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If the clouds of
crisis enveloping Japan, the Middle East and North Africa hold any silver
linings, they may be in the form of opportunity for resource investors,
particularly in the uranium, oil, natural gas and alternative energy sectors—at
least that's how Rick Rule sees it. The widely known and well-respected
founder of Global Resource Investments returned to cyberspace this week for a
webcast wherein he explored some of the investment implications of these
recent crises. In this Energy Report exclusive, Rick shares his insights and investment
ideas.
Rick Rule, world-renowned expert in resource investing, anticipates
ongoing repercussions on the nuclear energy front as one consequence of the
reactor crisis that has kept Japan in daily headlines for weeks. As you may
recall from The Energy Report interview with Alka
Singh last week, citizens and politicians around the world, fearful that
catastrophes like that at Japan's Fukushima complex could occur in their own
backyards, want governments to rethink nuclear power programs.
Riding the wave of growing fear, investors have been pulling out of
uranium stocks, as some in the markets are calling for an end of the nuclear
renaissance and the demise of the uranium bull market. With Japan's tragedy
marring perceptions of nuclear power as a safe and clean alternative to
fossil fuels, the uranium spot price fell right along with valuations of
companies in the uranium sector.
Reaction to the crisis is not over, Rick says, noting that this adds
volatility to an already volatile market. He expects nuclear-power opponents
to seize on the crisis to whip up as much political and social hysteria as
they can, raising—and perhaps exaggerating—questions about the
state of readiness for potential disasters, not just in Japan but also around
the world.
"We're going to have the opportunity to take advantage of fear
and terror in the uranium industry in a way that we haven't had," says
Rick. He calls attention to the fact that two uranium companies subject to
current takeover bids are already trading at 25%–30% discounts to the
value of the bids. This is "indicative of the wonderful opportunities
that we'll see over the next year," he adds.
Absolute Non-Starter
In no way does Rick consider the current crisis the end of the line
for nuclear energy for Japan or even the U.S., which seems to
"erroneously believe it can afford to ignore physical challenges in the
face of emotional challenges." Why? The U.S. derives 19% of its
electricity from uranium, according to Rick, who adds, "the idea of
shutting down 19% of U.S. generating capacity and throwing the country into
the dark is an absolute non-starter."
He fully expects Japan to return to its reliance on nuclear energy,
as well. "Despite the challenges Japan faces," says Rick,
"nuclear power is the inescapable cornerstone of its electrical supply
going forward, for the simple reason that nuclear power is so dense." He
explains that Japan can buy and store enough uranium to sustain its power
grid for five or six years, adding that in no way could Japan—or Korea,
Singapore or Taiwan—store enough oil, liquefied natural gas (LNG) or
coal to guard against geopolitical supply constraints that will affect other
energy sources. Around the globe, Rick states, nuclear power is an
inescapable part of the energy mix going forward—not just because it's
a major component today but also because energy demand will grow so much in
the future. According to some estimates, demand could be up to 35% higher
than 2005 levels by the year 2030.
To Be Rich Is Glorious
Much of that growth will come from developing nations, as what Rick
calls "emerging-markets liberalization" takes hold in fits and
starts. China is probably the best, and certainly the most-prominent,
example. The country started down the capitalist road in 1979, and the
post-Mao mantra introduced by Deng Xiaoping, the paramount leader of the
People's Republic of China then and throughout the 1980s, set off what he
describes as "the greatest boom I've seen in my lifetime."
Rick believes Deng wasn't seeking to diminish his power when he said,
"To be rich is glorious"—words that sent a signal to the
senior bureaucracy that the Chinese people should be a little more free and a
little more self reliant. Since the shift in sentiment, China's economy has
grown to 10 times the size it was then—300% just in the last
decade—and per-capita incomes are rising every year. It may be
"just a little more free," Rick says, but as China, India and
Brazil have shown, "when societies become a little more free, they
become a lot more rich; a little less constraint and a little more self
reliance generate absolutely incredible economic growth."
This phenomenon is a boon to the resource sector, in particular, he
says and he explains why.
Energy-Intense Lifestyles
In the Western world, wealthy people tend to spend their money on
services, according to Rick, adding, "prosperity at the bottom of the
economic pyramid is enormously beneficial for energy prices." The
ability of these billions of people to enjoy a better lifestyle is increasing
rapidly, he says, noting the lifestyle to which they aspire is energy
intensive. India and China are building national highway grids, selling large
numbers of vehicles and building electrical infrastructure similar to what
the U.S. did in the '30s, '40s and '50s. We don't hear as much about
Indonesia as we do China and India, he adds, but its 230 million people also
will make that country a formidable energy consumer.
At this time, Rick says, the average Chinese citizen consumes just a
fraction (3%) of the petroleum energy on which the average American relies.
Considering the size of its population, if Chinese per-capita consumption rose
to the level rivaling that of even South Korea (17% of U.S. consumption),
China's economy "would consume every drop of oil produced in the
world," Rick says.
As per-capita consumption increases in China and other developing
economies, he continues, the impact on global petroleum prices will be
dramatic. The fact is, billions of people not only want the standard of
living that the Western world enjoys but also, increasingly, have the means
to compete for it. Thus, inexorably, the price of commodities will increase.
This includes prices for all energy sources—at a time, Rick notes, when
energy supply has plateaued.
In terms of oil, while acknowledging that new technology will
facilitate recovery of additional reserves from existing sources and help
locate new deposits, he doesn't believe these endeavors will prolong the life
of oil at prices in the neighborhood of $100–$150 per barrel.
"We're running out of $100 oil," he explains, citing a variety of
reasons. To an alarming degree, he says, the national oil companies that are
responsible for the lion's share of production have diverted cash flow from
reinvestment in energy security to domestically popular spending programs,
including―ironically―subsidizing the price of energy or
"increasing demand while reducing supply."
Further, he expects national oil companies that represent about 30%
of the world's export crude (from countries like Mexico, Venezuela, Peru,
Ecuador, Indonesia and Iran) to cease being oil exporters within five years.
"Taking 30% of the world's export supply out of the equation when export
demand is increasing at 2% per annum," he says, "is a recipe for
incredible oil price rises."
Middle East Turmoil
And, of course, there is the increasing volume and intensity of
social unrest in the Middle East and North Africa. International crude prices
reached a 30-month high of $120 per barrel in February following earlier
turmoil in Egypt and Tunisia. Overlaying systemic shortages with agitation
for regime changes—not unlike the situations that also have erupted in
Yemen and Libya—suggests the enormous potential for disruption in
supply as a consequence of political turmoil, revolution and even higher
prices. "And the balance between supply and demand is too tight to take
the supply shocks that could come with regime changes," Rick points out.
For a glimpse into the potential of such supply shocks, consider the
recent reductions in Libya's oil production. Libya pumped approximately 1.6
million barrels per day (Mbpd) of crude before
heavy fighting between Muammar Gaddafi's forces and rebel troops, followed by
U.N.-approved air strikes, slashed production to less than 400,000 bpd. This
cut off exports and possibly damaged Libya's oil infrastructure. While the
country's exports likely account for less than 1% of the world oil supply,
Rick explains, the loss of 500,000–1 Mbpd of
Libyan oil drove the price of oil up 10%–15% worldwide.
Black Swan on Steroids
"And what would happen," Rick muses, if serious agitation
for social change were to occur in the United Arab Emirates, Kuwait or Saudi
Arabia? "That's a black swan on steroids."
Though attracting far less media attention than its reactor crisis,
the devastating earthquake and tsunami that hit Japan has purportedly wiped
out 29% of its domestic refining capacity. As the world's second-largest net
importer of oil, Japan relied on imports to meet 45% of its energy needs as
recently as 2009. "The nuclear capacity was threatened," Rick says.
"In northeastern Japan, the oil- and petrochemical-refining capacity was
not threatened―it was obliterated. But this isn't what you read about
in emotion-driven headlines."
While the oil market might be the most noteworthy bellwether because
oil is the most-ubiquitous and most-useful form of energy, tensions in the Middle
East and the crisis in Japan are focusing more attention on alternatives.
LNG: Fuel of the Future
Since 2008, Japan has been the world's third-largest nuclear power
user, with 55 reactors providing more than one-third of the nation's
electricity. Rick believes that additional nuclear capacity will replace what
has been lost at Fukushima, eventually; but in the interim, he expects one
consequence of Japan's need for power to create more reliance on hydrocarbons
and that's likely to be LNG. He considers LNG the "fuel of the future at
any rate, as it can be stored well, is energy dense and can be used for
peaking production, which is cheaper to establish although more expensive to
operate than baseload production."
Indeed, speculation that the damaged Japanese reactors will divert
LNG resources there has already driven up the prices of natural gas futures
and promises to incrementally tighten LNG supplies. Even before the March 11
tragedy, Japan ranked first among the world's LNG importers. With or without
Japanese demand, Rick believes that upward momentum in oil prices will lead
North American, and probably European, markets to investigate and initiate
use of LNG or compressed natural gas as transportation fuel, at least to
supplement diesel and gasoline for over-the-road trucking. He foresees a
dramatic effect on natural gas prices and the creation of a global market
that connects what currently are distinctly local markets.
Carbon Conundrum
Despite concerns about loading carbons into earth's atmosphere, Rick
expects parts of the world—particularly countries that don't think they
can afford clean air—to keep coal as an important component in the
world energy mix. "Despite being vilified," he says, "coal
will continue to be an important part of the energy matrix. The demand for
energy will supersede the demand for clean air, especially in countries that
are marching from 10%–15% electrification toward 100%
electrification." And like it or not, he adds, this isn't
hard—metallurgical coal for steelmaking isn't hard, except for
"the dirty, old, thermal, steam coal that China, India, Pakistan and
others will burn."
On the other side of the coin, he expects countries that believe they
can afford to use more energy—Australia, New Zealand, the U.S., Canada
and Western Europe—and fortified by fears about nuclear power, to
intensify focus on alternative energies that are more politically correct. In
fact, he anticipates "the unaffordable subsidies doled out to solar,
wind and run-of-river power generation to increase whether we can afford them
or not."
Rick personally considers only geothermal and hydro as the viable
alternative power sources that work. While he submits that both of these
sectors "are deeply out of favor," that makes them all the more
appealing to Rick, who reveals that we can expect to see him increase his
already-considerable stake in those sectors substantially.
Not that current headlines offer any rationale for panic, in terms of
hydro and geothermal energy—at least not in the sense that uranium is
suffering from the flared-up fear factor—but throughout his illustrious
career, Rick has encouraged investors to summon the courage to buy whatever
the masses of investors are snubbing. "It's the panic markets that offer
the best opportunities to buy good assets and solvent companies at
extraordinary discounts," he professes, adding, "More often than
not, the huge gains come with having the courage to buy when others
won't."
Rick Rule, founder and CEO of Global Resource Investments (GRI), began his career in the securities business
in 1974 and has been principally involved in natural resource security
investments ever since. He is a leading American retail broker specializing
in mining, energy, water utilities, forest products and agriculture. Rick's
company has built a national reputation for its specialist expertise in
taking advantage of global opportunities in the oil and gas, mining,
alternative energy, agriculture, forestry and water industries. Last month,
Rick closed a landmark deal with Eric Sprott,
another famous powerhouse in the natural resources arena. With GRI now a
wholly owned subsidiary, Sprott, Inc. manages a
portfolio of small-cap resource investments worth more than $8 billion and
boasts a workforce of more than 130 professionals in Canada and the U.S. This
article is based on Rick's Global
Resource Investments webcast, Monday, March 21.
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