Energy Prices Are Going Higher

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From Dan Denning, low on change at an airport internet kiosk:

With a crook laptop and an hour to go before we fly to Baltimore via San Francisco, your editor has plugged a few coins into an Internet kiosk at the airport to see what in the world is going on. A lot.

A Category Five hurricane (Gustav is hurtling toward the coast of Louisiana and Texas, just three years after Hurricane Katrina devastated New Orel ans. Bloomberg reports that oil and gas pipelines in the region are already being shut.

Hurricane season always reveals the two Achilles heel’s of Gulf oil industry (Achilles had two feet after all, even though only one of them was not protected by the gods). The first is that off-shore productionsome 1.3 million barrels per day from the Gulfhas to be idled when the storms roll in and can remain off line for repairs for weeks.

The other issue is that Gulf based crude oil refineriesyou know, the ones that produce petrol for American carshave to shut too.
Better hope those tanks are topped up for the Labour Day weekend!

Meanwhile, wouldn’t you like to know what was said during the one-hour phone call this weekend between British Prime Minister Gordon Brown and Russian President Dmitri Medvedev? Brown got off the phone, wiped the sweat from his brow, and told all of Britain, “No nation can be allowed to exert an energy stranglehold over Europe.”

He promises a “root and branch” review of Britain’s relationship with Russia. Sounds about right.

The trouble is, nations with abundant oil and gas reserves DO exert a stranglehold over those without them. Oil and gas are no good if you can’t sell them. That’s true. But the Russians can sell going East and West.

The Indians and the Chinese will be happy to lock up long-term energy supplies from Russia. After all, that’s where all the growth is. Where does that leave Europe? Well, it’s September, so it’s not cold yet. But in a few months, Russian gas, even if it comes with all sorts of geopolitical provisos, will look mighty nice compared to huddling in the dark and eating tinned food.

So energy joins the credit story on the front pages. And don’t even ask us about Sarah Palin! We know nothing about the governor of Alaska who’s been named as John McCain’s running mate on the Republican ticket. But as we’ll be in the States for two weeks, we’re sure to hear plenty more and will pass on anything worth knowing. Till then, we’ll hand you over to Diggers and Drillers editor Al Robinson…

From Al Robinson, at The Old Hat Factory:

What’s the best way to tell you have a real shortage on your hands? The government starts blaming producers for it.

And how do you find the answer to any problem? Scout out where the government is looking. Then look somewhere else.

Two cases in point popped up on our screen in the news today. The government’s looking for the solution to high prices. Where’s it looking? Company sales, revenue reports, shifty executives. The solution isn’t in a board room though. It’s out in the blistering hot oilfields of Saudi Arabia. Or Australia’s parched wheat belt.

Case one. We’re all having to pay more for food. Personally, we’ve switched to kangaroo sausages. They’re only $5 a kilo. But what’s the real reason prices are so high? Farmers are still suffering from drought and high energy prices. They have limited land to feed a growing global population. It’s a matter of constrained supply.

The government can’t make more rain, more oil or new fields. Don’t expect Kevin Rudd to launch into an energetic rain-dance at his next press conference, complete with tribal head-dress and grass skirt. We need the rain. But that won’t help, though it may disgust or amuse.

So seeing as Canberra can’t fix this, it needs someone to blame. Who else but food retailers? After all, they set the prices, don’t they? It must be greedy corporations hijacking consumers’ wallets. Fiends.

The ACCC is running a gloved finger over Coles and Woolworths to check if the industry needs more competition. We’re not sure what the watchdog will do if it finds evidence of under-competition. Maybe set up fruit and veg stalls outside the Melbourne and Sydney ACCC offices.

It’s busy poking its nose into the gas sector too. Australian gas prices, which have been well under the global standard for years, have risen. Especially in Western Australia. In WA, gas has more than tripled in price in recent years, from $2.50 per gigajoule to $8.

Could this be simply be the forces of supply and demand? Yes, to be blunt. Natural gas prices in the US have risen from US$1.70 in 2001 to over US$10 this year.

Also, West Australian gas has one customer that dwarfs the rest. Mining. Has any sector of any industry in the world grown faster this decade? According to the Minerals Council of Australia WA will need another 50,000 workers by 2020. With that population, they could earn spare cash as a rent-a-crowd for test matches at the MCG.

But politicians don’t solve things. They win elections.

“It is very important we know more about the competitive impacts of this situation,” Resources Minister Martin Ferguson said in The Australian today. “What the Opposition needs to explain to West Australian gas customers is why the Howard government did nothing, as gas prices continued to rise, to pressure companies to pass on the $460million they reaped following that Government’s excise cut of 2001.”

We certainly aren’t saying either of these inquiries are a waste of time. Who knows? Maybe Woodside is squeezing blood out the companies digging up stones in WA. Perhaps they’ve added their own premium on top of the energy crisis.

What we are saying is that there’s a real shortage. The government is making a big show like it’s fixing things. It probably isn’t.

But it’s acting. And that means there’s truly something wrong. If this is severe enough to make politicians act, it’s severe enough to threaten their next election. That means it’s severe enough to be affecting voters.

That’s the point. At the core, this is a supply and demand issue that’s taking place in the real world. Labour can blame whoever it likes. These misguided efforts only punctuate the fact that an energy shortage is, at this stage, a real and unassailable trend. Energy prices are going higher.

And really, that’s what makes the whole thing an investment. Still.

Al Robinson
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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