After several weeks' diversion, we return to perhaps the single most important factor in the current global market mix. Oil.
NYMEX crude has jumped above $109 this week, and it's anything but nutty to expect gas prices to ratchet toward $5 and higher over the near term (if that sounds bad, Europeans are now paying the equivalent of $9 per gallon).
As this happens, we're forced to reflect on the macro picture that's responsible for this phenomenon and to consider how other, broad political and economic currents will shape our investing future, both near-term and far.
We see it like this:
There is currently a war going on. It's an undeclared, economic war that has always been with us, particularly since the rise of nation states roughly two centuries ago. But recently it has grown in intensity.
As we approach the inevitable Kondratieff winter – a period of great wealth destruction that will ultimately erase all economic excesses of the current era and eliminate all but the strongest and most necessary business enterprises, the tendency on the part of nations will be to protect at all costs the economic standing of its citizenry, and by extension, maintain the social standing of its elites.
This is precisely what we're seeing in the Arab world.
As commodity prices smacked the average Bahraini, Egyptian and Tunisian urbanite, he sought redress (rightly or wrongly) from his government. And fearing their ouster at the hands of an increasingly angry mob, the immediate response of elites was to placate and pacify that same rebellious cohort through economic means. Yes, political and legal reforms were also laid out, but money was at the core of the fix.
How many hundreds of billions of dollars were pledged to the Arab masses over the last few months is hard to accurately quantify – and how much will actually reach their hands is another question. But note well the direction of the response: to buy the rebels; to underpin the status quo with money; to 'buy their love'. However you want to term it, the method employed is symptomatic of the new era we are entering.
The fact that there may be other interested parties stirring up trouble in these areas is peripheral to the central issue. In the case of the above noted Arab states, Islamists and other garden variety radicals may add local flavor to the 'uprisings', but they do not change a general pattern that we should expect to see replicated the world over.
We are facing a global economic breakdown that will unfold over the course of years, if not decades, that will affect different regions in an unpredictable pattern, and that will deconstruct the current world order as a direct function of the breakdown in the existing global credit system.
Of course, there will be efforts to shore up that system in any number of ways, all of which will fail and simply prolong the suffering. And in tandem with these failed efforts will come wars of a more conventional nature, as the nineteenth century imperialist model of nation building and market building) is replaced with nation-saving and market-saving efforts. Stable resources and markets will be sought by all in an effort to stave off the speed of economic contraction.
We would also expect to see Samuel Huffington's vision of a 'clash of civilizations' to inform the alliances of the coming period, as those with similar cultures, languages customs, etc. form larger blocs to tackle common interests and problems.
It goes without saying that the healthiest societies will be those that live within their means, that are self-reliant and that create a voluntary system of support for those elements of society that are weakest and/or require temporary reprieve from accident, disaster or just plain bad luck.
Which brings us back to oil
Oil will be central to the coming battle – mostly for the role it will play in juicing the military's of the main players. And for that reason we see great potential for Canada, and particularly its oil sand producers, whom, we believe, will be increasingly relied upon to supply the needs of western states as the world increasingly aligns itself along religio-cultural lines. Canada currently supplies the U.S. with nearly one quarter of its oil. That number will only grow.
We'll have more to say about the oil sands and natural gas in the next few weeks. In the meantime, here are some major Canadian oil sand producers, whom we believe will be relied upon to fill the gap as the fault lines deepen.
- Canadian Natural Resources Limited (NYSE:CNQ) currently has over 100,000 barrels a day capacity from its oil sand assets.
- Athabasca Oil Sands Corp. (TSX:ATH) shares are up by nearly 70% in the last six months.
- Canadian Oil Sands Limited (TSX:COS) is a pure play on the oil sands and therefore carries more risk.
- Suncor Energy Inc. (NYSE:SU) is the largest producer by far in the group.
Many happy returns,
Matt McAbby, Senior Analyst, Oakshire Financial
