Hurricanes, Price of Oil, Rising Dollar…

by BWK ~ September 8, 2008

Well, what’s the big story for this week? Is it the hurricane named Gustav, which was supposed to out-Katrina Katrina? Or is it another hurricane?  Or does the story focus on the fall of oil prices? Or is it the collapse of many other commodity and resource prices? Or is the story really a tale of the rising dollar?

How about “all of the above.”

My Perspective from the Broadcast Booth

I recently returned from New York City, where I had a unique perspective on unfolding events. I spent two days as a guest in the studios of the Fox Business Network, at the corner of 47th Street West and Avenue of the Americas (7th Avenue). Fox invited me to be an on-air “expert” and discuss Hurricane Gustav and its impact on the Gulf of Mexico energy complex.

It was really quite something to be in a fully equipped broadcast studio, surrounded by live feeds from major networks and many other forms of information. I could see the entire storm system develop in living color, both from radar pictures, satellite imagery and on-the-ground video.

And there I was, sitting at a desk in front of a battery of cameras, addressing the unfolding drama of a massive storm bearing down on the spot that produces 25% of U.S. oil output. It was like being Howard Cosell on energy, instead of sports. Aside from getting up at 3:45 a.m. to get to the studio on time, it was great.

Big Storm, Perfect Strike, Pins Still Standing!

Make no mistake. Hurricane Gustav was a big storm. Heck, Gustav was 400 miles wide, so it covered a lot of area. And Gustav bowled a perfect strike, moving northwest across the Gulf, right down the center of oil-patch alley below Louisiana.

But despite the evident power of this meteorological bowling ball, Gustav didn’t knock down any pins! As I write this, the Gulf of Mexico oil infrastructure seems to be intact. Gustav passed over, under and through literally thousands of offshore structures. And none of them appear to have been damaged, or at least not very badly.

Gustav weakened a bit as it approached the shore. So it seemed like the storm was bleeding down during the final approach. But the key “energy” point is that the oil industry has spent the past three years beefing up its infrastructure against wind and waves. And so we saw a strong storm pass right through, with almost no damage. Wow.

It’s a credit to companies like McDermott International (MDR: NYSE), which builds these offshore structures. And to Superior Energy Services (SPN: NYSE), which services and repairs the offshore structures. And BP (BP: NYSE), whose massive Thunderhorse platform took a direct hit and is still on track to produce over 250,000 barrels per day of oil within the next year. And to the likes of Halliburton (HAL: NYSE) and Baker Hughes (BHI: NYSE), whose technical expertise in drilling holes and making oil wells has contributed so much to safe operations offshore.

Onshore, the media were looking for the “human interest” angle. The “big story” was whether or not we would see a repeat of the 2005 hurricane debacle, with massive flooding in New Orleans and the associated human misery.

Well, the levees in New Orleans held up. Sure, Gustav prompted massive evacuations. So the bulk of the population was gone. And then the TV camera trucks moved in. It was kind of amusing to watch the TV people standing out in the rain, holding microphones to their lips and making comments like “Hey, it sure is raining hard out here.” Ummm…. Yes.

Of course, there was flooding due to Gustav. Power lines went down. The high winds caused lots of damage. That was my next “energy” point. If the offshore oil and gas facilities made it through the hurricane, what was going to happen to the electric power?

Without electric power, the pumps can’t work. The refineries are down. The pipelines can’t move product. But again, it seems that damage was not as bad as it could have been. So the pumps and pipelines are still up and running. That’s good for the likes of Spectra Energy (SE: NYSE) . And it means that refiners like Valero (VLO: NYSE) won’t have to rebuild parts of their refinery complex.

Remember Katrina in 2005? We all knew Katrina. And Gustav was no Katrina.

Oil Went Up Then Oil Went Down

Leading into Gustav, there was a special electronic trading session on Sunday, August 31. Oil prices traded up around $118 per barrel. By Monday morning, September 1 - and as Gustav was making landfall south of New Orleans - oil traded down towards $105 per barrel on European exchanges.

Sure, the markets were happy that Gustav didn’t knock out any significant oil infrastructure. But it was not just oil that was down. Gold tumbled. Other commodities and resource plays were down. And through it all, the U.S. dollar was up. In fact, the dollar was setting records against the likes of the British pound.

The Rising Dollar Story

There was something going on out there besides Gustav sparing the oil patch of the Gulf of Mexico. What was it? Well, the dollar is strengthening. This was another of my topics on the Fox Business broadcasts. The producers wanted me to discuss the “oil story.” But I worked at steering the discussion to the “rising dollar” story. And Fox was good about airing the discussion.

By the morning broadcast, Fox Business led with a story – and my commentary - not about the hurricane but about how the dollar has been strengthening for about eight weeks. That’s the REAL story.

I discussed how back in mid-summer, oil approached $145 per barrel. People were asking whether or not oil was in a bubble. Well perhaps it was the “froth on the beer,” but not a bubble.

And oil was rising as the dollar was falling. In fact, oil has been rising for well over a year, as the dollar has tumbled. For the currency traders, life was easy. Bet against the buck, and the Euro would rise. You saw this in gold and other precious metals as well.

Then in mid-July, it all changed. Overnight. There was no big announcement from the Federal Reserve or the European central bank. Nobody said “We’re Tanking the Euro.” But it’s pretty clear that they decided that enough was enough. The falling dollar and rising Euro was killing exports from European countries. It was putting Germany and France into recession.

So the central banks of the world started buying dollars. The U.S. buck strengthened. Oil fell from $145 into the $115 range. And even the Russian invasion of Georgia, or Hurricane Gustav, could not cause oil to rise. Stay tuned as this drama unfolds.

And while you are tuned-in, don’t give up on the long-term prospects for energy, precious metals and resources. The dollar is rising? This too shall pass.

Really, is the U.S. economy strong and getting stronger? No. Is the U.S. tax code becoming friendlier to investment and long term capital creation? No, again. Are the demographics of the U.S. labor force changing towards a long period of increasing productivity? Nope. Has the U.S. solved its problems in banking, finance, housing, energy, trade deficit, government spending? No, no, a thousand times no.

So it’s frustrating to watch as falling oil prices, falling gold prices, falling other things take down many of the companies in the OI portfolio. But have faith over the long haul.

Over the long haul, go with companies that own real stuff. Like oil reserves, or mine reserves, or critical technology in advanced resource industries. Go with the hard-stuff. Avoid the fluff. Or come the next financial hurricane, you might get blown away.

On a final note, I hope that you get Fox Business Network on your cable TV. It’s a great source of business information, and the staff are total professionals. Really, the anchors are not just blow-dried talking heads. They all have serious business and finance backgrounds. If you don’t get FBN, call your cable service and add it on.

Until we meet again…

Byron W. King

Note: Byron King is a frequent contributor to the free e-letter Whiskey & Gunpowder. To receive daily insights into energy, oil, commodities and other natural resources sign up here!

Additional Resources:
An Inside Look at the Boeing Plant at Everett
Peak Oil, Politics, and U.S. Energy Supply
Oil Exploration — A Lot of Looking, Not Much Finding
The Gold and Oil Correction
North Dakota Oil Is “Burning Up The Roads”
Major U.S. Oil Supplier, Nigeria In Trouble
Where Is Oil Headed?
How Much Is The Price Of Gas Affecting You?
US Offshore Drilling…and Politics
The Great U.S. Energy Transformation…
Rising Energy Costs and the U.S. Economy
Russian Oil Exploration — And Why The US Will Be Playing Catch-up
Are “Speculators” Causing the Oil Price Rise?
Warning from My Energy Insider…