Energy Investing: The Drums Of August, Israel Is Not Bluffing

by: Bill James

Life requires energy. Investments in food, oil, gasoline, natural gas, solar and wind seem likely to jump in price as soon as Israel and/or Iran take the next step.

Foreign Policy magazine: The Drums of August, Israel is not bluffing:

This summarizes the carefully worded case made last week in the Wall Street Journal by Israel's ambassador to the United States, Michael Oren. His article was nothing less than a case for war, and, over lunch on Friday, Aug. 10, he underscored to me how much thought and care was put into its drafting. (Oren is, for the record, my longtime very good friend.) The response to the article included the unlikely endorsement of its core points by Khalid Al Khalifa, the foreign minister of Bahrain, who tweeted it with the words "Time Is Short For Iran Diplomacy."

"The Drums of August" was not accidentally selected. At least within military circles "The Drums of War" is a common phase for the posturing in the approach to conflict. "The Guns of August" covered the approach to World War I. We have our last warning.

No one writes an article like this, emphasizing "for the record, my longtime very good friend", the Israeli Ambassador to the US, without assuring their points are correct. Only exploding bombs would be more clear.

Timing of Israeli strikes seems less than a year, not likely before the Nov 2012 election. A preemptive strike by Iran should not be ruled out. Sabotage against US oil infrastructure, destabilization of Mexico and actions by Venezuela are well within Iranian capabilities.

Fundamentals will continue to drive energy prices higher. US oil inventories sit at 366 million barrels (mb). We use about 19 million barrels per day (mb/d). Based on gasoline outages in the US Southeast in 2008, gasoline outages occur when inventories drop to about 290 mb.

America has 4 days spare capacity to manage a 365 day food cycle ((366 - 290) ÷ 19) or about 1.1%. As a thought experiment about how narrow a safety margin this, stand 10 feet from the edge of the helipad on a 10 story building. You feel uncomfortable getting any closer to the edge. A 1.1% safety margin would require you stand less than 2 inches from the edge. The Strategic Petroleum Reserve adds only 90 days supply against that 365 day food cycle.

Food has similar inventory risks, compounded by the drought.

As people become aware of the tiny public safety margins, they will likely scramble to build personal reserves of food and energy. Gasoline supply shock in the US Southeast in Sep/Oct 2008 provides an example (see image). When public inventories hit about 190 mb, drivers shifted from mostly empty to mostly full tanks. Nearly 20 mb were pulled out of the public inventory causing supply outages that lasted 8 weeks.

Before the Rural Electrification Administration subsidized power, more than 600,000 water and electric windmills were sold in the US. Vast numbers of roofs in India and China have solar thermal water heaters because in an unsubsidized market, it is the cheapest way to get hot water.

Life requires energy. As uncertainty grows, I believe people will invest in sources of energy, food and land. A 10% to 300% increase in home resource storage seems plausible. If behaviors shift, the vast numbers of people seem likely to move markets.

A lot of the investments will not be public, but may affect public stocks. My guess at public investments and trades are:

  • Solar: SunPower (NASDAQ:SPWR) and SunTech (NYSE:STP) relative to using their panels in an effort to re-tool transportation. A Seeking Alpha article on undervalued solar manufacturers identifies these companies: Yingli Green Energy (NYSE:YGE), Trina Solar (NYSE:TSL), LDK Solar (NYSE:LDK), ReneSola, Ltd. (NYSE:SOL), JA Solar Company, Ltd. (NASDAQ:JASO), Jinkosolar Holding Co., Ltd. (NYSE:JKS), First Solar (NASDAQ:FSLR).
  • Railroads (480 ton-mile per gallon efficiency): Link to The Street's rating of railroad stocks and symbols for "B" rated and above: Union Pacific (NYSE:UNP), Canadian National (NYSE:CNI), Norfolk Southern (NYSE:NSC), Kansas City Southern (NYSE:KSU), Genesee & Wyoming (NYSE:GWR), CSX (NYSE:CSX), Canadian Pacific (NYSE:CP).
  • Natural gas: Here is a primer on natural gas ETFs (Exchange Traded Funds). Of these S&P Oil and Gas Exploration & Production (NYSEARCA:XOP) and First Trust ISE-Revere Natural Gas Index Fund (NYSEARCA:FCG) are more centered on production and assets in the US.
  • Gasoline: Gasoline futures (RBOB) will continue climb for ordinary supply reasons.
  • Food, Oil and Gasoline: Please post comments for people on how to invest in food.

US and Canadian investments seem more likely to endure the winds, but that is just a guess. The scale and consequences of an Israel/Iran conflict are well beyond my abilities to guess.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Author is the founder of JPods, Inc., a Personal Rapid Transit company.

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