THE WACKY LOGIC OF OIL AND POWER

By Stephen Leeb

In this week's update, we turn to political and moral issues, as well as how to make money …
***** Dull news is good news.
***** The President’s energy agenda.
***** Idi Amin, Saudi Arabia and waking up with fleas.
***** The reawakening left brain of Americans.
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The most remarkable thing about the market lately is how little changed it is from week to week. So let’s turn our attention away from the short-term picture, towards something with more significant long-term effects

THE WACKY LOGIC OF OIL AND POWER

We have been bullish on oil for as long as TCI has been around. Although it’s not the only important commodity in an uptrend today, we believe oil exerts a stronger influence on the market than anything else. Consequently, we felt compelled to comment on how energy was dealt with in President Bush’s State of the Union Address last week.

First of all, we usually avoid politics in these updates. But it is clear America has become a house divided over the issue of how to handle Iraq, with much of the country favoring a change of course and the President sticking to his guns, literally. We don’t presume to know what, if anything, can heal that country, but we are pretty sure about one thing. The President would not be so firmly committed to a project so costly (in lives as well as dollars), so lengthy, and so unpopular if Iraq were not sitting on large oil reserves.

Our modern Western world was built on cheap oil. And our government will fight tooth and nail to maintain its supremacy by keeping control of as much oil as possible. (Unfortunately, so will the rest of the world, and therein lies the danger.) But that's not the most important aspect of the President’s speech. What appalled most about the President's words were his proposals regarding alternative energies, particularly his emphasis on corn-derived ethanol.

As a recent article in Scientific American pointed out, turning corn into ethanol is a non-starter. Corn is just far too expensive to use for fuel. If we try, we will only drive corn prices up to unaffordable heights. Soaring corn prices would in turn mean soaring prices for beef, chicken, pork, and any other animal we currently feed corn to. Growing enough corn to satisfy our fuel needs would also take too much land and water. The result would be a fuel that cost more than gasoline.

In fact, some have argued that it takes more energy to produce ethanol from corn than burning ethanol would produce. Now, if ethanol were made solely from corn stalks and otherwise wasted plant materials, it might make sense. But that doesn't look like the policy we're getting. Instead and we hate to say this the President's plan seems geared towards winning votes from farmers in the mid-West who would benefit from outrageously high corn prices. It may make good political sense. But it will NOT meet our need for affordable energy.

We cannot help notice the strange logic that dominates this issue. On the one hand, the world powers are willing to go to tremendous lengths and costs to secure oil supplies, yet when it comes to other energy sources, the efforts made are never more than half-hearted. The people of the future may well wish that today's leaders had spent less money fighting wars for oil, and more money developing sustainable alternatives. And speaking of the costs

RECOMMENDED FILM: THE LAST KING OF SCOTLAND (YES, IT SAYS SOMETHING IMPORTANT ABOUT INVESTING)

Recently, I enjoyed Forest Whitaker's excellent performance as Idi Amin in the film, The Last King of Scotland. Idi Amin, as you doubtless recall, was once President of Uganda. During his time in office, he ordered the slaughter of an estimated 300,000 members of minority groups in that country. (The title of the film reflects the fact that Amin liked his soldiers to dress in Scottish kilts.) It was a very well made film, though gruesome in parts, and Forest Whitaker certainly deserves the Golden Globe he has already received for the role, and possibly the Oscar as well.

However, the film reminded me of the appalling fact that Idi Amin in real life never was brought to justice. Instead, when he was finally deposed by an army composed of Tanzanians and Ugandan exiles, his only punishment was exile to the kingdom of Saudi Arabia, where he lived comfortably for over 20 years. Keep in mind, this man was as brutal and nasty as Saddam Hussein, if not worse. Yet, Saudi Arabia offered him sanctuary. Saudi Arabia, which is our best if not only real hope for our future oil supplies, assuming they aren't exaggerating how much oil they have.

We seem to recall a few years ago a country harboring a man named Osama who had orchestrated mass murder. In that case, our government was willing to bomb it back to the Stone Age if he wasn't brought to justice (he wasn't, and the bombing took place). Yet, Amin was safe in Saudi Arabia until his death in 2003. Meanwhile, the Saudis continue to be our best of friends, and we are doing nothing to end our dangerous dependency on them.

As the saying goes, if you lie down with dogs, you may wake up with fleas. Well, in the schizophrenic government we have today, the right brain may think oil is the only answer, but the left brain (the part that thinks holistically) seems to be shifting its priorities towards alternative energy sources. In fact, we think support for alternative energy will soon be higher than even in the 1975-85 period. Not only is fear of an oil shortage reaching the marketplace, but awareness of environmental issues such as global warming is spreading rapidly.

We're not completely convinced that today's environmental anomalies are due to fossil fuels, but we see that policymakers are becoming convinced. And that's all it takes to create an investment opportunity. Meanwhile, the trend is your friend and the short-term trend is still upward. All the positive factors we have discussed for the past month are still in place, with the continued exception of the Dow Transports. They are close to new highs, but not there yet. Nonetheless, we see few problems in the week ahead (baring, of course, extraordinary events).

Until next week,
Stephen Leeb
Editor,
The Complete Investor

http://www.completeinvestor.com/mf/

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