Market Review: Oil Storm

Oil has been called “the life-blood of America.” What happens if it suddenly runs dry?

That was the question posed by the cable network, FX, in a recent made-for-television movie, “Oil Storm.” Done in a “mock-umentary” style, “Oil Storm” depicts the consequences of America’s reliance on oil in a series of delectable “what if” worst-case scenarios.

If you didn’t see the movie (when it aired in mid-June), here it is in a nutshell: a category four hurricane destroys a vital pipeline in the Gulf of Mexico…panic sweeps of the nation…speculation drives the price of crude higher and higher…U.S. government turns to Saudi Arabia for oil…Saudi extremists commit terrorist attacks, killing 300 American oil workers…America sends troops to Saudi Arabia…still major lines at gas stations…Americans begin to turn against each other…the U.S. government decides to turn to Russia for oil…the Russians help in return for an investment in the upgrade of their pipelines…oil falls from it’s high of $153 a barrel down to around $77…and all is right with the world.

The steadily rising gas price results in major loss of American lives, a U.S. military expedition to the Middle East, a major depression, and martial law in effect across America. This is, of course, a gross oversimplification. Could these situations occur? Sure. Maybe not. We don’t know. But the chain of events was outlandish enough… we thought maybe one of the Daily Reckoning promotional writers might have had something to do with the plot!

The “mock-umentary” is a bit absurd. But it’s also fun. And the truth is, for the first time, given China’s demand for energy is growing by leaps and bounds (with India not too far behind), America has major competition for energy resources.

“Oil Storm” reinforced one of our major themes here at the DR: the United States depends daily on the kindness of strangers to bail them out. The strangers, in this case, ended up being the U.S. long-time cold war foes Russia. Oh, the irony!

But, we wondered, what would have happened if we had no other country to rely on?

What “Oil Storm” fails to mention are viable alternatives to oil. There are no mentions, for example, that U.S. companies are making huge leaps in “clean-coal technology;” a way for America to utilize a natural resource that we have 254 billion tons of to help ease the reliance on oil. Not a peep about the immense supply of uranium in the U.S and Canada, or on the technological advances and increased safety measures in nuclear power. Liquid natural gas? Yeah, right!

In a movie – that even your doom editors at The Daily Reckoning found to be “gloomy” – the United States’ dependence on oil was a fait accompli. Their solution? Get more oil.

Hmmm…and the final shot was a SUV nonchalantly driving down the street, relieved that gas prices had dropped. Did we miss something?

Kate Incontrera
The Daily Reckoning
July 9, 2005

P.S. Maybe FX didn’t want to give you the full scoop on the use of liquid coal or nuclear power as an alternative to oil…but we know someone who will. Outstanding Investment’s Justice Litle tells us that liquid coal will play a huge role in the future of China, the United States and India. And you could make a fortune on the right investments. Possibly doubling and tripling your returns in very little time.

P.P.S. For more on the resurgence of nuclear power, see “Flotsam and Jetsam” below…

And one more thing…

Whether you’re battening down the hatches for an “oil storm,” or Hurricane Dennis, you are definitely going to need a strong drink first – luckily we know just the place. Mick O’Shea’s on Charles St. in Baltimore is a favorite haunt for your DR editors…good food, good atmosphere – and our favorite bartender, Tricia. She may not always give service with a smile, but she certainly keeps those Grey Goose and ginger ales flowing.

— Daily Reckoning Book Of The Week —

In case you missed it, Dan Denning has bet Addison Wiggin that his new book, The Bull Hunter, will surpass Thomas Friedman’s book on the Amazon best-seller list… or he will wear a green sarong to this year’s Agora Financial Wealth Symposium (August 10-14 in Vancouver, BC).

If The Bull Hunter doesn’t bump Friedman out of the running by Friday, July 15, 2005 – you’ll get a chance to see Dan don a sarong….

Of course, we know how much you’d love to see Dan shed a little leg… but dashing past that blowhard Friedman is a worthier cause, don’t you think?

THIS WEEK in THE DAILY RECKONING: What does legendary chess player, Gary Kasparov, have to do with Russia’s Vladimir Putin? All the details below, in Kevin Kerr’s “The Ultimate Chess Game”…

The Blitz of London                                                07/08/05
by Bill Bonner

“As the citizens of London brush themselves off, and try to return to their normal lives after yesterday’s terrorist attacks, Bill Bonner reminds us that this isn’t the first time our British friends have been through this…”

Bubble Anatomy                                                 07/07/05
by Kurt Richebächer

“While economic optimists try to downplay America’s non-existent economic recovery – Dr. Richebächer looks at financial development through a different lens – and sees a more permanent softness in the U.S. economy…”

Irrational Exuberance                                                 07/06/05
by John Mauldin

“Despite the fact that you can’t turn on the television, open a newspaper, or surf the web without being bombarded with talk of real estate, there seems to be little public concern over rising home prices and a growing bubble…”

The Ultimate Chess Game                                    07/05/05
by Kevin Kerr

Legendary chess player, Gary Kasparov, has a new opponent: Vladimir Putin. Kevin Kerr looks at Kasparov’s uphill battle against fascism through the eyes of the Russian press…

Money Down the Rat Hole                                      07/04/05
by The Mogambo

“The Mogambo is in full lock-down mode at his bunker – complete with a camouflage Speedo. Why is he so frantic? The lack of growth in Total Fed Credit has a lot to do with it…”

HEADLINE, NEWS And INSIGHT: The world was shaken after Thursday’s terrorist attacks in London – the U.K. DR’s managing editor tells what thoughts where running through his head as the day’s events unfolded. See “Bolting the Door Too Late” below…

Bolting the Door Too Late
by Adrian Ash

“How can they be stopped? They can’t. Will they make people living in London more anxious and afraid? Of course.”

Beware of Property Bubbles
by Kurt Richebächer

“Housing bubbles heavily entangle banks and the whole financial system as lenders. For this reason, as a matter of fact, property bubbles have historically been the regular main cause of major financial crises.”

Last Man Standing
by Bill Bonner

“In absolute terms, her expenditures exceed her income by more than 6% per year. Asian, Eastern European and Russian economies grow – with positive trade balances. Wages barely rise in the U.S. In these new competitors, they soar.”

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FLOTSAM AND JETSAM: Not too long ago, we thought we had reached the end of our nuclear power age…but suddenly it’s starting all over again. The nuclear power of today is nothing like it was in the days of Chernobyl or Three Mile Island…but then again, neither is energy demand…

THE COMEBACK OF NUCLEAR POWER
by Addison Wiggin

According to a report from the Massachusetts Institute of Technology, commercial stockpiles of uranium have already plunged 50% from 1985 until now, simply because the rest of the world’s mines couldn’t keep up with demand.

The current uranium demand is about 180 million pounds per year. The current world production is about half that much.

By the way, there’s one place in the world that doesn’t have a lot of uranium…the Middle East. We’re talking about a serious global shift of power. And plunging financial and political resources for OPEC’s aggressor nations.

On the other hand, the United States and Canada have a huge percentage of the world’s uranium supply. So does Australia, with the world’s largest unmined reserves.

From 1996-2001, most uranium companies actually got out of the business. Some mines were closed. Others were never started. You can imagine what happened as demand for uranium started back up. By 2001, uranium was selling for $7.50 per pound.

A pound of uranium is about as big a ball as you’d get making an OK sign with your fingers. It costs about $5 to get that out of the ground. At this selling price, uranium was still barely profitable.

But it was enough for supplies to dry up. Closed mines meant no extra capacity. And no capacity meant orders for new uranium went unfulfilled. Prices went back up. By the beginning of 2003, the same ball of uranium sold for about $10.75.

Then with the crisis in Iraq getting deeper and new tension in Saudi Arabia, all on the back of major power outages in California and New York…the world has finally awakened to the seriousness of a permanent energy crisis ahead.

Oil rose to $60 a barrel at one point recently, and gas and coal prices have soared, as well. Meanwhile, uranium shot up to over $20 a pound! But keep in mind, in 1983, uranium cost $40 a pound. That’s more like $79 a pound today, after inflation. Uranium would have to shoot up another 295% to get to its real historical high.

Nuclear power is many times more efficient than other kinds of energy. You can measure different kinds of fuel costs by measuring how much heat the fuel puts out, measured in British thermal units. One million Btu of coal costs about $1.25. One million Btu of natural gas, about $3.50. And 1 million Btu of oil costs about $5.70. Even if a pound of uranium cost $400, it would cost about 1.1 cents per 1 million Btu.

That’s with current technology.

But there’s a new kind of nuclear power plant technology just around the corner that’s up to 100 times more efficient…is much safer…and could make even $1,000-a-pound uranium cost just 0.03 cents per kilowatt hour, which is like getting a gallon of gasoline for half a cent.

While I don’t see uranium going to $1,000 anytime soon, industry insiders – including Morgan Stanley – say the spot uranium price could go as high as $45 or $50 within the next 24 months.

And Quinton George, who runs Trinity Asset Management, says China’s demand alone should double uranium prices over the next two years…and triple demand for nuclear power by 2020.

Addison Wiggin
The Daily Reckoning

[Ed. Note: Of course, at some point, that uranium will run out, too. But right now, there’s about 40 times more uranium in the world than there is silver. Or enough for about 300 years of electricity production at current rates. But the boom in the right uranium stocks is already under way…