Solving a Shortage

Addison Wiggin – July 5, 2011

  • Three strikes and Israel’s out of gas… How saboteurs are amping up a unique profit opportunity
  • One broken promise, or a precedent for Social Security: Illinois tells 30,000 state employees to go without scheduled raises
  • Tales from the front lines of broke states and cities: No fireworks, no state parks, no toilet paper (or not much)
  • “Will the soldiers shoot?” and other questions to ponder when the violent revolution comes… that, and other ironic questions to ask on the 5th of July…

   Yesterday, as you prepared to light up your barbecue grill, saboteurs lit up a pipeline in the Middle East — again.

You keep repairing it? We’ll keep blowing it up!

For the third time this year, the natural gas flowing from Egypt to Israel has been cut off.

This time, masked men stormed a pipeline station, tied up security guards, planted explosives and then ran away and set off them remotely by firing gunshots.

Again, the source for 40% of Israel’s natural gas is out of commission.

Ironically, the perps might not even have it in for Israel. Both times before, the saboteurs were Bedouin tribesmen who feel the Egyptian government discriminates against them.

No matter, the results are the same. “In the long term, it looks like Egypt won’t be a reliable source of gas,” says Deutsche Bank analyst Richard Gussow, based in Tel Aviv.

No, probably not.

   As with past attacks, coal-fired plants and diesel generators fill the void to keep the lights on in Israel. The problem is that the source for the other 60% of Israel’s gas — a project called Yam Tethys — will likely run out of reserves by 2014.

Even before this latest explosion, the Israeli Public Utility Authority warned the unreliable Egyptian supply is one reason Israeli electricity rates could rise 20% next year.

“Electricity comprises a major input in industrial production, as well as for commercial enterprises and households,” says Amit Mor of the Israeli consulting firm Eco Energy. “Such a dramatic increase will have a macroeconomic impact, and will cause a significant increase in the consumer price index.”

   “How many times do you have to bump your head on your bed frame until you fix it?” asks professor Brenda Shaffer at the University of Haifa. “It’s another reminder that in all the considerations about what Israel needs for consumption, it shouldn’t count on the Egyptian supply.”

“We don’t even know what’s going to happen in Egypt in terms of government,” she adds, with the first elections of the post-Mubarak era coming in September.

For all the continuing angst of the Middle East, Israel is still among the top third largest economies in the world. And among the largest in the region. Bottom line: Israel needs a new source of gas — and fast.

Fortunately, it has one:

And that means opportunity.

   The Leviathan offshore field we’ve been discussing is one of the biggest gas discoveries in the last 25 years — with 16 trillion cubic feet. Our resident geologist Byron King has been eyeing developments there for some time, because he says the region has all the markers of a major “petroleum system.”

“It has analogues,” he explains, “with other of the world’s best hydrocarbon-rich areas. There are salt layers similar to, but not as thick as, the pre-salt of Brazil. There are structures and stratographic traps, like off West Africa, with oil plays like Angola and Namibia.

In other words — potential on a scale with Brazil’s offshore Tupi find… or the one off the coast of southwestern Africa that Byron latched onto in the fall of 2009. So far, that’s delivered a 518% gain for readers of his premium service, Energy & Scarcity Investor.

Byron has identified another tiny producer with the same or even greater profit potential. This company is sitting on prime Leviathan territory… and it’s the only company working the region that’s essentially a “pure play” on this massive find.

You can secure Byron’s full write-up on this company — plus a discounted membership to Energy & Scarcity Investorbut only for a few more days.

   Stocks are flat to begin the holiday-shortened week, the major indexes taking a breather after last week’s epic run-up. The Dow sits a hair below 12,580.

   Proving you can’t keep a good metal down, gold has rebounded from the beat-down it took late on Friday, to $1,511. This is the third time in two months gold fell below $1,500 — only to rebound within a day or two.

Silver is up more than 2.5%, back above $35.

   Contract, shmontract. In our ongoing chronicle of cash-strapped local and state governments, it’s the basket case of Illinois that gets our attention this morning. Illinois is denying scheduled pay raises to about 30,000 state employees. Union employees. Who have the raise written into their contract.

“The fiscal year 2012 budget does not provide the money for these pay raises,” says a statement issued by the governor’s office. “If the state paid these increases, the impacted agencies would not be able to make payroll for the entire fiscal year, preventing them from continuing operations and providing core services to the people of Illinois.”

The union is threatening to sue Gov. Pat Quinn. “By choosing to simply ignore a legally binding agreement, Pat Quinn has sunk even lower” than governors in other states, says union chief Henry Bayer.

This is a precedent. You can bet leaders in other states are watching this to see how far they can push. And although no one would admit it, we wouldn’t be surprised if the trustees for Social Security and Medicare are watching.

How many promises can you break before people start revolting?

   Minnesota’s state parks were off-limits to grillers and campers over the long weekend.

The partial shutdown of state government we mentioned on Friday is still under way. The governor and legislature are unable to agree on how to scrape the money together to keep things going.

For its part, Chicago did not hold its usual Independence Day fireworks extravaganza on the lakefront. “We’re doing it to be fiscally responsible,” said a City Hall spokeswoman when the decision was made last winter.

Thus, in little ways does daily life begin to change.

   But the worst holiday indignity people suffered as a consequence of fiscally challenged local governments was… drumroll please…

New song for the Great Correction: “Lady, Can You Spare a Square?”

Toilet paper was rationed in the women’s rooms at the Coney Island boardwalk in New York. Workers were under orders to leave the dispensers empty. Instead, women had to ask for TP handouts.

“Never in my life have I experienced anything like this,” said Regina Ballone, the young Brooklynite in the picture. “I walked toward a stall, and a bathroom attendant stopped me by shouting, ‘Hey, mami! There’s no toilet paper here,’ and she whipped out a big roll for me to grab some.”

The men’s room, you wonder? Nothing in there, either. Presumably anyone who anticipated the need could grab some from the attendants outside the women’s room.

Oy. We’re sure there’s more of this to come, too. If you look at the debt run up by the average state government, it works out to $1,297 for every man, woman and child.

   “What is behind the flash mobs?” asks a reader regarding the attacks we noted on Friday occurring in Chicago and other cities. “Why do they do what they do? “Is it just a fad? Do they do it because they are thugs/hooligans and have figured out if they do a ‘blitzkrieg’ type of attack, it works well? Or is their excuse because they are unemployed? ”Sounds like we need to bring our troops home to patrol our own streets.”

   “This revolution won’t be Minutemen with major, concentrated and/or coordinated activities,” writes a reader about whether troops called in to quell social disturbance would fire on their own people.

“The scenario, which most ‘sheeple’ will support, is one of relatively isolated riots and violent activity, mostly in major cities. The military, initially the National Guard, followed by federal troops, as the unrest spreads will respond to local incidents when the cash-strapped, diminishing police forces cry for help.

“Little step by little step, blanket martial law will follow.

“The soldiers will fire on faceless criminals who are looting and burning buildings, who are mounting violent attacks, who are shooting at the soldiers. And the military actions will be supported by the masses watching the violence on TV, thinking that this is, somehow, security.

“Look at what they have allowed with the TSA, for example.”

The 5: We did catch one potential explanation for the “flash mobs” that appears to have gone underreported — adult criminals are recruiting the kids to do the deed.

“You have large groups of kids — 15, 20 at a time — running into a store all at once,” explains Brendan Reilly, the Chicago alderman whose downtown district is the scene of many thefts.

“They mull around for a few minutes, find the items on their lists and, when a code word is yelled or texted to them, they head for different exits, knowing retail security can’t catch everybody. “What’s so terrible is these adults are specifically targeting young women under 18 because they can’t be prosecuted as adults. They’re stealing high-end items that can be quickly resold. The kids’ reward is some cash or one of the items on the list.”

   “I’m curious as to the evidence that Glenn Beck was fired,” asks our last reader (with a motive). “People who get fired are called into some office and fired and they are gone with their box of personal effects the same day. Beck has been saying he was leaving for months, and his final episode was broadcast LIVE. Not the usual forum given to a fired employee.

“My guess you didn’t like the Beck message, so saying ‘fired’ somehow diminishes the impact he has had. In reality, the Beck message is not all that different than yours. He just had a bigger audience and was more entertaining.”

The 5: Hold on there, Buckwheat. We don’t know anything about his “message,” because we have never seen his show. Nor do we know if he got fired or not.

“Half of the headlines say he’s been canceled,” Fox News chief Roger Ailes said of Beck back in April. “The other half say he quit. We’re pretty happy with both of them.”

Whatever Beck’s up to, whenever we mention his name, we get a mailbox full of abuse in return. So he’s doing something right. Or wrong. Our point on Friday was he’s being replaced by “The Five” — a rotation of part-time anchors in search of a permanent gig. Apologies for indulging in such a cheap thrill.


Addison Wiggin
The 5 Min. Forecast

P.S. “In Washington in the early 1930s,” writes a reader, “I believe troops were used against demonstrators with live ammo by Douglas MacArthur to put down a demonstration/riot. At the time, MacArthur was a lower- ranking officer, but following orders given by higher-ranking officers.

“My point is the army will do what it is told to do — plan on it.”

The 5: The “Bonus Army” protests in the summer of 1932 happened in a similar economic environment as our current one. World War I veterans who felt cheated out of their benefits converged on Washington — about 17,000 of them, with 26,000 supporters. They camped in what’s now Anacostia Park.

Police first tried to evict them in a botched operation that ended with two protesters shot and killed. Then President Hoover sent in the Army. A young MacArthur and Patton both took part in the operation to remove the protesters, using bayonets and tear gas. Fifty-five people were hurt, and 135 arrested.

“Posse comitatus” — the 1878 law that (hypothetically) forbids the deployment of the military on U.S. soil — didn’t apply in the District of Columbia. “Posse comitatus” in our time has largely been suspended for the rest of the country: The military is now routinely deployed in the 50 states to carry out the “war on drugs.”

Having just digested the last of the steaks we threw on the grill for our own family Fourth of July celebration, we urge you to take advantage of your 20% discount at Laissez Faire books and grab your own copy of The Idea of America, and maybe a few more for your friends and relatives.

P.P.S. Late on Friday, Sen. Rand Paul confirmed he’ll be regaling the crowd at Freedom Fest in Las Vegas next week. His speech: “The Inside Battle Against Big Government by America’s Libertarian Senator.”, Laissez Faire Books is the official bookstore of event. And our own Whiskey & Gunpowder is a sponsor.

We also plan to be in Vegas to do a “focus group” screening of our latest documentary, Risk! — a look at entrepreneurship in the U.S. post-financial crisis and the likelihood the country can “grow” its way out of the debt crisis.

You’ll also be able to catch a glimpse of the film if you’re planning to attend the Agora Financial Investment Symposium in Vancouver later in the month. Given this year’s theme — “Fight or Flight: Your Capital at Risk” — the film’s theme of entrepreneurship is about as timely as it could get.

[Ed note. As usual, we’re recording all of these sessions on high-quality digital audio and assembling a written report detailing every investment recommendation — including the “breakout sessions” with some of the most lucrative suggestions. There’s still time to secure your recordings at the lowest possible price. Here’s the order form.]


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