Summary:
- Gasoline prices
- Political Agenda
- Commodities – Metal Miners
Gasoline:
In 2019 / 2020 the USA was energy independent. Two things came together unexpectedly. The first was a joint effort by Russia and Saudi Arabia to flood the oil market with supply to break the back of the shale industry in the USA. Unexpectedly and at the same time covid broke out. This dried up demand for oil and gas. For the Russians and Saudis, mission accomplished with and exclamation point. March of 2020 saw the price of oil go to a minus $35 dollars a barrel! This weekend we saw oil touch $130 a barrel.
As the previous administration left office, the price of gasoline prices in my part of the USA was about $2.00 a gallon plus or minus. This weekend the price of gasoline was $4.00 a gallon plus or minus. This will have a ripple effect throughout the economy.
- Fertilizer is a derivative of Natural Gas – not gasoline but a fossil fuel. Think higher food prices.
- Transportation is still dominated by fossil fuels. Everything in our “Just in Time” society depends on logistics. Higher food prices.
- We cannot move to a green society without an increase in fossil fuels and minerals. Think decades for relief through alt-energy.
- We do not have battery storage for wasted alt-energy – estimated at 30% of all alt-energy production is wasted. Minerals needed to build storage systems are limited by regulations. It takes time to meet regulations if they qualify. PolyMet, a world class Copper / Nickel deposit in Minnesota, is in the 16 year area of trying to meet regulation and now fully permitted, overcome lawsuits from environmentalists. In fact, PolyMet first leased the property in 1989. 33 years and still five to ten years from production. You think we are going to solve this problem in six months or a year?
Dealing in Reality and not Wishful Thinking:
Expect the price of gasoline to double again from its current $4.00 a gallon price before the end of this year.
Expect the ripple effect on food prices – dependent on fertilizer and transportation – to increase significantly.
Expect much higher Nat Gas prices for heating costs next winter.
We cannot push a button and turn on the supply of domestic oil and gas. Iran, Saudi Arabia and Russia are not our friends, but we are beholding to them for energy. You have to ask as a National Defense question – Why are we not Energy Independent? We have available supply.
Government Policy:
Each government administration has its own policies, agenda and personality. It is clear to me that the current administration is agenda driven. The environment is the number one priority. As such they have declared war on fossil fuels. IMHO, they either don’t care about the impact on the population or have miss judged the time and “energy” needed to convert to the new green economy they (we all) desire. This is a thirty year to fifty year transition. The amount of fossil fuels and minerals required to make the transition are not currently available – period. There is no debate about this. This administration will never admit they are wrong in my opinion. Every excuse other than they made a mistake, is taken. Today it is the war in Ukraine that is causing the price of gasoline to double. This is not a true statement. It is a combination of policy to restrict development of fossil fuels – Oil, Gas and Coal combined with disincentive pressure (ESG) on energy companies to explore and develop new supplies of energy.
What can you expect next?
Since it is unlikely for this admin to admit that we need more supply of fossil fuel based energy as a solution, it is more likely that we will see a new tax on excess profits by energy companies for profiteering from the war in Ukraine. This would bring down the prices of energy stocks. I don’t know if an excess profit tax on profiteering can get passed into policy as the November 2022 elections are not far into the future and that is a variable. I also don’t know if President Biden could make an emergency executive order and change tax policy. I do not believe this can happen. But expect it to be discussed as the solution to the problem. As a free market believer that the solution to higher prices is high prices, I don’t see real life examples where price controls or excess profit taxes have solved any supply problems.
Commodities:
It is obvious to everyone who drives, travels or eats that commodity prices are rising. This is not going to change anytime soon. Possibly in 2024 with a different administration but that is not a given. LOTM maintains its thesis that this is the Decade of Commodities. It is going to be volatile and not a straight line higher. LOTM has taken a position in metal miners as our play on Inflation. This has not worked so far. Energy and other commodities have risen faster and higher. I think metal miners will rise in price. This has yet to be seen so far. Maybe it’s time is now. Good luck to us all.
LOTM Research & Consulting Service
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