Have you picked up a five-pound bag of flour or a dozen eggs lately? Both staples are up more than 40% since January 2007 — among the worst price hikes. In effect, your paycheck must increase 10% just to keep as much food on the table in 2008 as you had in 2007.

Of course, that’s assuming there’s a paycheck to spend. The Labor Department reported on April 3 that new applications for unemployment insurance jumped 38,000, to 407,000, at the end of March, a two-year high. Some analysts estimate the unemployment rate may reach 5.5%.

If that weren’t enough, oil has topped $110. Prices at the pump hit $3.28, another all-time high. Meanwhile, the nation’s truckers prepare to strike. According to reports, many truckers are operating at a loss when diesel prices rise above $4 per gallon. To protest rising fuel costs, a group of big rig operators engineered a massive traffic jam on the New Jersey Turnpike. They monopolized all lanes, geared down to 20 mph and crept from the Big Apple like floats in a holiday parade. Similar protests clogged Chicago and Atlanta. It feels, dear reader, like an emotionally debilitating chapter from Atlas Shrugged.

We take these protests very seriously. After all, the health of the American economy rests on the ability to move goods to and fro. Like shipping, trucking still serves as the world’s economic circulatory system. This business connects the world in ways high-tech never will. Trucking is, and will remain, irreplaceable on the world stage. We cannot live without it.

Trains and planes, by nature, have limited reach. Railroads lead to rail yards. Airplanes fly to airports. Ships, for their part, carry goods to the to the tidewater’s edge, but no further. In each case, commerce depends on the truck to finish the job.

Truckers will demand higher wages to offset higher costs. Higher wages will require the goods they haul to be sold at higher prices. You get the idea. And this scenario discounts a major disruption to world oil supplies. A militant group truly determined to thwart the American dream wouldn’t have to leave the Middle East. Ask policymakers which asset they covet more: The Green Zone or Saudi oil production?

Treasury notes and bonds yielding 3-4% may appear a safe haven in today’s market environment, but they are a long-term investment I would strongly advise you to avoid. It’s better to own a diversified portfolio of stocks — especially stocks that have the ability to pass through price increases and those levered to long-term investment cycles, like energy, natural resources and infrastructure stocks. They might be rocky in the short term, but they should far outpace bonds over the next five-10 years.

Therefore, we argue that it never hurts to hold a major refiner.

America’s limited refining capacity ensures tight supplies. It’s no secret that the U.S. hasn’t built a new refinery since 1976. Why? Keep in mind that historically speaking, oil markets thrive on volatility. OPEC can effectively manipulate the price overnight. Consequently, many industry executives remain wary of risking the billions in capital investment needed for such expansions. Even as gas prices soar, companies wonder: What about five years from now? What about 10 years down the line? How will alternative energy affect the demand for petroleum products?

Others argue that tangible growth in offshore refining capacity can offset a lack of U.S. expansion. Maybe so. Or maybe Southeast Asian growth will absorb any and all extra supply. Maybe a decrepit old American refinery will explode or succumb to fire, restricting capacity even more. And maybe sound judgment will prevail, and the illogical, economically unfeasible solution better known as corn-based ethanol will lose its proverbial steam.

Whatever holds for 20-40 years down the road, our present situation remains inescapable: The world consumes about two barrels of oil for every new barrel it finds.

To think this can continue in perpetuity is delusional, a naiveté of convenience and nothing more. No amount of rationalization can convince a sober mind that one plus one equals three. If and when carbon-based fuels are replaced, we think the substitute will be just about anything but ethanol. But for now, the world still runs on oil.

But the real problem, dear reader, isn’t the absence of oil. It’s the absence of cheap oil.

Until next time,

Christopher Hancock
April 11, 2008

P.S.: My colleague, Byron King, is the true expert on anything that comes out of the ground, specifically oil. He just found a way for his elite Energy and Scarcity Investor to cash in on the oil rally. In fact, he has one way to actually tap an American oil reserve that’s three times the size of Saudi Arabia’s.

Trucking and the Absence of Cheap Oil was originally featured in the Penny Sleuth.