A 400% increase in the price of a precious fuel source sounds outlandish, but that’s exactly what’s happening in the country that produces more copper by far than its closest competitor.

It’s happening in Chile. Only it’s not gas, it’s electricity.

The price of electricity in Chile has jumped from about 3.5 cents per kilowatt-hour to 35 cents per kilowatt-hour in just three years. That’s like gasoline spiking from $2 a gallon in 2005 to $20 a gallon today.

This situation – which has big implications for commodity investors – stems from a deal between Chile and Argentina a few years ago…

In 1995, Chile generated 57% of its electricity from hydroelectric dams, 28% from coal, and the rest from diesel fuel. The government sought ways to diversify its electrical generation. It settled on cheap, clean natural gas piped in from neighboring Argentina. The media hailed the project as a model of national cooperation.

Chile bet big on Argentine natural gas, which quickly came to produce 37% of the country’s electricity. The switch lowered energy prices… for about 18 months. Then, like my junior prom date, the relationship went bad in a hurry…

Argentina proved to be a terrible partner. By 2004, it began violating its production contracts. To meet increasing Argentine demand, suppliers cut the gas coming into Chile.

Chilean electrical production shifted to diesel, which effectively tripled the cost. Companies had to bring many of the old diesel generators out of retirement. Where a natural gas turbine costs $50 per megawatt-hour to run, the old diesel turbines cost $250 per megawatt-hour… a 400% increase.

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On top of all that, Chile is in the midst of its worst drought in decades. No water means no hydroelectric power. So the country is even more dependent on diesel than ever before.

This power crisis has rocked the global copper market. Chile produces 40% of the world’s copper. That supply is at risk… so naturally, copper prices are going up.

Back in July 2007, analysts at Macquarie and Citigroup projected copper prices around $3.50 per pound in 2008. Credit Suisse analysts bumped up their 2008 price forecast to $3.50 in March. Despite their increasedprojections, these firms are still underestimating copper’s stunning run, as you can see.

China is the world’s biggest consumer of copper. A lot of analysts thought a U.S. recession would put a damper on China’s demand, driving down the price of copper. But a stateside downturn only hurts China’s exports… Much of the country’s copper goes to internal development projects.

When it comes to choosing commodity stocks to buy, I’m not a big fan of relying on predictions. As my good friend Steve Sjuggerud says, the best indicator of tomorrow’s price is today’s close. In copper’s case that’s about $3.95 per pound, which is 33% higher than in December 2007.

Shares in copper producers have done well over the past year… But with China’s voracious appetite for commodities and Chile paying through the nose to pull its copper out of the ground, I think an investment in this sector is still a terrific way to play the bull market in natural resources.

Good investing,

Matt

P.S. We’re jumping at this huge opportunity in the S&A Prospector with a small Chilean copper company that produces without the high cost of mining. It pays a 6% dividend, will nearly double its copper production this year, and has found a way to reduce its electricity costs by 40%.

We get the benefit of high copper prices, reduced costs, and one of the largest dividends in the industry. Click here for more on the S&A Prospector and how to access this report immediately.

You should be glad you do not live in Juneau, Alaska. And if by a 1 in a 100,000 chance you do live in Juneau, turn off your computer. You are wasting precious electricity.

While it is not making any mainstream headlines today, Alaska’s capital is in a state of emergency. A series of major avalanches has taken out the lines that connect Juneau to the hydroelectric source that creates its power.

With nearly two miles of lines down, and no safe access routes for up to a month, the city is in big trouble. It has been forced to switch to huge diesel backup generators. They will be running full power for at least three months until the lines are repaired.

The freak incident will cause huge amounts of financial hardship in the area. As you can probably figure, diesel generators are a bit more expensive to operate than a dam. Juneau’s generators are burning about 100,000 gallons of diesel a day. And with diesel already going for a premium (remember there are no roads into the town to deliver fuel), the city’s fuel bill from this incident will be over $400,000 per day.

You want how much?!

Thanks to the rare ability for the city’s power provider to almost immediately raise its rates, Juneau’s citizens will be forced to pay about four times the normal amount when their next bill arrives. Prices are expected to soar from eleven cents per kilowatt to fifty cents or more. The fallout will not be pretty for this tiny town.

I know what you are thinking, “Boy, that stinks for them. Good thing it can never happen where I live.”

You are probably right. For those of us who live “on the grid,” a major, long-term blackout is highly unlikely, but this is another great reminder of how energy dependent this nation is. We are hooked on the stuff and no form of intervention is going to get this monkey of our back.

The only thing left to do is invest in the stuff and at least profit from the dangerous addiction. For decades, smart investors have been turning towards the nation’s utilities when the economy gets shaky. They make good, safe investments that often pay a hefty dividend.

Even though some may say we have reached the bottom of this economic downturn, I think the worst is yet to come. That means, as Jim Cramer loves to yell… buy, buy, buy.

Keep the juices flowing

Electric utilities are a great option right now. The market is finally being opened to competition, legislatures are allowing power producers to raise their rates, and the nation continues to expand its energy consumption.

Some of the best utilities to look at are the ones working in non-regulated markets, or the ones smart enough to working with wind, solar, or other forms of alternative energy. If a Democrat somehow steals his (or her, of course) way into the Oval Office, alternative energy is going to be a fantastic investment.

One company worth taking a look at is Exelon Corp. (EXC:NYSE). Its share price has nearly quadrupled in the past five years, and it pays 2.4% dividend.

There are dozens of similar mega-producers out there just like one. Start your research with the company that sells you your electricity and work out from there. Almost all of them are a wise investment, especially if the economy weakens any further.

The cost of nearly everything is on the rise in this country. Investing in the nation’s utilities is a great way to get some of that money working for you again.