, the gains are even steeper.
In his Energy Options Alert, for example, Larry Edelson and our market analyst Scot Galvin recommended a call option on one of these companies on July 26. It’s pretty diversified — involved in exploration, acquisition, development and the exploitation of gas properties. They estimate subscribers paid about $1.40 for it. Now it’s selling for $3.20, a gain of 128%.
Another option they’re tracking puts that one to shame. It surged from $4.40 to $23.50 in a matter of days.
Constructive, Protective and
Pro-Active Steps You
Can Take Immediately
This is no time to watch from the sidelines. You’re in a crisis that can affect you along many dimensions and for many months. You need to take steps that are constructive for the community, protective for your family and pro-active in your investment portfolio:
Step 1. Help the thousands who are stranded, starving, and even dying of thirst. On Sunday night I gave you the information in my emergency e-mail BEFORE the crisis even began. And earlier this week, as the crisis began to unfold, I gave it to you again. Now, as the City of New Orleans plunges into chaos, here it is one last time:
Contact the American Red Cross, which is always on the front lines to provide support during natural disasters. You can donate your time. You can donate in kind. You can even give shares of stock or airline miles. Call 1-800-435-7669. Or visit their website at http://www.redcross.org/donate/donate.html.
Step 2. Save on gas. No, the total amount involved is not going to be nearly as much as you can make in your investments. But it does add up.
For listings of the least (and most) expensive gasoline in your area, check http://www.gasbuddy.com/.
And to compare them to the latest data on the average gas prices nationwide, go to http://www.fuelgaugereport.com/.
Step 3. Get most of your money to safety. I’ve given you my favorite money market funds specialized in short-term U.S. Treasury securities. In case you don’t have those handy, here they are again:
• 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 4. For near double-digit yield and the chance for excellent capital appreciation, allocate some of your funds to Enerplus (ERF), my favorite Canadian royalty trust specialized in energy.
Step 5. To aim for the rapid, triple-digit, limited-risk profits available only through options, consider Larry’s Edelson’s Energy Options Alert. There are only 38 charter memberships left, entitling you to two years for the price of one. I initially thought they’d be sold out by Labor Day. Now, it looks like it could happen sooner.
Just remember that options are for your speculative money — not for your keep-safe funds. When you buy options on stocks, you can lose your entire investment. But you can never lose a penny more. The profit potential, meanwhile, is virtually unlimited.
Good luck and God bless!
Martin
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.
© 2005 by Weiss Research, Inc. All rights reserved.
15430 Endeavour Drive, Jupiter, FL 33478
