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Commodities: When the Oil Runs Out

July 25th, 2005

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Recently the CRB index - an index of 17 commodities - surged to its =
highest level in 24 years. On the same day, copper reached a 16-year high. =
Then oil made an attempt at a 24-year high - $55.67 a barrel is the mark, s=
et on October 25, 2004. Oil now stands at around $57/barrel and commodities=
are likely to tread water for a while, however, make no mistake - the over=
riding trend - on FUNDAMENTALS - is UP. p>

And the price of gasoline at the pumps isn=E2?Tt exactly heading south=
.. For the data, take a look at the ems.net/commodities-center/oil-gasoline-prices.php>Oil and Gas prices. =
Look out for $60+/barrel in the not distant future.

Justice Litle, re=
porting in The Daily Reckoning, takes a closer look at some of the=
longer term influences which will shape the world energy markets in the fu=
ture:

“China’s oil demand has doubled over the past decade, and the p=
ace is only increasing. There will be ups and downs along the way: When the=
current infrastructure boom and the flood of foreign investment slow, ener=
gy demand will slow for a time also. But in the long run, the trend is inex=
orably steep. Consider this from The Economist (from “The Hungry Dragon,” S=
eptember 2004):

“In around 20 years’ time, China’s income per p=
erson could be close to South Korea’s today. If its energy consumption per =
person also rose to current South Korean levels, its energy demand would qu=
adruple. The increase alone would be greater than America’s total consumpti=
on today, yet China’s energy use per person would still be only half that i=
n America. At present there is only one car for every 70 people in China, a=
gainst one car for every two Americans. If car ownership were eventually to=
rise to American levels, there would be 650 million cars on Chinese roads =
- more than all the cars in the world today.”

How is China goin=
g to ensure energy security with such a tall order to fill, let alone gener=
ating capacity for such incredible demand? First, by developing strategic t=
ies with key energy producers who prefer an alternative to the “Bush doctri=
ne” of the United States; second, by investing in local production and alte=
rnative energy sources that will reduce reliance on imports over time.

<=
p>With key producers like Venezuela and Russia already in place, and with C=
anada as a long-term energy source, China’s secondary focus is on alternati=
ve energy.

Through development of local resources and investments in =
cutting-edge technology, China can further close the energy gap and reduce =
dependence on outside partners. To this end, China is upgrading its nuclear=
power capabilities and investing heavily in advanced technology that will =
turn coal into petroleum products. It is in this area where Western investm=
ent opportunities remain; while it is not feasible to invest in the Venezue=
lan or Russian governments, China cannot avoid partnering with Western comp=
anies when access to technology is required.

Nuclear power is a natur=
al choice for China. The standard “green” objections to nuclear power simpl=
y do not exist in the Middle Kingdom. Furthermore, China has awful problems=
with water shortages, air pollution and acid rain. A nuclear alternative c=
ould remedy some of these issues by substituting nuclear energy for fossil =
fuels and removing stress from the environment. Nuclear power has another g=
reen aspect as well: It produces virtually zero carbon dioxide, and thus do=
es not contribute to global warming.

China has plans to develop a new=
type of reactor design known as a PBMR, or pebble bed modular reactor. The=
pebble bed reactor is theoretically cheaper and easier to build than tradi=
tional PWR (pressurized water reactor) plants. The pebble bed reactor also =
has a safety edge in that it is supposedly “meltdown proof”: The reactor’s =
uranium “pebbles” (actually the size of billiard balls) are coated with hig=
h-density carbon, preventing exposure in the event of a coolant leak. Thus,=
in theory at least, the disasters of Chernobyl and Three Mile Island could=
not happen with a PBMR. Furthermore, because the pebble bed reactor design=
is modular, extra generating capacity can be added over time, allowing for=
further development as needed and less lump sum expense for initial constr=
uction =E2?=A6 =E2?=A6

On another experimental front, China is spendi=
ng more than $3 billion on a coal-liquefaction plant in Inner Mongolia. The=
Shenhua Group, China’s largest coal producer, has partnered with a U.S. te=
chnology provider to convert coal into petroleum products. In a nutshell, t=
he process involves breaking coal down into hydrogen-enriched molecules, wh=
ich are then converted to traditional oil products. According to Zhang Yuzh=
ou, vice president of Shenhua Group, “The project consists of two phases of=
construction, and after the second is complete, the plant aims to yield 5 =
million tons of oil products annually and greatly reduce China’s reliance o=
n crude oil imports.”

The winners and losers in China’s quest for ene=
rgy security revolve around transport, exploration and technology. China’s =
demand for oil imports will rise inexorably over time, even as their intern=
al energy sources come on line. This will create a rising demand for tanker=
s, which in turn may benefit shipbuilders over the long cycle. As oil econo=
mics turn in favor of further exploration, there will be more opportunity i=
n development and wildcat-style exploration projects, with big profits to t=
he winners and heartbreak for those who come up dry. Look for the oil major=
s to participate indirectly in any exploration boom as well, spreading thei=
r risk through funding and backing of smaller players.

And of course,=
alternative energy technology is coming into its own. For the past few dec=
ades, alternative energy was simply not an economically viable option: Crud=
e oil was too inexpensive, the initial development costs too high, to take =
alternatives seriously. But now, the development seeds are being sown, with=
compelling economics on the horizon for fossil fuel substitutes. In this a=
rena, the companies positioned to profit most are those with hands-on intel=
lectual property…alternative technologies that can be sold, licensed or l=
eased but not easily copied or stolen, due to implementation requirements a=
nd need for hands-on expertise.

With the 20th century’s books now clo=
sed, China looks to the 21st…and they know it is their time. In this new =
century, the dragon will rise again. As investors, we ignore China’s destin=
y at our peril. Whether we see China as friend or foe is irrelevant; in fac=
t, whether or not China fully succeeds in its ambition is irrelevant. What =
is certain is that China’s strategic actions, and the resulting reactions, =
will dramatically alter the global landscape. We are in the beginning stage=
s of a sea change.”

So there we have it - as investors and traders we=
would be wise to pay heed to these global economic trends in the energy an=
d related industries. For those with an eye to the future, there are phenom=
enal profits to be made; but for those with their heads firmly buried in th=
e sands of time, possibly equally large losses.

In a future post, we=
=E2?Tll be taking a look at how to safeguard your investments and actually =
profit from the forthcoming turmoil.

For the full article, see f=3Dhttp://www.online-trading-systems.net/contrarian-center/daily-reckoning=
/DailyReckoning-20050309.php>The Dragon is Ravenous

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