This essay was originally posted at treasurechests.info on June 4, 2006.
The commodity boom currently underway in all areas is due do shortages. Shortages are the result of different circumstance depending upon the commodity. Different commodities will be examined but all stem from a common thread and will only be amplified by its shortages: Energy.
The most important source of energy is oil and related products. It is the most compact form of portable energy for easy use. Currently, around 25 billion barrels of oil/year are consumed and with China oil consumption increasing 2% year over year, over 500 million more barrels are required next year. If no other countries decrease their oil consumption, then there will be real felt shortages next year. The more and more I read about oil production and shortages (best book by far is "Twilight in the Desert” by Matt Simmons), this is going to be an extreme event. Current sources of oil are declining and India and China have economies growing at 9-10% per year, so unless more oil is found, prices will rise. There will be some point in the future where oil/gasoline prices will decrease consumption, but peak oil is looming and any decline in consumption will be met with declining production. If this relationship holds for the next 15 years, then oil prices are likely to rise much higher. In North America (excluding Mexico, where 66% of their population is under the age of 30), Europe and Japan, demographics are kicking in and most people nowadays are extremely out of shape. What better to have cars take one to the grocery store, a gas powered lawn mower to cut the grass etc. etc. All of today's inventions are designed to make life easier, so baby boomers are likely to simply grumble at the pump and pay for now.
It is amazing how much gas is used to keep lawns trim. On a Sunday afternoon when one person starts to cut their lawn, all the lazies (myself included) hear the sound and think "better get out and cut the grass before the city comes and cuts it." Within on hour, there is a smell of gasoline all over the neighborhood. My neighbor has a push mower and I plan to get one, but I have to find a good one, but am on the prowl. Oil is not only going into cars, but it is an essential requirement for increase in GDP. When peak oil hits, GDP of each nation potentially stands to collapse, so intense control for remaining oil will likely occur. A contraction in global GDP will result in an implosion of export items. Economies will quickly revert to localized economies rather than a global economy, simply because there will not be an energy infrastructure in place to support it. There always will be global trade, but as in the past, that market will be for the rich. This is over the course of the next few decades, but the changes down the pike are going to be fast and furious.
With oil playing such a big role in the future, oil fields will be nationalized for strategic military control in the sake of national security. This will happen in the US and it will happen in Canada within the next 15 years, that is a virtual guarantee. In the coming few years, there are maximum gains to be made in the commodities market in politically secure areas of the world (in the wise words of Donald Coxe; for those who do not know who he is or listen to him, go the following thread: http://www.bmoharrisprivatebanking.com/webcast.asp) until such an event occurs. A debt implosion is likely to occur after 2010 when the effect of baby boomers really starts to kick in. This is why I am a strong proponent of investing 50% of profits from the energy sector in 2008-2009 into gold and silver bullion.
Natural Gas production peaked in Canada in 2001 and is slowly declining. In fact within 8 years, there will be no more natural gas available from mainstream sources. Natural gas will be derived from coal bed methane, coal-to liquids and liquid natural gas (LNG) at a significantly higher price. One way to sidestep this for those of us in cold climates (-40°C or -40°F (both temperature scales are identical at this temperature) is to get geothermal heating. It cost around $22,000 for current homeowners by time installation and landscaping is done, but pays for itself within 7-10 years). Energy from natural gas will be obsolete in the US within 10 years unless people allow LNG terminals to be built. If people do not allow these developments soon, then there will be a 10-year delay in the available infrastructure to be set up and 10 years of pain.
Oil Sands, Shale Oil
Oil sands in Venezuela in my eyes will not be developed. After that country's leader Chavez recently took away oil fields, no one in their right mind would invest the required funds to develop the infrastructure in fear of confiscation. Shale oil/oil sands in Utah and surrounding States sounds great, but there is already a severe lack of water in that neck of the woods. Oil sand projects are very water intensive and a reasonably abundant water supply is required. Water will be a limiting factor in developing the Athabasca oil sands/Saskatchewan oil fields in Canada. I strongly think a desalinization plant will be built to provide necessary water (with a background salinity to prevent pipes freezing in the cold winters), likely in Churchill Manitoba. This is in the distant future, so I do not think politicians will even have this on their radar screen. There is a limitation as to how much oil will be taken out, especially if any severe droughts kick in.
Asset Control By Central Government
Oil Sands in Canada will be one of the most important sources of oil in the future, which is why I see them being seized by the Canadian Federal Government in 15-20 years. Currently, Canadian provinces and territories currently have control over their own assets. With the way things are headed, a single source of control will likely be sought under the umbrella of national security. There is news of terrorists being arrested in Canada today. Call me paranoid, but until I see hard facts, I would suspect media influence which could be blown into bigger things down the road and grasped by government to inject fear into the Canadian populous. Creating a smoke and mirror campaign by instilling fear into the populace will cause the public to voluntarily submit their freedoms to the government in replacement of fascism. The times we are entering are going to be tumultous, so do not believe everything you read or hear. The mass media is a way to disseminate information to the public. The real history and what is told are two totally different things.
For successful investors, it is important to take positions in reasonably good companies and hold them for more than one day. Large profits are to be made in the coming 2-3 years. This is how the most money is made in bull markets, so hang tight.
Water is used for industrial purposes, life, crops, etc. etc. It is the single most important molecule in life and shortages will spark wars. Within 10 years, attempts to mine water from the Great Lakes of North America are likely to by attempted by certain southern States. Mining refers to taking more than 1% of the total volume each year, because the Great Lakes only replenish 1% of their total volume each year. Desalinization plants can provide water, but this requires energy. We are nearing a shift in the crosscurrent of energy consumption; it will be from personal energy consumption to government energy consumption. Energy for things like food growth, transportation of critical goods, desalinization etc. etc. will be more important than personal consumption. Live in areas where water is relatively abundant and clean because cities and towns will literally shut down when their water source dries up.
India and China are growing their economies at 9-10% per year and increases in copper demand for making new buildings is inevitable. There currently is a two-day global copper supply and any further nationalization of copper mines in South America, coupled with declining copper production will only result in even higher prices. Many key copper mines in South America are reaching peak production, with no future mines to match current production.
Gold and Silver
What can I say other than make sure you own the physical. Gold and silver are money and the only way to protect wealth in a fiat currency system is to preserve it. For all the reasons mentioned above, gold and silver will become evermore precious.
I hope this has provided some further insight into why commodities are going higher. As peak oil hits, countries will continue to nationalize assets to protect their own interests. In the mean time, there is money to be made by companies in politically secure areas of the globe. Once the debt bubble from around the world is popped, make sure bullion and money are stored away from banks.