June 06, 2006
End of Cheap Oil!
by Puru Saxena
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The human race depends on energy, period. Our planet consumes around 84 million barrels of oil daily whilst supply is around 84.5 million barrels per day. Global demand has increased by roughly 2% per annum over the past 50 years. Most of the recent growth in oil demand has come from, you guessed it, China. At the beginning of 2000, China used to consume 4 million barrels per day and now it consumes 6.5 million barrels each day! In other words, China's demand has appreciated by 62.5% over the past 6 years! Despite this exceptional growth, the average Chinese still consumes only 1.82 barrels of oil in a year. Just for the record, the average American consumes 25 barrels in a year!
Across the Himalayas, India (home to 1.1 billion people) consumes 2.5 million barrels of oil per day. Accordingly, India's per-capita consumption comes in at a miniscule 0.83 barrels! On the other hand, per-capita oil consumption in a more advanced Asian country such as South Korea comes in at 17 barrels. Figure 1 shows that despite an enormous discrepancy in per-capita consumption levels, India is already a bigger consumer of oil.
Figure 1: India more thirsty than South Korea!
Source: www.yardeni.com
Over in North America, Mexico's per-capita consumption is 7.3 barrels a year. Now, let's assume that due to economic development in a few years time, the average Indian starts consuming half the amount of oil as the average Mexican - highly likely in my opinion. When that happens, India will require 11 million barrels of oil on a daily basis! So, whenever somebody tells you that oil is in a "bubble" and ready to crash, ask them where this additional oil will come from? As far as I'm aware, not a single gigantic oil-field has been discovered anywhere in the world for the past 35 years, this, despite all the technological breakthroughs and marvels! To make matters worse, the following oil provinces are past their peak production and in decline - Alaska, Siberia, US, Kuwait, North Sea, Indonesia, Mexico and China.
Let me put it succinctly, our world faces a dire energy crisis based on supply and demand. Over the coming years, I expect the price of crude oil to ignite! How high will it go? Frankly, $200 per barrel wouldn't surprise me. Over the past 9 months, the price of crude oil has consolidated and gone nowhere, thereby frustrating the bulls. Figure 2 shows that it may be getting ready for the next advance in its bull-market. Note that the RSI and MACD indicators at the top and bottom of the chart are now turning up as defined by the red arrows. Previously, whenever these indicators turned up, the price of crude rallied. Soon, the US will face its "Hurricane Season" and if last year's track-record is any guide, oil may easily reach $100 per barrel on supply disruptions.
Figure 2: Crude oil ready to ignite?
Source: www.stockcharts.com
Moreover, I also anticipate natural gas, uranium, ethanol as well as other alternative energy prices to rise in the future. In summary, energy should form a core position of your investment portfolio as this is the only protection we have from the energy shortages and the huge price increases we will witness as a result of expensive oil.
Our firm has invested a large chunk of our managed accounts to the energy complex. As far as possible, we've bought the underlying commodities rather than owning stocks of energy-producing companies. Finally, we've also invested in stuff like sugar, corn and wheat, which will be in great demand for the production of ethanol and bio-diesel.
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