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277: Country Ranking in a Peak Oil World with Resources Scarcity


07-12-2009

propertyinvesting.net-logoPropertyInvesting.net team

You are interested in investing and making serious money. Otherwise you would not be visiting this website – PropertyInvesting.net.  If we are incorrect, we apologise and we do not wish to waste your time. Hence you may choose to leave now.

What we would like to present is a logical rational for why we believe certain investment sectors, countries and currencies will perform above trend and other sectors, countries and currencies will perform below trend over the medium to long term.

We’ve just entered an incredible period of economic upheaval. The historical norms can no longer be relied upon. It’s scary because we can feela lack insight and control over our investments – through lack of knowledge, predictive ability and being given poor advice from people with vested interests total different to one's own.

So what we would like to do is try and help put a framework around what is likely to happen in the next ten years – some of the failurings of current policy, how these flaws will lead to market abnormalities and how these will drive up certain asset prices, currencies and investment returns.

There are a few general trends worth noting – because these have a significant bearing on how the financial and economic world is likely to pan out. We can used these to make predictions thence help this guide our investment decisions.

Please note - we are private investors and we believe in an open efficient market economy. This is the basis behind our thoughts and insights - nothing else. 

Trends

Socialisation and Nationalisation: The period of free market economics has ended - certainly for now. Governments have stepped in to prop up underperforming banks that in previous years would have been declared bankrupt as soon as their balance sheets were issued. By printing money to prop up these failed banks, we believe, will lead to poorly performing economic entities. Pure logic – if a bank is run by poor management then is allowed to continue after massive losses, thence – we are rewarding the failed and weak and penalising the strong and efficient. This makes economic nonsense. It is anti-capitalist and pro-socialist in its extreme - is this a thow back to by-gone communist era?  These actions will drive out competition and lead to higher prices, lower growth, higher inflation and less efficient business practices. This is the reason we now have:

·         US interest rates at 0.25% whilst banks are changing property investors and home owner a gigantic 5% (a mark up of 4.75%)

·         UK interest rates at 0.5% whilst banks are changing property investors and home owner a gigantic 5% (a mark up of 4.5%)

Logic would suggest that hard working families and property investors are now paying for the failings of these banks, as are the tax payers – because the governments are using tax payers money to bail out the banks. Meanwhile, the banks Executives stay more or less intact – and no doubt by the end of the financial year they will have made stellar paper profits and be able to reward themselves will large bonuses again.

Meanwhile, property development are finding it almost impossible to raise money, first time buyers almost impossible to get mortgages and property investors almost impossible to get buy-to-let mortgages. What we have is a completely broken system whereby banks are lending minimal amounts of money despite drawing billions from the Government (e.g. tax payer), also giving savers almost nothing whilst charging 4.5% over base rate and hoarding the cash. Meanwhile small businesses and property investors who start to run short of cash are struck down and go broke – however, the large failed zombie banks are saved by the governments. It’s a seriously poor economic situation and we can only pray will gets some semblance of normality as soon as possible (e.g. competitive lending practices, mortgage rates at no more than 1% over base rate, and failed banks being taken over by strong banks – leading to greater competition from high performing efficient banks).

Currencies

Dollar - Sterling  As the effects of Peak Oil start to kick-in, likely starting in 2010 when an economic recovery begins in earnest, we expect currencies of oil exporting nations to rise. Their fiscal deficits will drop, their reserves (in the form of oil at high prices) will rise in value and the strength and growth within many of these economies will rise. The currencies will become a safe haven against rising inflation and the declining dollar. The countries that are likely to have a particularly robust currency in a Peak Oil world of high oil and gas prices are Canada and Norway. Russia may also have a rising currency, albeit it will be more susceptible to large swings depending on country risk and political factors. The safe havens will be Norway and Canada. These are the only developed western oil exporting nations. A currency that is also likely to do better than expected is the UK Sterling because in the next 5-10 years, the U will only important between zero and 30% of its oil/gas requirements – so is well hedged against Peak Oil for the next ten years. If there is a change of government and thence the public sector spending binge (with all the inefficiencies it has bought with it) ends – then the UK eventually be able to balance its books and thence UK Sterling could rise against the Euro and Dollar. Much depends on reducing the UK deficit and reducing oil/gas consumption rapidly – as the oil/gas production declines 5% per annum. If there was a 15% cut in public sector expenditure in the next 5 years and a 20% drop in gas/oil consumption through conservation measures, then the books would probably balance and UK Sterling would sky-rocket – even if Peak Oil effects started to be felt globally. As oil/gas prices rise, the UK oil/gas reserves value will increase proportionally to those countries that have to import all their oil/gas (e.g. Germany, Spain, Italy, Greece, Portugal, France).  

Middle East tensions  Currencies in the Middle East are difficult to predict. If oil prices rise, this will probably help the regions political and security stability – in simple terms – if countries are make lots of money and there is less unemployment, there are less disaffected people that can cause trouble. The worrying thing in the Middle East is low oil prices, because deficits increase, social spending reduces, unemployment rises, there are more unhappy people that can then cause trouble. A hands-off security approach can then lead to festering bad feeling within the predominently young populations that ultimately would lead to a worsening security situation.

Take a look at Dubai – a boom city of global prestige and proportions and a very safe place to live – this is a shining example of how prosperity can lead to security. However, compare this to other countries in the region. There is a general trend-correlation between improved prosperity and improved security. There are very few examples of countries that have huge oil wealth and small populations that are not secure and prosperous (e..g Brunei, Qatar, Kuwait, Oman). With regret, we expect to see an increase in security problems in Iraq as the US and UK forces are pulled out - ditto for Afghanistan. The improved security that has been on an improving trend for the last five years as oil prices rose will likely see a reversal as oil prices slide, the global economy is hit by recession and their is less focus on Middle East security. We believe there will be deterioration in the overall Middle East security in the next 18 months - this may lead to an oil price spike if it gets very bad.  

Currencies of Commodity Rich Countries   The currencies of mineral rich countries will prosper if commodities prices rise and security stay good – gold, copper, iron, lead and other metals normally rises as oil prices rise. We expect no difference in the next ramp up in oil prices.  Countries that are particularly positively exposed to mining and high metals-mineral prices are:

·         Australia

·         South Africa

·         Mongolia

·         Bolivia

·         Chile

·         Canada

·         Russia

·         USA

USA, Australia, Russia, Canada and South Africa also have giant coal reserves – coal is used for power generation, as oil prices sky-rocket, these countries can use their coal production and exports to offset oil costs. For Canada and Russia, these countries also export oil and gas, so they win all around. Australia also has vast production of gas (LNG) and some oil, so is failry well hedged against high oil prices. Furthermore, its gas (LNG) coal and minerals are at the door of the biggest growing  consumer of them all – China, and also fairly close to India, so Australia despite its high oil usages is a winner in a high commodity priced world.

Country Ranking

What we have prepared are two tables. The first table is a Pure Peak Oil Profits table that ranks each country on:

The rating is intuitive and qualitative - using our experience and judgement. You may not agree with all of the criteria ratings - however, we believe its a fairly measure of the countries that will do well from Peak Oil and those that will suffer the most fron Peak Oil. No surprise that Norway and Canada come top. These two countries have huge oil and gas deposits, growing but relatively small populations (or oil revenue per person) and are very politically stable with excellent security. Expect their currencies and property prices to rise as oil prices rise.  

UK and USA  The UK comes out fairly well because it only imports very small amounts of oil and gas. It's currency is suffering at present from the gigantic deficit - however, a change of government is most likely in mid 2010 - expect the currency to recover if steps to tackle the deficit are enacted from mid 2010.  The USA would do well if it were not for it's gigantic oil imports ($500 Billion a year at $100/bbl) and deficit. Regretably with a new government this looks set to worsen - with more public sector expenditure and high taxes on the wealthy stifling GDP growth. The Dollar will likely decline further and oil prices rise as a hedge against this decline. Thence the deficit will worsen further because the USA imports 9 million barrels of crude oil a day. That's $250 Billion a year with a $70/bbl oil price - staggering - not good. the good news is the USA has plentiful coal and natural gas. Plus good demographics and excellent security. And the motivation, attitude and education of US citizens is second to none - its only a pity the tax bills will rise and the public sector well expand - thus acting as a counter measure to the private sector.  

Spain, Italy, Greece  As previously advised, the countries at most risk of Peak Oil are Spain, Italy and Greece - these beautiful countries will likely see economic decline as their aging populations, lower tax recepts, higher welfare spending and massive energy import bills along with declining populations create economic hardship in previously very wealthy countries.

 

 

 

Oil

Gas

Demographics

Stability

Overall

Norway

10

10

8

10

38

Canada

10

8

8

10

36

Brunei

10

10

8

8

36

Australia

6

10

8

10

34

UAE/Dubai

10

8

7

6

31

Algeria

8

10

8

5

31

UK

7

7

7

9

30

Russia

10

10

3

6

29

Saudi Arabia

10

8

7

4

29

Brazil

7

7

7

7

28

USA

2

9

7

9

27

China

5

6

7

5

23

India

4

4

8

4

20

Korea

0

0

7

7

14

South Africa

0

2

7

3

12

Portugal

0

0

4

8

12

Japan

0

0

3

8

11

Spain

0

0

3

8

11

Italy

0

0

3

8

11

Greece

0

0

3

8

11

 

Legend
Big opportunity - positive  
Opportunity - positive  
Neutral - hedged  
Threat - negative  
Severe threat - very negative  

 

 

Oil

Gas

Coal

Metals

Finance

Manufa-cturing

Agricul-ture

Know-ledge

Demo-graphics

Stability

Overall

Canada

10

8

9

9

9

5

8

10

8

10

86

Australia

6

10

10

10

9

5

8

10

8

10

86

USA

2

9

10

8

10

5

10

10

7

9

80

China

5

6

10

8

8

10

7

8

7

5

74

Brazil

7

7

7

9

7

7

9

7

7

7

74

Russia

10

10

9

8

7

5

6

7

3

6

71

Norway

10

10

0

0

7

5

4

9

8

10

63

UK

7

7

1

1

10

4

7

9

7

9

62

India

4

4

9

5

7

7

4

8

8

4

60

Brunei

10

10

0

0

6

2

4

7

8

8

55

UAE/Dubai

10

8

0

0

8

5

1

8

7

6

53

South Africa

0

2

10

10

3

5

6

5

7

3

51

Japan

0

0

4

2

8

10

5

10

3

8

50

Algeria

8

10

2

2

4

3

2

4

8

5

48

Saudi Arabia

10

8

0

0

7

3

1

6

7

4

46

Korea

0

0

4

0

7

10

3

8

7

7

46

Spain

0

0

0

1

8

4

8

8

3

8

40

Italy

0

0

0

1

7

3

7

8

3

8

37

Greece

0

0

0

1

6

4

6

7

3

8

35

Portugal

0

0

0

1

5

4

7

6

4

8

35

 

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