starting today’s essay, I have to thank Rick Rule of Global Resource
Investments for his insights on the following issues.
been involved in natural resources investing since 1974. He founded Global in
1994 and has been behind many of the largest deals (Silver Standard being one)
and the largest profits (between 1998 and 2006 he grew $15 into $460 million)
the industry has ever seen.
I spent the
better part of a recent morning discussing oil and the energy sector with him
over the phone last week.
“Most people believe that most oil in the
world is produced by the big oil companies, the Exxons, the Shells, the BPs,
the Totals of the world,” Rick began, “That
is not true. Most oil in the world is produced by national oil companies…
companies owned by the state or government.”
I asked Rick
what percentage of world oil production is controlled directly by governments.
His answer: “at least 70%.” Rick went
on to explain that this creates a situation similar to the Peak Oil theory
based not on lack of resources, but lack of competence on the part of political
“Much of the cash flow generated by these
state owned companies is spent on government spending programs. Now, oil and gas
are capitally intensive businesses. If you do not continually reinvest, you
impair your ability to produce.”
“It is my opinion that this lack of
reinvested capital will create a situation in which it is inevitable that in
five years the world supply of export crude from several key exporting
countries will be greatly constrained of not stopped altogether. Those
countries include Mexico, Venezuela, Peru, Ecuador, Indonesia and perhaps
the International Energy Administration worldwide
demand for crude oil imports is growing at a rate of 1.5-1.6% a year. When you
combine this growth in demand with a major cut in 20-25% of world exports you
have makings of what Rick calls, “a MAJOR
something I’ve yet to hear anywhere else, especially in the mainstream media.
All talk of higher oil prices that I’ve seen focuses on speculation on Wall
Street (true), the view that the world is running out of oil (false), or the
view that war in the Middle East will disrupt supplies (probably will be true).
Nowhere is anyone talking about a cut in exports due to government
misallocation of resources.
I asked Rick
if his “price shock” forecast was a certain thing. He responded, “There is one potential solution which may
or may not work. The Gulf States, most notably Saudi Arabia, Kuwait, and Abu
Dhabi, are aggressively reinvesting in building production capacity. The issue
is whether or not they can expand capacity enough to shelter the shock of the
decrease in exports coming from the other countries I listed before.”
So the one
group that could stop a spike in oil prices is the Middle East?
“Yes, paradoxically, the people who talk
about supply issues in the US are concerned about the very nations that are our
most reliable suppliers: the Persian Gulf countries. The Saudis are spectacularly reliable suppliers. They have
invested tens of billions of dollars maintaining a surplus capacity of two
million barrels per day specifically to level out price shocks. This suggests
to me that American consumers have been massive beneficiaries of a region that
they are being taught to dislike, namely the Middle East.”
these insights with recent comments from a former Shell Oil executive that gas
will be at $5 per gallon by 2012 and you’ve got a serious argument that energy
prices will be soaring in the future.
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