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April 06, 2005
Commodities: When the Oil Runs Out
Recently the CRB index - an index of 17 commodities - surged to its highest level in 24 years. On the same day, copper reached a 16-year high. Then oil made an attempt at a 24-year high - $55.67 a barrel is the mark, set on October 25, 2004. Oil now stands at around $57/barrel and commodities are likely to tread water for a while, however, make no mistake - the overriding trend - on FUNDAMENTALS - is UP.
And the price of gasoline at the pumps isn’t exactly heading south. For the data, take a look at the Oil and Gas prices. Look out for $60+/barrel in the not distant future.
Justice Litle, reporting in The Daily Reckoning, takes a closer look at some of the longer term influences which will shape the world energy markets in the future:
"China's oil demand has doubled over the past decade, and the pace is only increasing. There will be ups and downs along the way: When the current infrastructure boom and the flood of foreign investment slow, energy demand will slow for a time also. But in the long run, the trend is inexorably steep. Consider this from The Economist (from "The Hungry Dragon," September 2004):
"In around 20 years' time, China's income per person could be close to South Korea's today. If its energy consumption per person also rose to current South Korean levels, its energy demand would quadruple. The increase alone would be greater than America's total consumption today, yet China's energy use per person would still be only half that in America. At present there is only one car for every 70 people in China, against one car for every two Americans. If car ownership were eventually to rise to American levels, there would be 650 million cars on Chinese roads - more than all the cars in the world today."
How is China going to ensure energy security with such a tall order to fill, let alone generating capacity for such incredible demand? First, by developing strategic ties with key energy producers who prefer an alternative to the "Bush doctrine" of the United States; second, by investing in local production and alternative energy sources that will reduce reliance on imports over time.
With key producers like Venezuela and Russia already in place, and with Canada as a long-term energy source, China's secondary focus is on alternative energy.
Through development of local resources and investments in cutting-edge technology, China can further close the energy gap and reduce dependence on outside partners. To this end, China is upgrading its nuclear power capabilities and investing heavily in advanced technology that will turn coal into petroleum products. It is in this area where Western investment opportunities remain; while it is not feasible to invest in the Venezuelan or Russian governments, China cannot avoid partnering with Western companies when access to technology is required.
Nuclear power is a natural choice for China. The standard "green" objections to nuclear power simply do not exist in the Middle Kingdom. Furthermore, China has awful problems with water shortages, air pollution and acid rain. A nuclear alternative could remedy some of these issues by substituting nuclear energy for fossil fuels and removing stress from the environment. Nuclear power has another green aspect as well: It produces virtually zero carbon dioxide, and thus does not contribute to global warming.
China has plans to develop a new type of reactor design known as a PBMR, or pebble bed modular reactor. The pebble bed reactor is theoretically cheaper and easier to build than traditional PWR (pressurized water reactor) plants. The pebble bed reactor also has a safety edge in that it is supposedly "meltdown proof": The reactor's uranium "pebbles" (actually the size of billiard balls) are coated with high-density carbon, preventing exposure in the event of a coolant leak. Thus, in theory at least, the disasters of Chernobyl and Three Mile Island could not happen with a PBMR. Furthermore, because the pebble bed reactor design is modular, extra generating capacity can be added over time, allowing for further development as needed and less lump sum expense for initial construction … …
On another experimental front, China is spending more than $3 billion on a coal-liquefaction plant in Inner Mongolia. The Shenhua Group, China's largest coal producer, has partnered with a U.S. technology provider to convert coal into petroleum products. In a nutshell, the process involves breaking coal down into hydrogen-enriched molecules, which are then converted to traditional oil products. According to Zhang Yuzhou, vice president of Shenhua Group, "The project consists of two phases of construction, and after the second is complete, the plant aims to yield 5 million tons of oil products annually and greatly reduce China's reliance on crude oil imports."
The winners and losers in China's quest for energy security revolve around transport, exploration and technology. China's demand for oil imports will rise inexorably over time, even as their internal energy sources come on line. This will create a rising demand for tankers, which in turn may benefit shipbuilders over the long cycle. As oil economics turn in favor of further exploration, there will be more opportunity in development and wildcat-style exploration projects, with big profits to the winners and heartbreak for those who come up dry. Look for the oil majors to participate indirectly in any exploration boom as well, spreading their risk through funding and backing of smaller players.
And of course, alternative energy technology is coming into its own. For the past few decades, alternative energy was simply not an economically viable option: Crude oil was too inexpensive, the initial development costs too high, to take alternatives seriously. But now, the development seeds are being sown, with compelling economics on the horizon for fossil fuel substitutes. In this arena, the companies positioned to profit most are those with hands-on intellectual property...alternative technologies that can be sold, licensed or leased but not easily copied or stolen, due to implementation requirements and need for hands-on expertise.
With the 20th century's books now closed, China looks to the 21st...and they know it is their time. In this new century, the dragon will rise again. As investors, we ignore China's destiny at our peril. Whether we see China as friend or foe is irrelevant; in fact, whether or not China fully succeeds in its ambition is irrelevant. What is certain is that China's strategic actions, and the resulting reactions, will dramatically alter the global landscape. We are in the beginning stages of a sea change."
So there we have it - as investors and traders we would be wise to pay heed to these global economic trends in the energy and related industries. For those with an eye to the future, there are phenomenal profits to be made; but for those with their heads firmly buried in the sands of time, possibly equally large losses.
In a future post, we’ll be taking a look at how to safeguard your investments and actually profit from the forthcoming turmoil.
For the full article, see The Dragon is Ravenous
Posted by Tony at April 6, 2005 04:23 PM