Oil is up AGAIN today, blasting above the $66 level and within merely $1 of a new all-time record high.
Clearly, we are on the verge of the greatest energy crisis of modern times.
But this energy crisis is not just a repeat of the 1970s Arab oil embargo. Nor is it strictly the aftershock of another
It is the consequence of forces that have never before converged in one time and place — spot shortages popping up around the globe … technological limitations that demand new engineering … and festering conflicts coming to a head.
Join me on a brief worldwide tour. You will see what’s happening on the ground right now. And together, we can pull out some big-picture conclusions along the way.
Spot Shortages Popping
Up Around The Globe
Our first stop is the
They mob the pumps. They wait on two-mile lines for an hour or more, anxious to fill their gas tanks and their five-gallon cans.
Gas station owners insist there’s no actual shortage of gas on the island. But rumors of shortages, whether true or not, effectively create the very shortages that are rumored.
Gas prices, already at over $3 per gallon, are no restraint. Residents want gas for their cars, trucks and home generators. Tourists want gas to avoid being stranded mid-way on 4-day island tours. So they’ll pay any price.
An isolated phenomenon? Not quite.
We fast foward three weeks and travel 4,500 miles to the East where residents of
The rumors are different — about a truckers’ strike disrupting supplies to the region, about a likely price surge of 30 cents per gallon in just one day, and about the possibility of $4-per-gallon gasoline.
But the result is the same: Residents mob the gas pumps, again causing local shortages.
Petroleum and trucking officials insist that the rumors are false and that any strike, even if one does occur, will not affect gasoline delivery trucks. But the panic buying at the pump continues nonetheless.
One gas station runs out of regular unleaded gas by Wednesday afternoon. Another reports 14 cars waiting in line at his pumps at
These spot shortages, however, are minor compared to another gasoline panic on the other side of the world.
Soon, hundreds of gas stations in
Long lines of cars wait outside any gas station with supply. And as soon as gas lines ease in
Analysts say the shortages are caused by the central government’s cap on retail prices. But even after a series of domestic price hikes, observers fear that the gas pump panic is just a preview of massive shortages still to come.
Question: If the flow of supplies can be so dramatically compromised even under relatively normal circumstances, what will happen in the wake of major supply interruptions?
What will happen, for example, in the event of a civil war in
The answers lead directly to …
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Conclusion #1 |
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 — not only in the U.S. but also in Africa, Australia, Asia, Europe and South America. |
Worldwide Gas Refining
Capacity Maxed Out
Texas City refinery, March 23
We turn back the clock to March 23. The place — BP’s Texas City refinery.
An essential piece of equipment in the facility, called a “raffinate splitter tower,†is designed to boost the octane level of gasoline. It’s made to hold dangerous, flammable liquids — but only up to a pre-determined, safe level.
This time, though, the liquids are building up to a height of 120 feet, far higher than normal.
A transmitter inside the tower is designed to send a signal about the level of the liquids. But it fails to transmit. So the highly dangerous liquids continue to build up.
An alarm is supposed to sound, alerting staff to the imminent danger. But it, too, is silent.
At approximately 1:20 pm, a series of explosions rocks the facility. There’s a geyser-like release of gas, and fire is everywhere. 
Fifteen workers in and around nearby trailers are killed. Another 170 are injured.
It’s one of America’s worst work-place disaster in decades, leaving the facility in shambles and driving oil and gas prices through the roof.
Ironically, however, it could have been easily avoided.
In fact, on March 10, management signed off on a work order which noted serious problems with the very same equipment that failed 13 days later. But in their apparent zeal to meet surging demand, they decided to start up production first and make the long-overdue repairs later.
Nor is this the first time the refinery had troubles: The same equipment was known to have failed during more than half of the last 17 start-ups. The same refinery had experienced two fatal accidents in 2004. And the same kind of process-related fire would take place AGAIN, on July 28.
Houston, August 17
The U.S. Chemical Safety and Hazard Investigation Board (CSB) responds with unprecedented speed and alarm. Chairman Carolyn Merritt calls a press conference. And, for the first time in its history, CSB issues an “urgent safety recommendation.â€
CSB blames the accident on faulty systems at the site, slams BP’s lack of oversight for all of its North American facilities, and blasts the company for an overall corporate culture that tolerates “serious and longstanding deviations from good safety practice.â€
Despite all this, many Wall Street analysts, still trying to make their case for lower oil prices, say these kinds of disasters are isolated incidents that have little or no lasting impact on oil markets.
I think they may need some help with their memory.
Perhaps they’ve forgotten the gravity of the Texas City disaster, shutting down a 12,000-acre refinery that was processesing 470,000 barrels of oil per day.
Perhaps they missed the fire at Chevron’s El Segundo refinery on July 20, forcing another 150,000 barrels per day of capacity to be taken off line.
Or maybe Wall Street was sleeping on July 26, when still another explosion, this one in Russia, shut down a mid-sized refinery in Novo-Ufimsk, rupturing a major pipeline, ingiting inflammable fluids, sending plumes of flame high into the air, and taking another 117,000 barrels per day off line.
Did they also miss the mishaps at Murphy Oil’s 120,000-barrel-per-day Meraux refinery on July 28?
And what about Exxon Mobil’s shutdown of its 235,000 barrels-per-day Joliet refinery in Illinois, also on July 28?
The list goes on and on, and it leads me to …
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Conclusion #2 |
The world’s oil refineries are being pushed to — and beyond — their limits. Either production must be voluntarily curtailed for better maintenance or … future failures will inevitably cause more involuntary cutbacks. |
Major Oil Producers Under
Legal Attack Around The World
OPEC countries are now pumping oil as fast as humanly possible. Non-OPEC members are doing the same.
But they always seem to fall short. Why?
One underlying reason is the rapid growth in demand. As Larry has detailed many times, the three most populous regions on the planet — the former Soviet Union, South Asia and China — are all in a rapid modernization phase, creating a far greater-than-expected demand for energy.
But what you don’t see (and what most analysts don’t understand) is the growing impact of resistance movements that are increasingly hampering exploration and development.
Years ago, these movements were of little concern to the oil industry. Most of the protesters were unsophisticated. They lacked political and legal clout. And there was always enough slack in supply networks to handle any disruptions.
Not today!
Among the countless legal conflicts now emerging across the globe, let’s look at just two …
Niger Delta, Nigeria, August 16
We go to the oil-rich Niger Delta in southeastern Nigeria, the epicenter of an on-and-off oil war since the 1980s.
Royal Dutch Shell, one of the largest crude oil producers in the region, is trying to negotiate a settlement with local community leaders regarding a massive oil spill that took place in 2003.
But suddenly and unexpectedly, the talks break down. A popular protest erupts on the streets. And Shell is forced to shut down 14,000 barrels per day of oil production, sending new shock waves through the oil markets.
Meanwhile, Chevron-Texaco is also on the the hot seat in the region, accused of destroying the traditional local economy, running pipelines through gardens and villages, and leasing helicopters to the military to attack local demonstrators.
The company retorts that its operations promote democracy and development, and it accepts no responsibility for environmental problems or human-rights abuses perpetrated by the government.
But local opponents say Chevron-Texaco’s pipelines are obsolete, rusty and leaky; that major and routine oil spills have permanently contaminated the drinking water of local residents.
Especially outraged are 500,000 tribal Ogonis, who claim their traditional fishing and farming livelihood has been laid to waste.
The Ogonis not only protest contamination from oil wells and pipelines, they also claim that gas flares, burning 24 hours, are producing intense heat and chemical gas fogs, polluting nearby homes, and rendering farm fields barren.
Today, after many years of conflict, it’s finally coming to a head in an ugly legal battle. But this time, the battle isn’t in Nigeria’s oil-friendly courts. It’s in California’s environment-friendly state court and in U.S. federal court.
The company vehemently denies the villagers’ claims and argues that the facts have been grossly distorted. But regardless of the outcome, new exploration and development plans in the region are in jeopardy.
Lago Agrio, Ecuador, August 22
We find ourselves in Lago Agrio, an Amazon rainforest outpost in northeastern Ecuador, where another unprecedented dispute is unfolding, also with roots that go back decades.
In the early 1970s, the town didn’t even exist. Now it’s a hot, humid, and bustling boomtown; and the Lago Agrio North Station, the center of the disupute, is one of the first oil installations constructed by Texaco in 1972.
Farmers living adjacent to the station accuse Texaco of deliberately dumping waste waters into the environment without any treatment. Families have testified that they have health problems due to the contamination of the streams, wetlands, and rivers. And they say that cattle and other domesticated animals have also died mysteriously.
According to the plaintiffs, it’s the “trial of the century,†and it’s too early to predict the outcome.
But it’s not too early to note the impact of protests in two Amazon provinces that forced oil production to ground to a halt last week. Lost daily output: roughly 170,000 barrels of crude oil.
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Conclusion #3 |
The conflicts in Nigeria and Ecuador are not new events that have suddenly emerged; they have been festering for decades. The same is true for numerous other oil-related battles in Africa, South America, and of course, the Persian Gulf. Expect many more in the months ahead. |
A Massively Complex
Global Phenomenon
What I’ve shown you today is just a small sampling of the emerging energy crisis:
· sneak previews of widespread fuel shortages …
· stark symptoms of neglect regarding the industry’s infrastructure, and …
· growing worlwide resistance to new exploration and development.
In addition, consider the impact of …
· the terrorist threats to shipping lanes, storage facilities and refineries …
· the possible outbreak of civil war in Iraq, pitting Iraq’s Shiites and Iran against Iraq’s Sunni’s and Saud Arabia, potentially disrupting oil production and shipping in the Persian Gulf.
When you do, you will see that, clearly, this energy crisis is more than just a supply-and-demand imbalance that can be measured by economsts or fixed by policymakers.
The energy crisis is a vast array of potential distribution bottlenecks, technological failures, and geopolitical conflicts.
It’s a highly complex global phenomenon that can only be resolved in one way — with a convulsive upward price adjustment.
My Recommendations
First, if you haven’t done so already, clear out of any stock or investment that is potentially hurt by rising fuel costs.
Delta Airlines is already on the brink of bankruptcy, driving its shares down another 2.6% on Friday to $1.50. Major auto and shipping stocks could be among the next victims. Also clobbered will be stocks that suffer from rising interest rates, a natural consequence of rising prices overall.
Second, put the proceeds, along with all of your keep-safe funds, in 3-month Treasury bills or a money market fund specialized in short-term Treasury securities. One example is the Weiss Treasury-Only Money Market Fund. But there are many other good ones available as well.
You get the highest rated securities in the world. You get higher yields soon after each Federal Reserve rate hike. Your yield is exempt from most local and state income taxes. And you get truly free checking.
Third, allocate a portion of your portfolio to investments that benefit directly from the energy crisis. A relatively conservative (but not risk-free) approach is to buy Canadian royalty trusts specialized in energy. The dividend yield has been running at roughly double or triple the yield you can get from a money market. And the trusts also give you the potential for excellent capital gains.
Fourth, if you have funds you can afford to put at risk, consider buying call options on select energy companies, especially those that are ripe for takeover. You can lose your entire investment, plus any commissions, but never a penny more. And your potential is virtually unlimited, with triple-digit profits not uncommon. (For more details, see Larry’s latest report, updated this morning.)
Above all, buckle up and stay safe. Oil prices are always subject to corrections. But the world energy crisis has barely begun.
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.
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