204: Oil surpluses & deficits as a % of country GDP - unique insights for property investors
There is considerable concern amongst property investors that oil prices are rising and this is affecting their investment portfolios. We have been warning of this threat for the last 12-18 months and have provided many Special Reports on the subject.
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We'd like to go one step further than previous reports by quantifying the affect of oil price imports (deficits) or exports (surpluses) in percentage terms on countries overall GDP (in 2007 Purchase Price Parity, World Bank numbers). The below tabulation is a unique insight for our visitors into the affect that $140/bbl oil prices are having on countries economies. It is a ranked list from top to bottom from the most positively exposed country to high oil prices as a ratio of that country's GDP, to the most negatively exposed.
We now enclose an analysis of key countries - in order of the perceived interest to our visitors:
UK: Surprizing for many people, the UK still produces about as much oil as it uses - hence it's oil deficit (or imports) are view low. So the UK is fairly well protected from high oil prices for the next few years - albeit it's oil production is declining by about 15% a year. The UK also gleans much valuable oil/gas revenue tax from the North Sea which helps Government finances - some $30 billion a year. UK also produces about half of it's gas requirements, which also helps. A significant proportion of global oil, gas and mining wealth also comes back to London (and Aberdeen) in the form of dividends and financial services. Hence although the current state of the property market looks rather bleak, the worry concerning high oil prices for the overall UK economy is more one of public anxiety about rising petrol price and petrol tax (running at a staggering ca. 78% of petrol prices), plus the inflationary pressures it puts on the economy. Higher interest rates would therefore be an outcome of higher oil prices. But on the positive side, the pound should stay reasonably strong compared to many currencies of oil importing nations if oil prices rise further, because the UK is reasonably well hedged against higher oil prices.
USA: The oil deficit situation for the USA is indeed bleak - at present the country is spending $712 billion on importing oil per annum, compared to it's GDP(2007) of $13,811 billion - a massive 5.2% of it's overall GDP. This is like slapping an additional tax rate of 5.2% on the economy as a whole (all goods and services). This will undoubtly suck the economy down over the years to come - and the US deficit will suffer because of it. Standards of living would need to drop somewhat to compensate. Currency re-adjustment might help the deficit, but oil imports will have a very negative long term impact. The US currency is definately a non Petro-Currency and hence will continue to be under pressure, particularly with interest rates at 2% (unlike UK's 5% and the Euro's 4.25% for example). The sooner the US reduces it's dependence on imported oil the better. Until it does, this huge economy will feel real pain from high oil prices - and there will continue to be a massive £712 billion or more annual transfer or wealth from the USA to oil exporting nations. For real estate prices, it will put additional pressure on them and the economic growth rate will slow compared with the low oil price highr growth period from 2000 to 2005. As the dollar declines against other global currencies, asset's will become relatively cheaper and foreign investment from Middle East and Far East will help support residential and commercial real estate prices. But overall, the boom times are are over - unless you invest in areas positively exposed to either new business, technology, oil/gas (Houston/Dallas/North Dakota), coal (Wyoming) or global finance (New York). In the next few years there is likely to be a huge push to reduce oil consumption - renewables projects (wind, solar), electric cars and coal-electric plant expansion are likely to come to the fore-front.
Libya: You might have noticed that Libya comes top of the list. In case you are wandering how one can achieve 128% of GDP, this is a quirk because we used 2007 GDP numbers alongside an 2008 average oil price assumption of $140/bbl. Therefore if Libya's only business-revenue-productivity was oil, it would imply a GDP growth rate of 28% from last year. This tells an interesting story in it's own right - Libya is booming - expanding. As oil prices have risen from $10/bbl in 1999 to $140/bbl today (a 1,400% increase!) and because most of Libya's GDP is oil related, then the country is quietly undergoing an economic transformation. The more adventurous might consider ways of investing in property or the economy of Libya -particularly if you believe oil prices will stay high or rise.
Russia: Projected over the next ten years, Russia is likely to be one of the top property investment hotspots in relation to the impact of oil and gas that this has on the global economy. We project oil and gas revenues to rise ten-fold from 2002 levels up to 2012. Current oil export revenue totals $368 billion! Oil alone is currently 17.6% of Russia's GDP - and gas production and revenues are rising sustainably as more gas is exported to western and central Europe, and gas prices rise in line with (albeit lagging) oil prices. Moscow and St Petersburg are the clear winners - since most of the oil and gas revenues are collected in these cities - then distributed. An oil surplus per annum of $368 billion is a lot of cash - much of this money will go into real estate. Again, St Petersburg and Moscow spring to mind for real estate investing, as well as west London and the Russian Back Sea coastal resorts. Russia will increasingly export oil and gas to rapidly growing China -this market will also help Russia's economy. We project at least $550 billion of oil/gas revenues per annum for Russian in the next 10-20 years.
Norway: A winner. Stable country. Beautiful - when it's sunny anyway. And a $112 billion oil surplus with a population of just 5 million. Wise use of the oil funds - a proven track record of good governance of their Oil Sovereign Wealth Fund, a very trusting and honest business environment. Massive gas wealth in addition which is expanding, as oil production declines. If you want a safe home for your wealth, real estate in Norway takes some beating. Oslo - the capital is a highlight. The oil towns of Stavanger and Bergen are others, along with holiday homes along the coast to the SW of Olso (within a 2 hour drive).
Canada: As the USA becomes increasingly desparate for oil, Canada is the natural safe neighbour that will supply increasing quantities of oil - through oil sands developments. Canada has a $55 billion oil surplus - not as high as many think because Canada uses so much oil itself. However, oil production is increasing so this surplus will likely rise to a healthy $100 to $150 within 5-10 years. Gas exports to the USA will also help. Overall, the Canadian dollar is a Petro Currency and should strengthen as oil prices rise - the economy looks well placed to prosper and we expect real estate prices to remain healthy in Edmonton, Calgary, Fort MacMurray (oil sands development area) and Toronto, the financial capital. A relatively safe place to invest - huge country, massive of resources and a relatively small population. It may eventually also explore for oil in Artic areas like Russia, though this is likely to be many years away.
Spain: We have been giving soft warnings about Spain for some time - and the numbers don't look very encouraging. Spain is spending about $83 billion on oil imports in 2008. For Spain, this is 5.8% of it's overall GDP. If Spain's economy does not slow dramatically because of this - we will be very surprized. Undoubtly real estate prices will suffer. In 1999, Spain used 0.5% of it's GDP for oil imports - it now uses 5.8% - that's like a massive tax hike. Unless it's productivity, technology and finance were supreme and gained to compensate, this 5% tax would affect the economy markedly. Hence be careful with Spain. As oil prices rise, less air travel could also affect it's tourism and second home markets. The aging population is also a concern. But select enclaves like Marbella could still do okay, plus dynamic Valencia and Barcelona and possibly Madrid - it's the "out of the way places" we would be most concerned about (remote country areas, northern Spain).
Italy: We have been giving firm warnings about Italy for some time - like Spain, the numbers don't look very encouraging. Italy is spending about $80 billion on oil imports in 2008 which is 4.5% of it's overall GDP - that's like a 4.5% tax on the whole economy. The aging and declining population is a big concern, plus high cost manufacturing and reliance on retailing luxury good for western markets. We predict a long term decline for Italy from the booming period of ca. 1990 - 2004. It's a beautiful country, nice people and it's great place to visit - everyone looks great! - but the economy is not in good shape. Early retirement, aging population, lack of young workers, expensive labour and not much oil or gas add up to problems in the future. Best avoid property investment in Italy.
Qatar: The indigenous popultion is only 200,000 yet its oil revenues are $58 billion. Massive expansion of LNG, gas to liquids projects and other financial oil/gas services will make Qatar one of the richest countries in the world per capita in years to come. Somewhere to consider property investing. With a surplus of 103% of GDP - the country is highly exposed to high oil and gas prices. If you believe oil/gas prices will stay high, Qatar is worth a look. A key risk is security/tensions with Iran as neighbour the other side of the Persian Gulf.
Brunei: This Sultanate on the north coast of the island of Borneo has an oil surplus of $9.7 billion, a similar surplus for gas/LNG exports and a population of only 200,000. Famous up until 1986 for its wealth - it went quiet for many years. But now it is again prospering - some 80% of it's GDP is from oil and gas - so if you want real estate exposed to high oil/gas prices in the Far East - Brunei is the most positively exposed to high prices.
South Korea: This country is incredibly energy intensive - it needs lots of oil and gas for its manufacturing, power, transportation and ship building activities. A massive 10.3% of it's GDP is spent on oil imports. And it also imports massive quantities of LNG for power. South Korea has no oil, gas, coal or mineral wealth. It must pay for it's oil from revenues of its relatively dynamic manufacturing businesses - this 10.3% tax is massive - something we are no sure it can handle. Risky - but the Far East and shipping is booming - so who knows - may be S Korea will be okay?
So who pays for the ca. $2 Trillion oil import bill per annum? The oil importing nations.
So who gains from the ca. $2 Trillion oil export value per annum? The oil exporting nations.
Hence there is a MASSIVE $2 Trillion transfer of wealth from the oil importing nations to the oil exporting nations (at $140/bbl) - with an overall $4 Trillion of oil value produced per annum (81.5 million bbls crud oil/day at $140/bbl). In part because it is so difficult to spend such a huge quantify of money within the mainly relatively small oil export nation's economies, the funds are re-invested in the oil importing nations (e.g. USA, western Europe) by Sovereign Wealth Funds. After all, the whole business has t be kept running - it's no use knocking out your key customers! Because of this, as som banks fail and deflation takes hold of assets in oil importing nations, the exporting nations plus China and India will likely step in purchase these low priced assets. Western banks will increasingly be owned by Chinese, Russian and Middle Eastern funds - along with cash generating infra-structure. essentially, expect a transfer of not only wealth, but then assets to the oil exporting nations. Oil will be paid for with something - whether it be cash or assets. We'l expand on this theme in future, but for now, the world is not going broke - its just that the wealth is being transferred. This is a fundamental principle in buisness and economics - as well as property investment. Please take care to invest where asset price are likely to:
- Rise - oil exporting and/or strong manufacturing and financial services nations with rising young populations; and not
- Fall - oil importing nations, weak manufacturing centres and financial services countries with declining, high cost and aging populations
We hope you have found this Special Report insightful. The analysis and mathematical model underlying this piece of work has taken many months to develop - we hope it helps clarify the dynamics of oil surpluses and deficits in the different countries for your respective property investing strategies. And helps improve your investment returns.