PropertyInvesting.net: Property Investment Special Reports

298: Peak problem on horizon - update and property

11-29-2009

PropertyInvesting.net team 

 

Peak Oil: As mentioned end 2008, we believe Peak Oil occurred in July 2008 and now we are on a bumpy plateau of oil production, until a more serious production decline kicks in around 2015 (see chart at the end of this report). There are currently two distinct camps that have developed. One is generally populated by economists and government bodies and authorities that believe market forces caused by higher energy prices will lead to increasing supply, and technological advances will help plug any supply-demand gap. The other camp is populated by academics, technocrats and professional retired oil workers with no political allegiance. They are normally referred to as vocal fringe groups, doom-mongers and skeptics. If anything, we belong to the latter camp, though we are more optimistic than most. Our production profiles tend to show flat production until 2015, rather than rapidly declining or rapidly increasing production. But we are also on the pessimistic side with regard to the actual date of Peak Oil - now being behind us. Over 90% of knowledgable people think Peak Oil will be in the future so we are squarely in a minority on this call. We have much hard evidence to suggest Peak Oil was July 2008. Our analysis has a strong foundation in the scientific analysis of technical numbers, technology innovation, and sector knowledge with an overprint of politics and social aspects that effect and constrain oil production rates.

 

Production Rates: Remember Peak Oil is the maximum oil production rate ever – after the Peak, oil production levels normally decline steadily downwards. This does not mean oil is running out as such, it will just get more scarce. Peak oil can also be caused by demand dropping permanently – e.g. no one wants the oil! Oil reserves may even rise whilst oil production drops – if production capacity cannot be maintain because of either aging infra-structure, increasing water production, delays in projects, problems funding developments, political issues (assets being seized), OPEC wanting higher oil prices and therefore cutting production rates, and/or wars etc. All these things have to be thrown into the hopper and it is indeed a complex issue. But we believe our production and demand forecasts are the most accurate we have encountered. Our track record is better than most, we successfully predicted $125/bbl by end 2008 in July 2007 when oil prices were $70. That said we were taken aback by the collapse in the oil prices late 2008 and the severity of the recession that we believe the high oil prices caused. Many lessons to be learnt there.

 

Outlook: So what is the outlook. A few interesting developments:

 

• OPEC claim to have about 4 million barrels of oil production in reserve (we think this is more like 1.5 million barrels and this will all be used up by end 2010)
• Saudi Arabia is using during these low oil priced times some 165 rigs – a massive number – back in 1980 there were only 25 rigs and production was higher. For us, this is a sign not all is will in the country with the biggest oil reserves in the world. They are struggling to maintain and/or to build oil capacity. So don’t be surprised if nothing happens when people ask the Saudi's to produce more. What’s more much of the new oil production is heavy or sour crude that is difficult to handle in oil refineries - not many refineries are equipped to handle this crude. 
• USA will increase it’s oil production by about 6% this year from 2008 levels – this is the first increase in oil production since 2002. Production will rise from 4.85 million bbls to 5.25 million bbls. Most of the increase is from big new projects that came on stream this year in the Gulf of Mexico and increases from the Bakken Shale Formation in North Dakota. But don’t expect this trend to continue – these projects were planned 3-6 years ago when oil prices rose above $25/bbl – few new discoveries have been made since, despite record oil prices.
• Russia’s oil production also increased slightly this year – as tax breaks kicked in that stimulated small developments and drilling. But again, we expect this to be a fairly temporary phenomena – and oil production to start a terminal decline next year albeit from a very high level of 10 million bbls/day.
• Angola has been the country with the largest production increase in the last five years – but we see developments drying up and Angola is likely to hit Peak Oil this year
• Iraq is a bright area – oil production should rise consistently from a low of 1.5 millions after the war, to 5.5 million barrels a day by 2016. Massive new redevelopment will take place as long as security stays relatively stable by historic measures.
• Big new gas developments will slowly increase natural gas liquids (condensate) production which is positive – big increases coming from Qatar as a massive LNG expansion continues (the North Gas Field is so gigantic no one knows how big it is – should last 200+ years).

 

Property Prices: So what does it all mean for the global economy and property prices? We believe:

 

• The USA will continue to print money in attempting to seek growth and new jobs – the dollar will decline further by about 35% in three years
• Because of the declining dollar, oil prices will have to increase by 35% just to cater for the declining dollar
• As the dollar declines, more money will shift into hard physical assets such as oil, gas, gold, metals, coal, railroads and renewable energy
• Property prices will rise in oil/gas exporting nations and decline or stagnate in oil/gas exporting nations
• Oil may eventually be sold in a basket of currencies such as the Euro, Yen, Dollar and new Middle Eastern currency – this is not likely to happen quickly - until at least 2015 but its worth watching out for – because if this happens it will put further pressure on the dollar. 

 

Currencies: Remember, years ago currencies were pegged to the gold standard. Now, governments are printing money hand over fist with scant regard for the currency value – to try and inflate the economies and reduce the value of the debt borrowed from foreign countries. This will likely eventually lead to higher inflation and interest rates and lower growth. It leads to inefficiency and loss of currency value as poorly performing businesses, public sector and entities are subsidized by printed money – people can waste more and get away with it. But things will eventually catch up in the form of higher interest rates, slower growth and massive budget deficits. Note the real dollar value is now only 4% of what it was in 1960 – no wander there are so many millionaires!

 

Change or Lack Of It: We believe there is a fundamental problem with change. Too many people at the top and middle ranks of Government are unwilling to change and innovate. The public sectors is far too large – particularly in the UK. Waste is massive – too man “job-worths” pushing paper around. In the UK, since 2000 oil production has halved. How can the UK go from the 5^th biggest world oil producer to a net importer in 9 years? Meanwhile there is practically no leadership in energy conservation and efficiency. Our oil imports will increase over the next five years by about 10% a year. Why not try and instill an energy saving mindset in the population that reduces oil usage by 10% a year – to follow the production decline down and thence keep oil imports to a bare minimum? Conversion of cars to electric and/or hybrid electric would achieve this, but there is no concerted action being taken – no incentives – no innovation – no change. By the time the effects of global Peak Oil take affect it will be too late.

 

Investor Guidance: For the investor, one needs to position one portfolio of investments to protect and achieve high returns as this complex series of input and outputs take place.

 

Invest in (long position):

 

• property in areas of minimum exposure to the negative effects of Peak Oil – the UK this is London and Aberdeen (and short distance commuting towns on electric rail lines) – both area that benefit from high oil prices
• oil/gas exploration and production companies
• coal production companies
• gold, and gold mining companies
• marginal farmland close to cities
• railways and canals
• heavy oil sands
• electric car companies
• smart electric meters and battery companies
• energy efficiency and conservation technology companies
• renewable energy companies (solar, wind, algal bio-diesel, biomass) 

 

Avoid (or short):

• airline companies
• container – shipping
• remote tourist destination
• out of town retail parks
• car companies (with no focus on electric cars)

 

Being UK based investors, we favour investment in London (and southern England) residential property and high growth oil exploration/production companies and . We also invest in coal and mining. We would avoid airlines like the plague. We think the pound will recover in Spring 2010. 

 

Commodities: We think all energy costs will rise – oil, gas, electric. Commodities prices will rise – such as gold, iron ore, steel, aluminum, platinum, uranium etc. Reason – China (plus India and Brazil). These countries need massive resources to develop, just like the USA did in the 1950s and 1960s. It takes a lot of cement, oil and metal to build cities. China’s GDP growth will likely average 8-12% in the next ten years in order to develop jobs and housing and foster a basic standard of living for it’s one billion inhabitants. The political and organizational will to enact this plan is gigantic – otherwise social/security will be impaired. So don’t expect the resources pull will go away.

 

Peak Gold and Peak Uranium: Sorry everyone, gold production is declining as well. This will put upward pressure on gold prices. Gold reserves are also probably overstated. Mining costs will rise as yields drop, manpower costs rise and electricity prices rise. Ditto uranium – a little know fact is that the world currently uses 160% of the uranium production a year – how can this be? Because the extra 60% comes from dismantling nuclear war-heads - and the number of war-heads is running out. It's wishful thinking that Nuclear power will save the day. There is not enough uranium! Any other process using far less uranium is many years away and in the research-development phase – and may never be technically perfected. At best nuclear electric power will remain at current output levels but output is more likely to decline than expand despite it’s benefits for CO2 levels and climate change.

 

Other Special Reports on resources and inpact on property:

 

More Special Reports on Peak Oil and Energy:

 

277: Country Ranking in a Peak Oil World with Resources Scarcity

275: Cars - The Absurdity and Necessity

274: How susceptible are countries to high energy prices? Impact for property investors..

270: Turbulence in Property Markets Caused By Oil Price Spikes and Peak Oil

265: How to Profit from Peak Oil - USA, UK and Europe

264: Another oil price spike is just about to hit us...watch out

263: Investing in Property with Energy in Mind "post Peak Oil"

262: Electric Revolution, the Environment and the Next Energy Crisis

257: Property investing, the UK economic situation and oil & gas

251: Peak Everything!

249: What's next?

244: It's the oil price again - it caused the recession

243: Oil price crash sows seed for next massive oil spike

242: Oil, Cars & Property - what we'd do if we were UK Prime Minister

 

 

 

Environment: Meanwhile there will be increasing environmental pressure from climate change – the world population has doubled in 50 years – and vast tracks of the world have been deforested. Burnt down to make way for farmland – denudation of rainforests in many places. Should we collectively feel guilty? Yes. Is the problem being collectively tackled? No. As more regulation is put in place on emissions, energy prices will likely rise further. An expanding population, flat or declining oil production and massively growing developing economies in Asia, Africa, Middle East and South America will pull harder on resources – Europe and North America will pay higher energy prices.

 

Dubai World: Interesting development. Is it another "Black Swan" event - something that has blindsided everyone, that will be a trigger for another leg down in a global recession, or a temporary relatively small shock. Probably the latter, but that's what people thought about sub-prime. Difficult to say with any certainty. We rather expected the worst to be over for Dubai as oil prices had risen for UAE from $37/bbl to $80/bbl in the last year. It's possible when the news got out and no-one expected such bad press on the issue - after all, it would probably have looked far worse back in early in 2009 when oil was $50/bbl. Anyway, at least UAE has massive oil/gas reserves. If anything, it will create further pressure for OPEC to increase oil prices further as the dollar declines and place like Dubai need to pay their debits. No good news for overall global economic growth.      

 

Something Doesn’t Add Up: The whole equation doesn't quite add up unfortunately. If global GDP growth averages 3%, oil demand historically goes up 1.3% (a third of the % GDP). However, oil production will remain flat until 2015. Outcome – rising prices until demand meets supply. But if oil prices rise above $100/bbl a recession is likely to start in Western oil importing economies like the USA and Italy/Spain. So you can sense that as China, Brazil, India and other developing nations suck in more oil imports – and oil prices rise – it will be at the expense of western oil importing nations GDP growth. We believe this is a fundamental economic model one needs to consider when property investing moving forwards.

 

We hope you have found this Special Report insightful. If you have any comments, please contact us on enquiries@propertyinvesting.net

 

Peak Oil

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Appendix:  Country Ranking

What we have prepared are two tables. The first table is a Pure Peak Oil Profits table that ranks each country on:

• amount of oil exports (green) or oil imports (red)
• amount of gas exports (green) or gas imports (red)
• demographics moderately expanding population (green) or declining population (red)
• stability - a summation of political, country risk, security and threat of war - green is stable, red is unstable

The rating is intuitive and qualitative - using our experience and judgment. You may not agree with all of the criteria ratings - however, we believe its a fairly measure of the countries that will do well from Peak Oil and those that will suffer the most from Peak Oil. No surprise that Norway and Canada come top. These two countries have huge oil and gas deposits, growing but relatively small populations (or oil revenue per person) and are very politically stable with excellent security. Expect their currencies and property prices to rise as oil prices rise.

 

	Oil	Gas	Demographics	Stability	Overall
Norway	10	10	8	10	38
Canada	10	8	8	10	36
Brunei	10	10	8	8	36
Australia	6	10	8	10	34
UAE/Dubai	10	8	7	6	31
Algeria	8	10	8	5	31
UK	7	7	7	9	30
Russia	10	10	3	6	29
Saudi Arabia	10	8	7	4	29
Brazil	7	7	7	7	28
USA	2	9	7	9	27
China	5	6	7	5	23
India	4	4	8	4	20
Korea	0	0	7	7	14
South Africa	0	2	7	3	12
Portugal	0	0	4	8	12
Japan	0	0	3	8	11
Spain	0	0	3	8	11
Italy	0	0	3	8	11
Greece	0	0	3	8	11

 

Legend
Big opportunity - positive
Opportunity - positive
Neutral - hedged
Threat - negative
Severe threat - very negative

 

	Oil	Gas	Coal	Metals	Finance	Manufa-cturing	Agricul-ture	Know-ledge	Demo-graphics	Stability	Overall
Canada	10	8	9	9	9	5	8	10	8	10	86
Australia	6	10	10	10	9	5	8	10	8	10	86
USA	2	9	10	8	10	5	10	10	7	9	80
China	5	6	10	8	8	10	7	8	7	5	74
Brazil	7	7	7	9	7	7	9	7	7	7	74
Russia	10	10	9	8	7	5	6	7	3	6	71
Norway	10	10	0	0	7	5	4	9	8	10	63
UK	7	7	1	1	10	4	7	9	7	9	62
India	4	4	9	5	7	7	4	8	8	4	60
Brunei	10	10	0	0	6	2	4	7	8	8	55
UAE/Dubai	10	8	0	0	8	5	1	8	7	6	53
South Africa	0	2	10	10	3	5	6	5	7	3	51
Japan	0	0	4	2	8	10	5	10	3	8	50
Algeria	8	10	2	2	4	3	2	4	8	5	48
Saudi Arabia	10	8	0	0	7	3	1	6	7	4	46
Korea	0	0	4	0	7	10	3	8	7	7	46
Spain	0	0	0	1	8	4	8	8	3	8	40
Italy	0	0	0	1	7	3	7	8	3	8	37
Greece	0	0	0	1	6	4	6	7	3	8	35
Portugal	0	0	0	1	5	4	7	6	4	8	35

 

 

 

 

If all else fails, find a beautiful hideaway near London and head for the hills!

 

 

Lulworth Cove

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bletchley Park

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Or find a tax haven like Switzerland

 

 

 

 

 

 

 

 

 

 

 

And leave the Tube behind

 

 

 

 

 

 

 

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