I think I have got to the bottom of why City salaries are so high: it’s because of the regular humiliation the recipients of the cash have to put up with.
Consider the fate of Britain’s economists last week. Reuters asked 50 of them whether they thought the Bank of England’s monetary policy committee would raise interest rates. All but one said it wouldn’t. It promptly did.
Then there are the oil analysts. At the beginning of last year most were still expecting the oil price to fall back. It didn’t. By the end of 2006 they had more or less given up and started forecasting long-term oil prices in the region of $70 to $100 a barrel. It should come as no surprise, then, that the oil price spent much of last week in freefall and is now hovering at about $55 — its lowest level since mid-2005. The result? Many analysts have flip-flopped and now predict oil at below $50 by the end of the year.
Imagine the misery of constantly having to come up with reasons to explain why you were wrong without actually admitting that you usually are. I’d want £500,000-plus a year for it too.
I’m now going to put myself on thin ice by making a prediction of my own: I predict that the oil analysts will be just as embarrassed in a year as they are now. Why? Because there is no way the oil price is going to go below $50 and just stay there.
Why the oil price won’t sit below $50
We know the population of the world is rising fast (by about 150 people a minute) and that the many people being born into increasingly rich emerging markets want to live in the same way that the western world does. They want their houses well-lit; they want their televisions and computers on standby all the time; they want heating when it is cold; they want air conditioning when it is hot; and they usually want to be somewhere they are not, which means they want a car or a plane to get there.
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In the next 10 to 15 years power demand in China and in India will double and the International Energy Agency tells us global demand for energy will also have doubled by 2030. How can the price of oil not be in a long-term uptrend? Expect more flip-flopping in January 2008.
The other point we shouldn’t lose sight of just because the oil price has fallen is that we still desperately need a real substitute for oil. The West has its worries about the security of supplies from the Middle East and Russia, but even if these concerns didn’t exist there still wouldn’t be enough oil about to cope with a doubling of global demand.
It would be nice to think the slack could be picked up by renewables — wind, wave and solar power — but it can’t.
It doesn’t matter how excited the European Union gets about global warming or how many announcements governments make about energy efficiency and low-carbon economies, it remains the case that renewable energy is expensive, inefficient and capable of meeting only a small part of the extra demand.
The only thing that is up to the task, as far as I can see, is nuclear power. It is secure, in that most reserves are based in stable countries such as Australia, Canada and America; it is reliable (unlike, say, wind power which is hopelessly unpredictable); it is clean, in that its production, while not carbon-neutral, emits very little in the way of greenhouse gases; and, despite perceptions to the contrary, it is safe.
Nuclear power is the only real alternative to oil
No wonder then that there are 30 reactors under construction in 13 countries and that China is talking about building another two a year for 15 years. Even Russia, which you’d think wouldn’t be remotely worried about the security of its oil supplies or global warming, says it intends that 25% of its energy needs should be met from nuclear power by 2025.
The obvious way to capitalise on this surge in reactor construction is to invest in uranium, the raw material needed to produce nuclear power. You would have been wise to start doing this five years ago — the price hasn’t fallen in a single month since 2001 — but the imbalance between supply and demand is such that it is probably still a good investment.
For years, mine production has met only 60% of annual demand, with the rest coming from stockpiles and decommissioned nuclear warheads. Clearly this can’t go on indefinitely — stockpiles are being run down and there are a limited number of warheads left, which suggests the price of will keep going up.
Possible ways to play this story include buying shares in Energy Resources of Australia (the world’s second-largest uranium miner) or, more speculatively, AIM-listed miners Uramin or Urasia. Another possibility would be to buy International Nuclear Solutions (also listed on AIM), which provides construction design and engineering services to the nuclear industry. It is small and unproven but has potential.
Finally for the very brave I’d suggest US-listed Thorium Power. Thorium is a mildly radioactive metal with similar properties to uranium in that it can be burnt in a reactor to produce power.
However, it also has advantages over uranium: it is much more plentiful, it produces less waste when burnt, and its half-life is a mere 500 years rather than tens of thousands of years.
Thorium Power is developing technology to take advantage of all these properties and as such is a risky but also potentially very good investment.
First published in The Sunday Times 14/1/07