Winning the Global War for Natural Resources
Commodities / Analysis & Strategy Jan 31, 2007 - 08:54 PM
Although Hezbollah, al-Qaeda, and the war in Iraq often grab the headlines, I think the global battle for natural resources will probably define the 21st Century when it's all said and done. This war isn't fought with bullets … yet. Instead, it's fought with contracts and trade agreements as countries like China, India, Russia — and, yes, the U.S. — struggle for economic hegemony.
Here are just a few of the latest moves ...
- Russia recently surpassed Saudi Arabia to become the world's largest producer of oil and gas, and it's ripping up contracts and forcing new deals on customers from Western Europe to the Asian steppes. The country uses its muscle to reward allies, like Armenia, by charging them much less for natural gas than critics like Georgia.
- Last month, Russia threatened to revoke permanently the operating licenses of Western oil majors in the Sakhalin-1 and Sakhalin-2 project, while state-controlled Gazprom is excluding all foreign (notably Western) energy majors from its giant Shtokman gas project.
- Sinopec, China's state-controlled oil company, is selling a 25% stake in an east China refinery to Saudi Aramco. This deal could give the Saudi company a major foothold in China's fast-growing market.
- Sinopec is also signing a $100 billion deal to develop Iran's Yadavaran oil field.
- Plus, India and China (who often compete with each other) recently agreed to form a joint venture to acquire oil and gas assets in Africa and Latin America.
Right now, this race for the Earth's scant supplies of oil and other natural resources is an ever-present force burning in the background. But like a low-intensity brushfire, it could quickly erupt into out-of-control flames.
Investors who are prepared stand to make big profits. Those who ignore the risks might simply get burned. Before I give you two investing approaches, I'd like to tell you about …
Three Trends That Threaten
To Push Up Prices at the Pump
The race for natural resources is on … and for good reason. There are at least three big forces that could really cause energy prices to rocket higher.
First, the Western oil majors — like ExxonMobil, Chevron, BP, and Shell — are failing to replace the reserves they pump. In 1997, they were able to replace 140% of their reserves; in 2005, they were able to replace only 75%! This indicates just how hard it's becoming to find oil. Everyone's trying to grab what they can, while they can. And as you know, limited supply will likely equal higher prices going forward.
Second, new oil exchanges are springing up around the globe. Qatar and Dubai are each starting their own, and India is planning to start one in Mumbai. In the beginning, these three exchanges will trade oil in U.S. dollars … but they'll be able to switch to other currencies. Rather pointedly, Russia is also starting up a new exchange in St. Petersburg next year. All Russian energy products now trading in New York will return home, and the trades will be priced in rubles.
What's the big deal? The greenback is propped up by the fact that oil is priced in dollars. If that advantage gets taken away, the wobbly U.S. currency could tumble even lower than it has recently. The deeper the dollar plunges, the more oil will cost us.
Third, global oil use continues to climb. It hit 84.5 million barrels per day in 2006r and should average 85.9 million barrels per day in 2007, according to the International Energy Agency. That's more than 59,600 barrels a minute!
What's driving that demand? Well, the Chinese put seven million new cars on the road this year alone. But before we point fingers, remember that U.S. gasoline consumption is still rising, too.
America has 5% of the world's population yet consumes 25% of its energy (two-thirds of which we have to import). That's not just vulnerability … that's a disaster waiting to happen!
Reason: Other countries are quietly trying to gain an upper hand. For example …
Russia Is Building An Empire of Energy
I first wrote about the ongoing battle for natural resources in “ The Great 3-Way Race for Energy ”. Since then, the biggest development has been the rise of Russia as an energy empire. Indeed, U.S. Senator Richard Lugar recently labeled Russia an "adversarial regime" that increasingly uses its growing energy dominance as a powerful geopolitical weapon. He warned that this could lead to an economic "catastrophe" for the United States.
What comes next? In an interview with the British newspaper The Guardian , respected economics professor Peter Odell points out that once-mighty Western oil majors now control just 9% or 10% of the world's oil reserves.
According to Odell, Russian and Chinese state-owned oil companies could make hostile takeover bids for key Western oil companies. With a few bold moves, they could wipe away what little control over the global markets the Western oil majors have left.
Of course, we don't have to allow those takeovers. But countries like China and Russia could simply refuse to do business with any Western oil company they can't buy.
The problem is clear. And unfortunately, it doesn't just apply to oil. The same scenario is playing out in other areas like strategic metals – copper, nickel, tungsten, uranium, and more. Supplies are getting tight, and countries like China and Russia are both slowing down their exports of these metals, and running around the world to lock up any other available supplies.
The Good News: We Can Still Win and You Can Make Money in the Process
Make no mistake, this is a dangerous situation. And it's all the more dangerous considering the insane clown posse we have running Washington.
However, there will be winners in this global war for natural resources, and I still believe many of them will be right here at home. I'm talking about the oil explorers and producers … the operators of miners and mills … and other natural resource companies right here in the U.S.
A flood of money will continue pouring into these markets, and plenty of American companies are finding resources both at home and in friendly countries that won't slam them with sudden tax hikes or outright takeovers. On top of that, many of these stocks are trading at dirt-cheap valuations! But they won't stay that way for long.
If you want to take a diversified approach, you can always invest in a nice natural resources mutual fund like U.S. Global Investors Global Resources Fund (PSPFX). This no-load fund has a low expense ratio of 1.3% and should make the most of the next flood of money into global energy.
But for real outperformance, I'm sticking with the individual companies that will make the most of the global rush for natural resources. And here's the simple three-step approach I'm going to take ... it's one that you can apply to your own trading:
- I'm going to pick my investments by looking at both the fundamental and technical pictures.
- Then, I'll pick a price I'm willing to pay, along with two profit targets (one short-term and one longer-term). I'll also figure out where my stop-loss will be. That way if the trade goes against me, I'll get out with a small loss rather than a big one.
- Because nothing goes up in a straight line, I'll go long or short. I won't get married to an investment – the goal will be get in, make quick profits, and get out.
That's the approach I'm taking with my new service, Red-Hot Resources . No big explanations … no long holding periods … just quick trades for serious traders, backed by macro — and micro-analysis. If that sounds like something you're interested in, you can find out more by CLICKING HERE or calling 800-430-3683.
I'll be making the first trade early next week. After all, the race for natural resources is only going to escalate from here. Get in early or you just might miss the boat.
Yours for trading profits,
Sean Brodrick
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