370: Crash now very close
Many elements have conspired to drive up oil and energy prices in the last few months:
Oil Listing: We have itemised the different upward pressures on oil demand from recent crises and policy changes:
· China adding to strategic oil reserves until 2020 +600,000 bbls/day extra oil demand
· India adding to strategic oil reserves until 2015 +150,000 bbls/day extra oil demand
· Japan after nuclear crisis for at least a year +250,000 bbls/day additional oil demand for power generation
· Germany shutdown down 7 nuclear power plants +100,000 bbls/day additional oil demand
· US summer driving season additional demand (and end of US refinery maintenance) -1,000,000 bbl/day less supply
· Libyan oil production for a term of at least 2-3 months and likely longer -1,500,000 bbl/day less supply
· Bahrain, Egypt, Oman, Nigeria lost production from riots and disturbances -150,000 bbl/day less supply
· US Gulf of Mexico ban on drilling and slow progress in re-instating developments -200,000 bbl/day by mid 2011
Nuclear power has been set back many years. Many projects will be cancelled or delayed. It will be more difficult to raise money for nuclear power plants from banks. Nuclear power will become a political hot potato again.
Hydrocarbons: Meanwhile the oil industry was set back hugely by the 2010 Gulf oil spill and ban on drilling knocking off at least 200,000 bbls/day in the short term. This is likely to increase as the years roll on. There is very little spare capacity left the next big disruption would see prices sky-rocket to $150/bbl hence the nervousness in the oil markets. For investors, its clear that its too little and too late for renewable energy. Renewable energy id frankly just too expensive and it takes too much energy to develop capacity in 90% of projects. The clear winners seem to be:
· Gas and Shale Gas
· Oil exploration and production in areas outside North Africa and the Middle East
· Land food
Peak Climate Change: As we predicted, climate change is rapidly going off the political agenda - its profile sadly or not has been in decline since the collapse of talks at Copenhagen a few years ago. In years to come, the wars, strife, and energy issues will mean that economic well-being, jobs and heat-light-energy will be the burning issues, not climate change. We predict a dash to coal and shale gas as nuclear power plants are decommissioned. These two forms of energy are the lowest cost and give countries the best chance of surviving economic hardship as the world's population expands to almost unsustainable levels. Water and energy will be the things people will need and there frankly won't be enough money to solve any climate change issue that may have resulted from mans 150 year industrial and agricultural/food expansion. The focus will be delivering higher crop yields with less water to feed the world as oil supplies cannot meet rising demand. The US Shale Gas areas will boom. Bakken Oil Shale areas will boom. North Dakota will boom, as will NE Texas and NW Louisiana. In the UK Aberdeen will boom as industry spends more money getting the last of the North Sea oil out and oil prices stay high. London will perform well as oil money is re-invested through banks around the world.
Property: For the property investors, its more bad news because a long protracted war in this area will likely lead to far higher oil prices, then inflation, higher interest rates, slower growth and stagnant or declining property prices in most European and US areas. The attacks add further to our prediction that trouble is just around the corner. The US debt mountain, Euro sovereign debt crisis and inflation along with this North African and Middle Eastern crisis all add up to recession in our view. Going to war also takes huge quantities of oil to power so expect on Monday oil prices to rise sharply towards $120/bbl. Sometime in the next 6 weeks to 6 months, we expect a stock market crash as its becomes clear the recession had begun.
Inflation: As inflation kicks in, normally interest rates follow shortly after which then depresses property prices. But there is still a chance that if inflation stays around 4% and property prices stagnate but keep up with inflation of 4%, then property investors will do well in the long run. This is because inflation reduces property investment debt in real terms debt declines and equity rises. This is one reason why so many people invest in property. As long as property prices follow inflation, then it is an excellent hedge and protection against the ravages of inflation. Over a ten year period, 4% inflation compounded is 48%. Over a ten year period, the real terms size of debt would drop to 2/3rds of the original amount. If one had 10% equity to begin with, this would rise about four fold over ten years. The real issue is if property prices fall well short of inflation but this is rather rare in history and would imply a lengthy depression or deflation possible but not likely. Whatever happens in the western world, we believe governments will try and stimulate, print their way out of deflation even if there is a double dip shortly, as long as there is not an economic meltdown, we think there could be one last bout of money printing say mid 2012 before the partys over.
Safe Havens: For property investors, our advice is to stay in safe havens like London, Aberdeen, Geneva, Oslo, Calgary, Monaco, Luxemburg, Zurich, Perth and Munich. Wherever the international super-rich make their home and areas that prosper when oil prices rise. They dont need to be tax havens they just need to be where hedge funds, super rich and international money ends up in times of trouble. Vast sums of money a being relocated out of the Middle East, Asia and Africa now we would anticipate and much of this money will be heading into prime real estate in European countries.
Dubai: A warning also about UAE and Dubai this huge city was built from abundant cheap oil. But as tensions rise across the region, there is likely to be far less investment into Dubai because of the higher risk. If troubles can occur in Bahrain and Oman, why not UAE? People can always make arguments that it is different, but all the riots and problems have been slightly different in Egypt, Bahrain, Jordan, Tunisia, Libya, Saudi, Iran and Oman. If the Gulf is significantly affected in anywhere else in addition to Bahrain, then Dubai property prices are likely to crash further down from their highs in early 2008.