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Dodged a Bullet

Written by Luke Burgess
Posted September 26, 2005

Dear Wealth Daily reader:

As many of us watched football yesterday, the energy industry exhaled a collective sigh of relief. Initial damage assessments showed only limited destruction to oil and natural gas platforms in the Gulf of Mexico.

It just wasn't as bad as everyone expected. By late Friday, Rita was down-classed to a category 3 storm and the storm failed to outdo its processor. Texas Governor Rick Perry said, "As bad as it could have been, we came out of this in pretty good shape."

Hurricane Rita spared Houston's giant oil refineries but did manage to hit plants further east and shut down rigs in the Gulf of Mexico.

Over the next few days we'll see a hiccup in the system causing gas prices to rise. But it certainly won't be as bad as post-Katrina.

In fact, according to the Lundberg survey, gas prices have actually cooled off a bit.
'Retail Gas Drops': Lundberg
According to the survey of 7,000 gas stations around the country, retail gas prices dropped an average 20 cents in the past two weeks because of decreased demand and a comeback by Gulf Coast refineries that were hurt by Hurricane Katrina.

The national average price for all three grades declined to $2.84 a gallon for the two weeks ending Sept. 23.Nationwide self-serve regular averaged $2.81 a gallon. Midgrade was hung at $2.91, while premium was at $3.01.

Some of the Katrina-ravaged refineries are back online allowing refiners to do business as usual. But the average capacity is still below normal.

Demand also played a role in the recent gas price drop. Demand is virtually nonexistent in places like New Orleans, where residents have evacuated because of rising floodwaters. Meanwhile, motorists in other parts of the country, stung by the recent price spike, are consuming less gas.

Among the stations included in the survey, the lowest price for unleaded regular was in Baton Rouge, La., at $2.57 a gallon. The highest was in Honolulu at $3.23.

Refinery outages have also eased the demand for crude oil, prompting a pullback in prices. In a special NYMEX electronic trading session Sunday, crude oil futures were down over $1 to around $63 a barrel.

Light, sweet November futures sat at $63.50 in late morning trading and actually touched a 20-day low this morning of $62.65.

Today's drop also came after President Bush indicated that the Strategic Petroleum Reserve can be tapped again.

The government hopes to alleviate any new pain at the pump caused by Hurricane Rita.

Bush also implied he will likely name a federal official to oversee the reconstruction of the Gulf Coast from the devastation caused by Hurricane Katrina.

Snow Days in September
Georgia Governor Sonny Perdue requested on Friday that public schools be closed Monday and Tuesday in order to save on gasoline costs.

Perdue requested that Georgia public schools take two "snow days" to conserve fuel.

The request did not sit well with many parents who had to scramble to find babysitters and day care for their children.

The governor estimated that closing all the state's schools would save about 250,000 gallons of diesel fuel by idling buses, plus an undetermined amount of gasoline by allowing teachers, staff members and some parents to stay home. All but three of the state's 181 districts agreed.

Everything to Rise Due to Energy's Climb

High gas prices can do more than increase your transportation budget. And it doesn't take someone with an advanced business and economics degree from Harvard to understand why.

All crude oil is not converted into gasoline. A great deal of the oil that doesn't wind up in the form of carbon monoxide goes to everything else.

Some non-fuel uses of petroleum include:

* Solvents used in paints and printing inks
* Lubricating oils for machinery
* Wax used in candles, polishes and candy making
* Asphalt used for everything from road-building to making shingles
* Synthetic rubber


Of course, there are several industries that rely heavily on gasoline. And when transportation costs rise, so too do prices of the goods that are being moved.

Here are some items you already are paying more for, or will in the future, because of high gas prices.

Food

The U.S. Agriculture Department has said that retail food prices will rise for the rest of this year due to the late-summer surge in crude oil prices.

The agency expects food prices to rise as much as 3.5 percent from last year.

"Higher energy prices will soon work their way into the food supply system and cause food prices at the retail level to increase slightly for the remainder of the year" - Ephraim Leibtag, USDA food-price analyst

Fresh fruit and vegetable prices are already up more than 6 percent for this year, the largest increases among food categories. Meat prices were flat and dairy was down. Cereal and bakery goods were up 1.4 percent.

Tires

Tire manufactures use both petroleum and steel to keep you on the road. A double-whammy of higher prices.

Incredibly, about five gallons of oil are used in the production of one semi-trailer tire.

Just this year, Goodyear has announced three price hikes. The most recent is a 5 percent to 8 percent increase, depending on models. And you can be sure to expect more and bigger hikes as the year progresses.

Fertilizer

Farmers are getting drilled by higher fertilizer costs.

A few years ago, a ton of nitrogen-based anhydrous ammonia, a popular farm fertilizer, cost about $150. Now it's more than $400 a ton.

The high-rising cost of natural gas, a primary ingredient of nitrogen fertilizers, is the primary culprit.

And high fuel prices are worsening the problem. Long distances must be traveled to deliver fertilizer to farms throughout the country.

Plastics

Plastics, like fertilizers, are made from petroleum and also require increasingly expensive natural gas to make. Instead of an ingredient in plastic products, natural gas is often used to heat pellets of plastic so they can be molded into thousands of consumer products.

Just consider for a minute how many items you have lying around the house that are made with plastics.

Everything

I can go on and on telling you about how the price of everything is going to rise. But I think you get the point.

There's no way around it. The cost of everything will rise due to higher energy prices.

-Luke Burgess 

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