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Back when Hurricane Katrina hit New Orleans, the price of petrol in the US hit a new, unthinkably high level, of more than $3 a gallon.
Meanwhile, the price of oil spiked to well above $70 a barrel – again, nigh on unthinkable and worthy of headlines across the world.
Yet here we are, 18 months later, and the price of oil is back above $70 a barrel, on this side of the Atlantic at least. And in the US, petrol prices are even higher than in the wake of the 2005 hurricanes, hitting an average of $3.20 a gallon.
And not a disaster in sight to blame it on…
Part of the reason that US gasoline (petrol) prices are so high is because refinery capacity is running at near-historic lows. Ironically, this is partly because vital maintenance was put off in the months following Hurricane Katrina, as a large chunk (nearly a third) of refinery capacity was knocked out by the storms. Those delays are catching up now – maintenance can only be put off for so long.
You can read more about the reasons behind the refinery problems, and how to profit from surging petrol prices in the current issue of MoneyWeek (for a three-week free trial, click here: /file/194/subscribe-from-not-logged-in.html).
But it’s not just about the refinery squeeze. The reality is that the cost of oil and all its products is rising because supply just isn’t keeping up with demand. This is the very simple reason behind the boom in alternative fuels and the green energy hype. While oil prices remain high, other sources of energy start to look viable.
This is particularly pertinent to us here in the UK. North Sea oil production has already ‘peaked’ – in other words, we’ve already passed the point where we’ll get the most oil per day out of the region – now it’s just a matter of managing the decline. In 2005, Britain became a net gas importer. By 2020, we could be importing 80% of 90% of our gas.
It’s not just our oil that’s peaked. By 2015, our electricity generating capacity could be cut by a third, says Grant Ringshaw in The Sunday Times, as “ageing coal and nuclear power stations are closed.” Nuclear reactors currently provide a fifth of Britain’s electricity, but in 20 years that’ll be down to 6%.
And of course, you can’t lose all this capacity without having some impact on supply. In just eight years, demand for energy could outstrip supply by 23% at peak times, says Logica CMG. That would mean blackouts and general chaos.
So why not build more plants? Well, the trouble is that we want to have our cake and eat it – we want all that energy, but we don’t want to generate carbon dioxide while we do it.
Burning fossil fuels is not the most environmentally friendly way to power a country. So realistically, Britain needs more nuclear power plants.
Now there are plenty of hurdles on that road. People are concerned about safety, of course, and there’s a great deal of opposition to expanding nuclear power in this country, mainly on those grounds.
But the truth is, that for the nuclear industry, it doesn’t matter that much what the UK thinks. Elsewhere in the world, the battle for nuclear power has been won, with Asia in particular – probably the most important region economically in the coming decades – embracing atomic energy. China is talking about building around 30 reactors over the next 15 years or so, for example, while Japanese giant Toshiba reckons that about another 90 to 130 new reactors will have been built by 2020.
That’s good news for uranium miners, who supply the basic power source needed for nuclear reactors. But it’s also good news for everyone involved in the nuclear construction and of course, the clean-up industry.
You can read more about nuclear power and how to profit from it in a MoneyWeek cover story from the end of last year – How to generate profits from nuclear power.
Before we go, you may have noticed that MoneyWeek editor Merryn Somerset Webb has a new book out – Love is Not Enough: The Smart Woman’s Guide to Making (And Keeping) Money.
Now we realise that – in common with most other investment magazines – our readership is mainly male. But despite the title, Merryn’s book has plenty to offer anyone – male or female – who could do with some straightforward, no-nonsense advice on why money matters, and how they should go about achieving their financial goals. For example, I wish I’d had someone give me tips on how to negotiate a pay rise, before I stepped on the career ladder and learned the hard way.
So even if you feel comfortable with your own level of financial prowess, do your children or less responsible siblings a favour and buy them a copy of Merryn’s book. You can find out more about it here: Love is Not Enough
Turning to the stock markets…
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In London, the FTSE 100 closed 4 points lower, at 6,638, yesterday as a late slide from drug stock GlaxoSmithKline offset gains for the mining sector. GSK shares fell over 5% on news that its popular diabetes drug Avandia increased the risk of heart failure. For a full market report, see: London market close
Across the Channel, French shares also closed lower after a day of light trading. The Paris CAC-40 was down 11 points to 6,089 at the close. However, the Frankfurt DAX-30 added 11 points to end the day at 7,619 as chemicals stocks Bayer and BASF led blue-chips higher.
On Wall Street, US stocks closed mixed. The S&P 500 climbed as high as 1,529 – above its record closing high – in intraday trading, but ended the day with an overall gain of just 2 points, at 1,525. The Dow Jones industrial index fell 13 points to close at 13,542. And the tech-heavy Nasdaq added 20 points to close at 2,578 as Sirius Satellite bounced back from recent setbacks with gains of over 2%.
In Asia, Sony and NEC led the Nikkei 123 points higher to a close of 17,680. In Hong Kong, the Hang Seng ended the day 67 points lower at 20,860.
Crude oil climbed over $1 higher yesterday on geopolitical concerns, although futures had fallen back slightly to £66.03 this morning. In London, Brent spot was last trading at $70.21 a barrel.
Spot gold was relatively flat at $662.70 this morning, whilst silver had fallen to $13.03.
Turning to currencies, the pound was at 1.9719 against the dollar and 1.4646 against the euro this morning, whilst the dollar was at 0.7424 against the euro and 121.46 against the Japanese yen.
And in London this morning, retailer Marks and Spencer announced a 26% rise in annual profit to its highest level in nine years. However, net income of £659.9m was below analysts’ expectations and M&S shares had fallen by as much as 2.5% in early trading on concerns that revenue growth would slow as the UK retail market becomes, in the words of Chief Executive Stuart Rose, ‘more challenging’.
And our two recommended articles for today…
Is this it for gold’s bull market?
– The bull market that peaked in May 2006 finally gave up the ghost last week. Or so Wall Street has been saying. But is this really the end – or just a brilliant buying opportunity? To read Adrian Ash’s analysis of current gold price trends, click here: Is this it for gold’s bull market?
Where to make money this summer
– In Britain and the US stock markets are hitting multi-year highs. And the good times look set to continue through the summer months. But are markets booming or bubbling? asks Merryn Somerset Webb. To find out why it looks like the latter – and which mainstream market looks to have slightly healthier fundamentals – read: Where to make money this summer