Scotland's Oil-Are we going back to the 1970's ?

Some of you may know that I am Scottish and still live in Scotland which is why today's post is of particular interest and relevance to me. It is not often that Scotland gets a mention in terms of the Global Economy but today we have been all over the news.

The reason for this is that  oil workers at the Grangemouth oil refinery in Scotland are going on a two day strike starting on Sunday. The dispute is not about pay so much as pensions. The Wall Street Journal reports

It reminds me of when I was much younger and the last time that Labour was in power in the UK-we had the so called "Winter of Discontent" and the Miners and Dustbin Men Strikes.

“It was the decade of strikes, electricity shortages and piles of rotting rubbish on the street,” recalls a BBC report.

 

I was fairly young at the time but I can remember fairly frequent power cuts and problems getting coal for the fire we used to heat my parents Central heating System.It was also the time when arguably one of the UK's most militant Union Leaders Arthur Scargill head of the National Union of Mineworkers came to prominence.

Then in ‘73 the oil crisis broke. Arab OPEC members were outraged at the West’s support for Israel in the Yom Kippur war . They ceased  shipments of oil to the US and Western Europe. At the same time all of OPEC decided to increase its prices following earlier failed negotiations with the “seven sisters” – the seven biggest Western oil companies at the time.

The result of this action was a damaging blow to the heart of the oil-dependent industrialised world. The price of crude went up fourfold (to $12!) and sent Britain’s already troubled economy into a tailspin. Growth stalled and inflation rose from 5% in 1970 to a high of almost  27%  by August 1975. From a low of 5% in 1971, interest rates soon rose into double digits and hit 15% by 1976.

It is spookily similar to what we are seeing today history may not exactly repeat itself, but  today oil’s and food prices have been shooting up and workers  industrial action is once again making the news.

 

The question I guess is why is some relatively small refinery in Scotland making the news anyway? Well it is the receiving end of the major artery in the North Sea oil pipeline network. An artery that stretches from Grangemouth, south of Edinburgh, at one end to the Forties oil field over 200 miles away out in the North Sea at the other.

 

This pipeline transports crude from around 70 oil fields in the North Sea, amounting to over 40% of the UK’s entire crude production . It means BP -(BP-LSE) may have to close the pipe, with costing approx £50m per day ,the strike may only be for two days but it will take a week to boot up the refinery again afterwards.

So after more than three decades, with another Labour Government in power oil prices are high, food prices are going up and now, strikes are back. In the ‘70s the food/fuel double whammy led to stagflation . Deflation in the housing market forces consumers to tighten their belts and their resultant lower spending crimps growth.

So not only does it look like the UK is heading down the path of the US but the Global oil situation that I discussed in an earlier post this week- Has Oil Peaked ? is of severe enough dimensions that a 2 day strike in a refinery in the East Coast of Scotland merits Global headlines on the likes of Bloomberg- U.K. Braces for Fuel Cuts and CNBC Pipeline Strike

Break out the Candles-there may be trouble ahead !!

 

Best Wishes

 

Alan

Technorati Tags: Oil,Gas,North Sea,BP,Grangemouth Refinery

Brazil's Booming Economy Drawing More Investors - Markets * US * News * Story - CNBC.com

 

Interestingly after my post earlier this week (Investing in Brazil) this appeared on CNBC yesterday-just goes to show reading this blog keeps you ahead of the Crowd :-)

 

 

Brazil's Booming Economy Drawing More Investors - Markets * US * News * Story - CNBC.com

 

It further reinforces my view that Brazil is a worthwhile longer term opportunity to consider for your portfolio.

 

Best Wishes

 

Alan

 

Technorati Tags: Brazil Fund

Has Oil Peaked ?

A lot of you will be familiar with the Peak Oil theory -for those who are not then you can read more about it here-Peak Oil. Oil reached more or less $120 a barrel recently but today backed off and was at one point down $4.

A recent Reuters report quoting Saudi's King Abdullah did not seem to be reported much but could have big implications for the Peak Oil story and Oil prices in general it said:

Saudi Arabia's King Abdullah said he had ordered some new oil discoveries left untapped to preserve oil wealth in the world's top exporter for future generations?

"When there were some new finds, I told them, 'no, leave it in the ground, with grace from god, our children need it'," King Abdullah said?

Saudi production capacity stands at around 11.3 million bpd, and is scheduled to rise to 12.5 million bpd next year

Al-Shaybah oil field, southeastern Saudi Arabia

 

 

 

 

 

If , as you could interpret by these comments there may be a reduction in available oil to the world from the Saudi's in years to come then this could have major global macro economic ramifications.

Currently the US relies heavily on Middle Eastern Oil and this has been reasoned as one of the major drivers of the conflicts in that area, namely control of Oil supplies or at least ensuring they do not fall into the hands of states that the US may find difficulty dealing with.

Whatever the reasons for any conflicts ion the Middle East it has been well documented that the US is keen to reduce its reliance on Oil from the Gulf.So where can it go to get alternative supplies?

We are all aware of the claims being made on the Arctic and Antarctic driven a lot by the belief of huge reserves in these areas, Alaska is another area where there is the potential for some large finds.Politically though these areas are going to come up against a  lot of resistance from the Conservationist lobby's and there could easily be a  lot of the NIMBY (not in my backyard) fraternity unhappy as well.

A less problematic solution particularly with the price of Oil at  $115-$120 a barrel is the Tar Sands of Canada.

The most talked about of these is  in the country's Alberta region.Over the past few years, companies like Suncor, Canadian Oil Sands Trust, and Western Oil Sands have all shot up more than 1,000% by literally extracting valuable crude oil from the province's sandy Northern terrain.Alberta was the first province to set up a regulatory framework and workforce infrastructure. Today, nearly two-dozen companies have a stake in Alberta's oil sands.

However there's a region of Canada that geologists believe holds even richer oil deposits than Alberta.

 

In fact, it's the province right next to Alberta... Saskatchewan.

• The Saskatoon StarPhoenix reports, the "Saskatchewan side of the oil sands formation could lead to a long-term economic bonanza for this Province."

• The National Post writes, the "bitumen find in Saskatchewan could spawn a new industry."

• The Regina Leader-Post writes, "Although the Alberta oil sands tend to get most of the publicity, the oil sands in Saskatchewan contain ‘significant world class deposits' that are of ‘top quality.'"

How much oil is in Saskatchewan?

Preliminary estimates are 60 BILLION barrels of oil.

Thing is, less than 5% of Saskatchewan's oil property has been fully explored!  So there could potentially be even more undiscovered oil!

For  more than 40 years Saskatchewan has sat idle—untapped—chock-full of rich oil sands because the Saskatchewan government  had refused the necessary permits to allow exploration

Recently the Saskatchewan government finally granted access to this region.Without a doubt the Canadian Oil Sands would solve a lot of the issues facing the US

Canada is sitting on a huge oil reserve with a "no risk" transport route to the world's largest consumer. Currently with Oil priced as it is then extraction is a worthwhile exercise compared to when Oil was at $50 a barrel.

I believe that in years to come the Canadian Tar sands will become a key plank of the US strategy for reducing its reliance on the Gulf for its Oil. This can only bode well for the companies that are involved such as :

 

Suncor
Western Oil Sands
Canadian Oil Sands Trust
Nexen Inc.    
Imperial Oil
Statoilhydro
Encana  
Shell   
Exxon.

 

I would look for some pullbacks on some of these companies and start tucking away small amounts at a time when the price has dropped back.I believe that companies such as these will continue to grow at the rates that they have done in the last 5-10 years.

 

Best Wishes

 

Alan

Technorati Tags: Suncor,Oil,Tar Sands,Peak Oil

Investing in Emerging Markets using ETF's

 

Continuing on my recent themes of investing in emerging Markets, it may be worth looking at the Deutsche Bank x-trackers these will give you exposure to numerous emerging markets including India, Vietnam, Korea, Taiwan, Brazil and Russia.

You can find details at www.dbxtrackers.com

 

 

Best Wishes

 

Alan

Technorati Tags: Russia,Brazil Fund,Investing in Brazil,Investing in Russia,ETF,Emerging Markets

Investing in Brazil

A few Years ago Morgan Stanley came up with the original idea that four big countries – Brazil, Russia, India and China – would together soon become so important in the world economy that they could be viewed as a single group, much as we think of Europe or Latin America.

They dubbed the group BRIC, after the first letters of their names, saying that their combined economies, from being just 15 per cent the size of the world’s six most advanced countries’ – including the US and Japan -- would grow to become even larger than them in combination in fewer than 40 years.

There has been a lot of focus on India and China and I have written about these countries in past articles Broken China ??   &  Investing in India The challenge with both these countries is that they do seem to still be linked to the fortunes of Wall Street and have suffered along with the US Markets

Brazil and Russia, by contrast, are among the handful of countries best situated to supply those increasingly valuable natural resources and so are fairing a lot better and seem less exposed to the US story and more exposed to the Commodities and Energy story that is doing well in the face of the US recession.

Russia is a huge exporter of oil and natural gas, nickel and platinum group metals. Brazil is the world’s biggest supplier of internationally-traded agricultural products such as sugar, soybeans, coffee, corn, orange juice, beef and poultry.

                                         

Both still have enormous resources that can be developed to meet Asia’s growing demands.

 

No shortages of energy, food or water

Last year Brazil’s main stockmarket index rose 71 per cent in US dollar terms, or even faster than India’s, suggesting that international investors are awakening to the potential of the South American giant.

Much of that interest was focused on Brazil’s two biggest stocks – Vale (NYSE:RIO) and Petrobras (NYSE:PZE). Vale is the world’s biggest exporter of iron ore; Petrobras has just made the world’s second-largest oil/gas discovery in 20 years, deep beneath Atlantic waters.

But it’s renewable resources, rather than minerals, that are increasingly attracting investor interest.

The well-known British investor, Jim Slater, says Brazil is “insulated against the world’s main shortages – fresh water, agricultural commodities and energy.”

It contains nearly a fifth of the world’s fresh water, available to expand agricultural production and carbon-free electricity generation. Hydro-power already provides 80 per cent of Brazil’s electricity needs, and two big new dams are being built on the Amazon at a cost of $10 billion.

Because it can produce alcohol fuel from sugarcane, without subsidies, for prices competitive with petrol, Brazil has been dubbed “the Saudi-Arabia of ethanol.”

David Fuller, the London-based analyst, says: “No country is better positioned to benefit from the agricultural boom than Brazil, with its large and fertile land mass, absence of any desertification, and ample supply of fresh water.”

Other commentators point to the nation’s economic growth rate (around 5 per cent a year), a foreign trade surplus (running at about $40 billion a year), large foreign reserves, a strong currency and a buoyant stock market.

Last year Brazil attracted FDI (foreign direct investment in factories and business operations) of $37 billion, or twice as much as India. It was the world’s third biggest raiser of investment capital via equity issues after the US and China. And its international bonds are expected to be granted investment-grade status within two years.

Brazil has a flourishing middle class of 20 million – depending how you define “middle class,” five times larger than India’s – as well as political stability, a favourable environment for foreign investment, and strong job creation (5 million new jobs since 2000).

Years of favourable international environment, combined with good policies such as more disciplined public finances and trade liberalization, have delivered low inflation and falling interest rates. One result is the emergence from poverty of a new lower-middle class, so the nation’s notorious income inequality has been declining.

Sensitive to foreign capital flows

What are the negatives?

The public sector is bloated and corrupt, packed with time-servers with jobs for life and fat pensions to look forward to. Taxes to pay for it gobble up more than a third of national output – a proportion much higher than in other emerging markets and out of proportion to the low quality of services provided.

As is commonplace in countries where planning, building and operating infrastructure is almost entirely in the hands of bureaucrats, Brazil has some serious infrastructural problems, including power-supply shortages. The regulatory environment is not sufficiently clear to attract private investment.

Labour laws are highly restrictive, with welfare and other compulsory contributions adding 60 to 100 per cent to employers’ payrolls.

The stockmarket is very sensitive to flows of foreign capital, therefore exposed to adverse money shifts that may be triggered by developments unconnected with conditions in Brazil itself, such as the US sub-prime crisis.

Finally, remember that although Goldman Sachs’ BRIC study projected good per capita growth rates for the Brazilian economy over the coming decades, it suggested the three other nations in the group would grow even faster.

If you are interested in adding Brazil to your international portfolio to provide balance, the best way to do so is probably via one of the exchange traded funds listed in London or New York. There is an iShares MSCI Brazil Fund in London which I would favour as it is priced in Sterling and not Dollars or there  is the Brazil Fund (BZF) that trades in new York if you are looking for a dollar denominated fund.

               Best wishes

 

Alan

Technorati Tags: Investing in Brazil,Coffee,Brazil Fund,Russia,China,India