Brent crude has bubbled up to a ten-month high around $72 a barrel amid an impending strike in Nigeria and violence in Palestine. And no wonder: the supply/demand imbalance looks “particularly stark” at present, according to the International Energy Agency (IEA). Global demand is rising more rapidly than expected and is now set to climb by 2% in 2007 to just above 86 million barrels a day. Non-Opec supplies are likely to fall below one million barrels a day due to project delays. Unless Opec raises production fast, which it is loath to do, says Kevin Norrish of Barclays Capital, prices will keep rising.
Prepare for a post-oil planet…
As the IEA says, “we definitely do need more crude oil” and not just in the near future. Daniel Howden in The Independent pointed out last week that, according to the IEA’s most conservative estimates, the world is likely to consume 113 million barrels a day by 2030 as Asia industrialises. But where is all that oil going to come from? There has not been a major discovery in recent years. Indeed, according to the Oil Depletion Analysis Centre, global oil production will soon peak. The Centre’s Colin Campbell, who has worked for various oil majors, says production of easily extractable oil peaked in 2005; factor in deep sea reserves and other less accessible sources, and the peak will come in 2011.
Note that when Shell geologist M King Hubbert predicted in the 1950s that US production would peak in 1969, he was ridiculed – yet it did actually peak in 1970. Two-thirds of global reserves lie in the Middle East, but the reserve figures are suspect: Gulf states appear to have overstated reserves in order to secure higher production quotas. In 1985, Kuwait reported a 50% reserve hike with no corresponding discovery, says Bill Powers on Financialsense.com. And can Saudi Arabia boost production, as everyone expects? Oil expert Matthew Simmons is among those who think output production may be peaking; Simmons also notes that no Opec producer has ever been independently audited. Oil at these levels could soon look very cheap indeed.
…unless Canada comes to the rescue
With oil reserves in the Alberta tar sands thought to contain around 170 billion barrels of oil, more than Saudi Arabia’s biggest field, the Canadian market is a prime beneficiary of rising oil prices. But oil is not the only commodity Canada’s got plenty of. It has abundant supplies of water, which has been called the oil of the 21st century, as well as nickel, wheat, copper and timber. In fact, commodities comprised 61% of exports last year, and exports in turn accounted for 32% of GDP.
The commodities boom, which looks likely to keep going for a few years yet, has supported a trade surplus over the past few years and fuelled strong gains in the Canadian dollar (“loonie”), which has hit a 30-year high of around 95 US cents against the US dollar. Robust consumption has also underpinned GDP growth, which reached 3.7% in the first quarter. Likely interest rate rises, along with the ongoing commodities boom, bode well for the loonie, says Jim Jubak on Moneycentral.msn.com. Throw in miniscule political risk and Canada is “about as good as it gets”, suggests Rathbones, which says Canada is in a long-term uptrend. One ETF tracking the market is the Composite Index Fund (TSX:XIC), while Jubak is currently eyeing up Brookfield Asset Management (TSX:BAM.A, CAD42), which owns property, timber and power generation assets, as well as natural gas group Encana (ECA, CAD70).