Fuel - The Catalyst!
Under normal circumstances, I would avoid discussing politics. However, this is not a normal situation and therefore I want to highlight some key facts.
Whether you are aware of it or not, we are living in a highly inflationary, war cycle. The money supply is surging at an alarming rate and nations continue to out-bid each other for natural resources. In a nutshell, the mad scramble for commodities is on! Unfortunately, this dangerous fight may only get worse in the future. Glimpses of this are already unfolding with the geo-political unrest brewing in the middle-east.
Today, our world faces a unique scenario - the enormous appetite of China and India. Both these gigantic countries have been shopping around the world securing their supplies of natural resources to meet the needs of their 2.3 billion people. Recently, China and India formed a strategic alliance to bid for major oil-interests in the world and acquired interests in Kazakhstan, Nigeria and Syria. Saudi Arabia also seems very keen to tap into this growing market as demonstrated by Saudi King Abdullah's recent visit to both these countries. And this insatiable hunger doesn't just stop with oil. Over the past couple of years, Chinese leaders have been busy purchasing all sorts of metals and minerals from Australia, South America and Canada.
Believe me, all of the above has not gone unnoticed and the leaders in Europe and America are getting nervous. For decades, these developed regions have enjoyed an endless supply of cheap natural resources. However, this has now changed due to stiff competition from the highly populated emerging economies where demand is growing fast and per-capita consumption is amongst the lowest in world. Despite all you hear, I can assure you that the officials in Washington, Paris and London are not happy with the fact that the emerging nations now consume more oil than the developed ones (Figure 1).
Figure 1: Crude reality - increasing oil demand from emerging markets!
To complicate matters even more, Iran plans to launch its Oil Bourse in March 2006, where (for the first time ever) Iran will sell its oil to any country who is willing to pay for it in Euros. For a long time now, oil has only been sold for US dollars - a big advantage for America and its currency. You see, every nation depends on oil and if payment for it can only be made in US dollars, it creates artificial demand for the American currency. In my opinion, this is one of the main reasons why (despite record-high deficits) the US dollar has not yet collapsed. Now, if Iran manages to set-up its oil exchange, countries around the world may not need to hoard so many dollars, which will seriously undermine American supremacy.
Please take note that a few years ago Iraq stopped selling its oil for US dollars. Once Saddam was removed by the US, Iraqi oil started flowing (once again) in exchange for US dollars! Are you surprised then by the fact that the "guardian" of our world is now building a case against Iran's nuclear program? Perhaps, it has now given up trying to look for the "weapons of mass disappearance" in Iraq and wants to find them in Tehran! History has shown that each commodities bull-market in the past 200 years has coincided with a major war, without a single exception. So, now we are left with two choices. Either we learn from history and protect ourselves or we continue to live under the illusion that everything will be okay. "But how do I protect myself?" you may ask. I honestly don't know but all I can say is that a big exposure to commodities will surely help you in safeguarding your wealth. During periods of conflicts, countries always embark on the road of massive money-printing in order to finance their efforts. Already, America has spent billions of dollars in Afghanistan and Iraq. I hope I am wrong in my assessment, but if the conflict in the middle-east escalates, you can be sure that nations will print a blizzard of paper money. All this money-printing and liquidity will cause the price of commodities to go sky-high!
Back in November, I had advised you to get back into the energy sector. Since then, oil has risen steadily and surprised most analysts and investment "gurus". For sure, this rise may have been helped by the situation in Iran but our world faces a much bigger energy problem today. Most of the world's oil provinces are in decline and not a single gigantic oil field has been discovered over the past 35 years!
Let's review the daily output of some of the largest producers in the world. Saudi Arabia is at the top of the list and produces roughly 10 million barrels, followed by Russia - a close second. What is ominous is the fact that each of the top five oil-producing nations (with the exception of China) still produces less oil today than it did in the past! In other words, (despite claims of endless reserves) Saudi Arabia and Russia have failed to match their record production levels recorded in the early 1980's! The proof is more often than not, in the pudding. If our world is really awash with an endless quantity of crude oil, why then are these nations not increasing production to meet the growing demand? Or is it that these nations are not in a position to increase production much further? The consensus view is that the lack of refining capacity is responsible for high energy prices. This can't be true because if our world can't refine more oil, demand can't go up! The real reason why oil is becoming expensive is because our world is not able to pump enough crude oil from the ground to meet the rising demand. The global oil-production peak is upon us and investors must take action now in order to avoid financial pain.
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