War. Famine. Pestilence. Death - Part 2  

Posted by Big Gav

Six months have passed since I first introduced the peak oil portfolio, so I figure its time to have a look and see how its been going.

The same disclaimers as last time applies - this isn't investment advice, I'm not a financial adviser and don't ever invest based on the rantings of strangers on the internet, particularly pseudonymous ones !

Bearing in mind that over this period, the oil price has dropped from around US$68 to US$66 (negative for this portfolio), while the A$ has declined from 75 cents to 71 cents (positive) and the ASX has risen from 4600 to 5100 (positive), here's how things are looking:

Oil Search (OSH)2520$3.92$9,878
Woodside (WPL)280$44.15$12,362
BHP (BHP)445$27.60$12,282
Alinta (ALN)865$11.03$9,540
Origin (ORG)1355$7.27$9,850
Worley Parsons (WOR)965$18.72$18,064
Centennial Coal (CEY)1980$3.81$7,544
ROC Oil (ROC)3570$3.24$11,566
GRD (GRD)1755$2.24$3,931
TAP Oil (TAP)1690$2.23$3,768
Paladin (PDN)2200$5.04$11,088
Solco (SOO)16,665$0.25$4,166
Aust Renewable Fuels (ARW)3185$1.83$5,828
Karoon (KAR)2560$1.63$4,172
Compass Resources (CMR)3155$2.14$6,751
Downer EDI (DOW)820$8.80$7,216

By way of comparison:
WTI$68 (approx)$66-3.00%
WTI (adjusted to A$)$91 (approx)$932.00%
ASX 2004600510011.00%

While I've beaten both the index and the oil price over that 6 months, I must admit to feeling like an abject underperformer when I look at the stellar performance of a lot of energy related stocks - particularly recently listed uranium miners at the dodgy end of the market like Toro Energy, up 500% over the past week.

A lot of the recent uranium miner action (which has also affected the larger players like ERA and Paladin) has been driven by Chinese interest in acquiring or developing Australian mines.
China began its mission to become a nuclear power in 1951, when it signed a secret deal with Russia under the guise of developing clean nuclear energy. But half a century later its voracious energy needs mean it is actually focusing on developing nuclear energy for peaceful purposes.

China's energy self-sufficiency ended in 1993, when it was forced to become a net importer of oil to meet the demands of its surging economic growth, and although it is the world's second-largest consumer of oil after the US, its fuel of necessity is coal. It is the world's biggest producer and biggest consumer of coal, but the environmental degradation resulting from its reliance on freely polluting coal, much of it brown coal with a high sulfur content, is unsustainable.

China is estimated to have 70,000 tonnes of economically recoverable uranium - more than enough for its military purposes, but insufficient to meet its energy demands. Of Australia's existing three uranium mines, South Australia's Olympic Dam alone has known reserves of 1.5 million tonnes.

It is believed that domestic supplies of about 750 tonnes a year, mainly from the several mines in Gansu province, meet about half of China's demand. China has discovered deposits in many provinces but many of these remain undeveloped due to technology constraints and expense.

The rising uranium price has probably helped fuel the stockmarket rise too - as north american miners seem to be behaving the same way, though some commentators are warning this bubble is going to burst.
Summit Resources, one of the more advanced explorers, has gone from 27c 11 months ago to $1.41 yesterday. It is now capitalised at $265 million - even though the Labor Government in Queensland where it is based is the nation's most obdurate in banning yellowcake production.

The one Australian company that is developing a mine, Paladin Resources, has still to come into production in Namibia, but is now capitalised at an extraordinary $2.37 billion.

Even if the much hyped Chinese investment flows into our uranium industry, the money from Beijing will be talking to BHP Billiton and Rio Tinto, which - unlike most of the stocks in the eye of the speculative storm - have substantial undeveloped uranium resources here and exploration data to back them up.

Enthusiasts pointed to the rising uranium price and the growing world shortage of uranium, but analysts said any of the new explorers were four or five years away from production - at best. Uranium at $US40.50 a pound is no use to a company that is still drilling its first holes.

Analysts who specialise in junior resources stocks were yesterday unanimous in warning that investors are heading for a fall by pumping up uranium stocks. Fat Prophets's Gavin Wendt called the speculative wave "ridiculous". Far East Capital's Warwick Grigor blasted investors as being "naive". Stock Resource analyst Steve Bartrop called one of the recent listings and market darling Toro Energy "overpriced grassroots exploration".

Another category 4/5 cyclone is passing over Australia today, with Glenda disrupting oil and gas production in the North West, but apparently not causing any major damage to facilities at Karratha as far as I can tell.

ETRM notes that investment banks like Credit Suisse Group and Lehman Brothers and piling into energy trading, after "witnessing the billions of dollars that competitors at Goldman Sachs Group Inc. and Morgan Stanley have made as Wall Street’s two top commodities players". The same post points to an article about Africa's impending fate as another victim of the curse of oil (my spin, not theirs). They also note the UK energy regulator is predicting further energy price rises ahead.

Jeff Vail has a post evaluating different oil investment stategies (following on from his recent look at the dearly departed M3 measure of monetary growth). While I do like reading Jeff's economic analysis I must admit I miss his more theoretical posts like "The closing of the map" and "The logic of collapse".
A Note on Using Oil Vehicles as a Hedge:

Beyond “investing” in oil (which is, itself, a debatable label—more accurately it is “speculation”), it is also possible to use the above vehicles as a hedge against rising oil prices. Briefly, a hedge in oil will offset the increased cost incurred by each of us as oil prices rise. For example, if one personally plans to use $1000 in oil each of the next 5 years at current prices, then by investing $5000 in the oil ETF you will lock in that cost for the next 5 years. So if oil doubles in price, your cost to use the same amount of oil will also double, but you will recoup that added expense through profit on your oil ETF. Roughly, this is what Southwest Airlines has done (they are hedged through 2010), and is why they remain the only profitable airline. An oil option is the most efficient hedge mechanism because it requires tying up less money to hedge against a given quantity of oil usage, without incurring the risk of losing more than you paid for the option. Such a hedge is valid against several potential future problems: the decrease in suburban home values, the cost of commuting, the cost of home heating and electricity, potential losses in index mutual funds, possible hyper-inflation, potential downturn in the economy leading to unemployment, etc. However, calculating exactly how to hedge for each of our individualized risk-sets can be challenging and imprecise.

While the proposed Iranian oil bourse may have disappeared from view (FTW had some detailed commentary for subscribers recently - and no, I'm not amongst them), but the confrontation over their nuclear plans is still lurking in the background, with a 30 day deadline being imposed by he UN security council for Iran to "comply with demands that it abandon uranium enrichment activities".

In local news, the Rodent and Lord Downer of Baghdad are complaining about Indonesian propaganda directed against them over due to rising tension over West Papua. Some sections of the Indonesian population seem to think Australia intends to break up the Indonesian federation. While this isn't official policy, I guess a tinfoil analyst could point to East Timor and some of our policies towards Papua (more from the morality driven side of politics rather than the Liberals) and suggest that they could be right (especially given the rather rich load of natural resources enjoyed by these regions in particular). Personally I think Australia always should have opposed Indonesia's seizure of East Timor and West Papua, so tough luck to the Indonesian nationalists and good luck to the Papuan separatists. But I suspect any Australian policy will be driven by our interest in resources rather than doing the right thing by the local inhabitants.

On a big brotherish note I see new surveillence powers have been passed into law here with barely a murmur from anyone. A mostly benign police state is still a police state, unfortunately. Talk of controls on the usage of these powers tends to bring to mind the law limiting intercepts in the US that Bush is flagrantly ignoring.

But hey - at least we're not in Iraq.

And finally, there was a call for revolution today - a green revolution. Before any spookier types of reader get upset, I should note that the would be revolutionary is Tony Blair (looking rather unhealthy lately), who is still trying to balance out the bad historical karma he will endure for invading Iraq with lots of rhetoric about dealing with global warming before it is too late.
Tony Blair has called for a "technological revolution comparable to the internet" to slow global warming.

Speaking in New Zealand, he said it was important to develop machines which produced fewer emissions, while maintaining economic growth. Mr Blair promised to push for an international framework to supersede the Kyoto Protocol when it expires.

The speech came after the government admitted it was unlikely to meet its target for cutting greenhouse gases.


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