Thursday, September 15, 2005

Katrina Changes Things

The Wall Street Journal reported that US gasoline consumption has fallen by 4.3% since Hurricane Katrina hit the Gulf Coast. The Journal went on to explain that few analysts are ready to project a continuation of this trend, but as I said last time, I am. I think the uncertainty of the oil supply is finally reaching the consciousness of Americans, and I believe they will embark on a mini conservation program that will result in a slowing of per capital energy consumption. For years we have been warned repeatedly that our mobile lifestyle was being made possible by such "rock solid" bastions of democracy as Indonesia, Russia, Iran, Saudi Arabia, Venezuela, and Nigeria. But since there have been few alternatives and oil has remained available and cheap, we have looked the other way. But, oddly enough, Hurricane Katrina has done what OPEC and terrorism could not do: it has shown us how fragile our supply of oil really is. One big storm knocked out 50% of the refining capacity of this country. Emergency oil supplies have been released and gasoline prices have fallen from near $3.40 gal. (Indiana) on the day of the storm to $2.90 gal. today, but I do not believe prices are destined to go significantly lower in the coming year. Indeed, gasoline prices now have three tail winds pushing them: A terrorism premium, a storm or natural disaster premium, and an emergency supply premium. The first two premia are obvious, but the third needs some explanation. If you are a major US organization with large energy needs, whether you are a government or commercial enterprise, you must now consider the merits of having an emergency fuel supply as a backup for your needs. This kind of emergency fuel storage build up occurred during the last energy crisis in the late 1970s in very large numbers, as governments, businesses, and individuals installed storage tanks to buy ahead of the perceived inevitable price increases in oil prices, but also to provide an emergency supply of energy. I believe, at some level, this better-safe-than-sorry type of hoarding will happen again. Indeed, the probability of this kind of hoarding would increase dramatically if gasoline prices were to rise above the recent hurricane-induced price spike of $70. The same motive forces that will compel institutions to add emergency energy storage capacity will also compel consumers to go on something of a energy diet. But more importantly, it will cause a dramatic increase in demand for for fuel efficient automobiles, appliances, and houses. This conservation and efficiency ramp up will not wait on solid cost-benefit solutions, but will spring first from a sense of buying "insurance," and then, as innovations become abundant, will evolve into a kind of Y2K stampede toward smart cars, houses, and cities. Again, the first step will be conservation, but the next step will be a huge increase in demand for high-mileage cars, especially, hybrid cars and diesels. With home prices in a persistent uptrend in most areas of the US and low unemployment, the average family in this country feels pretty well off right now, and buying a high-mileage hybrid car or a diesel powered car in response to the heightened awareness of the fragility of our energy supply, will trump the normal cost-benefit analysis. Americans have been awestruck by the devastation and human toll of Hurricane Katrina. But the subliminal message in every heart-rending picture from the storm's aftermath is that those who were able to take care of themselves fared much better than those who waited on the government. I am not slamming the government here. There are enough people doing that. I am just stating that we are a nation of doers. Most of us are in this country because we or someone among our forbearers decided to move on. We are a freedom loving people, and one of our most prized possessions is our lifestyle. Most of us are not willing to move back into the city and use public transportation. Someday smarter cities with a more people friendly attitude may pull that off, but until that happens, we will move heaven and earth to fight for our way of life. I believe that the cumulative effects of terrorism, unstable or hostile governments in control of the oil supply, and the shocking events of a natural disaster, will stick in the crawl of most people, and little by little, they will take steps to use less energy. It is not something that you will see start tomorrow morning, or next week, or next month. It may not show up in the economic statistics for a long time, but I am convinced a new attitude about energy consumption is underway. It will change the profitability of a lot of industries. We are already making some changes in your portfolios that we believe will take advantage of the new forces at work. When we are finished, I will discuss some of our views on individual companies in more detail. Next time, I'll take you through an update of the Barnyard Forecast. Not to fear, the forecast for the economy and stock prices is still good.