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317: Oil, inflation and enlightened countries for property investors


GDP and Oil Growth Correlation: Global economic expansion has averaged about 4% per annum over the last 50 years. This expansion has been driven by increasing oil, gas and energy supplies. Generally, oil consumption grows at half the rate of GDP expansion. Hence oil consumption has grown by about 2% per annum for an extended period of 50 years. Oil consumption has risen from 42 million barrels a day to 85 million barrels a day in this period. Meanwhile the world population has over doubled. No wander GDP has grown. And the older people – on top of the pile – have become very wealthy, off the back of younger workers, investments and expanding oil supplies feeding this growth.

An End: But its all coming to an end soon. Western GDP growth will slow tChina super rich in Londono a snail’s pace in all oil importing nations.  The reason is simple. Peak Oil. The Peak Oil for all liquids production was July 2008. The Peak Oil for conventional crude oil production was 2004. We are now on a plateau. This implies we will either have to get far more efficient in the use of oil, or GDP growth will decline.

Oil Addiction: Far too much oil has been wasted for too long. And it shows no signs of ending. Part of the reason is the massive subsidies for oil as a fuel for heating and cars in poor developing countries, along with oil exporting nations – this does nothing to stimulate energy efficiency. The second reason is almost no progress in oil conservation in countries like USA, UK, Australia and Canada. These energy intensive nations are burning around in low efficiency cars and trucks as if nothing has changed. This is a big mistake – but don’t expect anyone to notice for another few years. Until the oil prices skyrocket again.

Growth Resumes from Mirage Money: The global economy has started to motor now – after massive stimulation packages paid by massive borrowing or mirage money – likely never to be paid back. Inflation will start to take hold shortly partly because this money is not created by efficiency or productivity – it is spent (not created) and printed (not earned). It’s a social experiment waiting to go wrong – not based on any sound market principles. Social financial engineering at it’s worst.

Euphoria Kicks In: What is just about to happen is a feeling or mild euphoria as people thing the worst is behind them. They will think things are back to the good old days. Low inflation, low interest rates and strong GDP growth. But in western oil importing nations, this is no longer possible. The reason - the massive cost of oil imports that will stress the economic system so much, it will cause a temporary mini mirage boom then a crash. Greece, Portugal, Italy and Spain will all topple out of the Euro.  Norway and Russia will benefit from the high commodities prices. UK will again be exposed by financial meltdown in western nations and high inflation – along with higher taxes and public sector jobs cuts.

The Crash: Property prices would then crash. But not after a mini-boom off the back of the low interest rates, mild euphoria and some misguided expectations that things will improve after the election. Bottom line is the Labour government have spend all the money and more – it will be years to get back into shape.   

Misguided Rally: There could well be short time (misguided) rise in the stock market – but it will probably not last very long. Inflation is already out of control at 3.4% - and interest rates should have gone up a few month ago in our opinion. By the time the rates shoot up, following the oil price rise, it will be too late to control inflation – they will have to overshoot – thence with increasing tax burden, wage rises not matching inflation, increasing mortgage costs – there will be more property stress and defaults will rise once more. We will all look back on the £200 Billion of printed money shoring up bonds and guilts as a complete waste of money – people will dive into commodities as the US dollar declines, driving up oil prices further, and inflation further. Then the bubble will pop (again). This is most likely to happen around $125/bbl – with oil prices shooting back down to about $60/bbl as another recession hits. This is all also likely to happen in the next 24 months – soon. It’s already well underway – if you believe our view.

Chinas Thirst: The underlying driver is China’s massive appetite for oil to build their economy. They need oil for building new cities, roads, power plant, rail, ports, factories and housing – just like the USA did in the 1960s. And all the new cars of course – 20% increase each year – new cars should reach 525 million by 2050 according to our calculations needing 10% of the worlds oil even if 50% are power by electricity. China is not going to go away – its a runaway train. And we will see this in rising oil prices as the global oil supply remains flat at 86 million barrels a day and demand increases 2% a year (increasing 4% in developing countries and declining 2% a year developed countries).

PIGS – Sell: We re-iterate our sell recommendation on Greece, Italy, Spain and Portugal plus northern England, Midlands and mid-north Wales. We have a hold on southern England and London and Aberdeen. Norway will boom, as will Russia, Australia and Canada. USA will go further down – as the annual cost of medicare per person of $6500 added to the $1500 oil import bills gets too much. That’s double the UK cost for both these.  How a country can spend $500 Billion on oil imports and grow economically is beyond our economic thinking.

Manage The Risk: We wish we could be a bit more positive – but thought we should warn you. If you are serious about reducing your risk, maximising returns for a health care free retirement, our advice is – start reducing your debt, but invest in small to medium sized oil exploration, development and production companies  - watch the oil price rise to well over $110 per barrel then sell before it crashes back to $60 / bbl again.

Oil Sands Boom: Long term, if you want to plant your money somewhere, Canadian Oil Sands companies are probably about the safest place for long term equity growth and high dividends – plus a very strong currency in a stable and secure country.



Best Country Analysis  - Insights: But don’t get too disheartened – we are starting an analysis of what makes countries wealthy and great. There is a very strong correlation of secure wealthy countries with:

·         Transparency International Index (more honest the better)

·         Christian (Protestant)  (more hard working the better, good laws, don’t feel guilty of making money for the society, social values - teamwork)

·         Good Education (wealth is created from thinking, innovation, value creation)

·         Woman’s Rights (more the better, women working, empowered)

·         Lake of cronyism – teamwork and objectivity (not family, but community based, also goes with Christian Protestant)

·         Resources – oil, gas, coal, water, forestry, agriculture, land   


If you have all the above – the country will be safe, wealthy, excellent social fabric, happy and have good equal rights for women and all people living in this society. They may still be very wealthy even without oil or gas – like Sweden, Finland and Denmark. And lovely safe places to live as well – where old people are treated with respect, young people are nurtured and men and women work side by side to create wealth objectively. But if you want to be ultra-safe, you should select for your property investment a country that ranks high in all the above criteria.

Norway, Canada, Australia – that’s it!   UK is not far behind, and the USA 9if only they could tackle their debts). France and Germany also rank high. If the workforce has hard work ethic, non crony objectivity and are innovative and educated – it helps hugely. That is why we do not recommend Greece. The lower down on the Transparency International Index – the worse it gets. Greece is a classic example of a government that has covered up the extent of it’s debt problems – it score only average on the integrity scale. The UK scores higher – but Norway, Sweden and Denmark probably score highest.  They also have more women minister than any other countries!    

Africa – A Tough Environment : And on the other end of the scale, if you are a landlocked African country with no oil, gas or metals – don’t expect it to be easy to make money in property investing. Corruption, crony behaviours, rigged elections, poor governance are all problems, as are inadequate legal protection and crime on some countries.     

Woman Make Massive Contributions: To challenge the norm, can you think of any country where women have very few rights that is very wealthy (unless it is massively helped by giant oil exports)?  Thing about it – because if you take out half the working population from contributing to all but the most mundane tasks – your economy will always suffer.

Enlightened Countries: So if you focus on countries with well educated hard working men and women with good work ethic, honesty and objectivity – plus resources (oil, gas, coal, metal, forestry, water) – you’ll be in the right place. If you can’t believe it – maybe it’s a good idea to go on a field visit to Amsterdam, Copenhagen, Stockholm, Helsinki or Oslo.









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