Start the conversation
Money Morning Investment Director Keith Fitz-Gerald is currently leading an investment trip through China, taking in that country's culture and scenery, as well as its investment opportunities. Here is Part II of a short series detailing his observations and discoveries.
By Keith Fitz-Gerald
Money Morning/The Money Map Report
XI'AN, CHINA – For years, I've been telling hushed, incredulous audiences around the world that oil prices were headed higher – much higher.
I consistently list three causes: Supply, demand, and interruption.
The first is obvious – even though most folks still don't want to believe it. Data suggests we're burning through the world's petroleum reserves four times faster than we're finding new ones. We haven't had a major new discovery of significance in 30 years. And, adding insult to injury, we still don't have workable substitutes in place (alternative energy technologies such as fuel cells, for instance), even though we've had decades of warning to get our act together.
The second, demand, is tougher to call. On one hand, higher prices are reducing demand in so-called first-tier countries. But when it comes to the rest of the planet, all bets are off.
Here in China, for example, they're using fuel at an accelerating rate. Part of that is the increasing reliance on fuel oil, but an even bigger catalyst is simply because companies like Chery Automobile Co. Ltd., Geely Automobile Holding Ltd., and Chongqing Changan Automobile Co. Ltd., are producing inexpensive, gas-powered cars for the masses.
The same is true in India where Tata Motors Ltd. (TTM) $2,500 car is opening up driving and vehicle ownership to millions of consumers who otherwise would never have also become motorists.
And they're gearing up for more. China Petrochemical Development Corp., Sinopec Shanghai Petrochemical Co. Ltd., and China National Petroleum Corp. are adding as much as 24% to their crude oil refining capacity in the next three years. Much of that is simply to cope with an economy that's risen at 10.6% the first three months of 2008 – the ninth-straight quarter of double-digit expansion.
China, which is already the world's second-biggest energy user, will need to import as much as 60% of its oil by 2020, according to Wang Jiacheng, deputy director of the research unit at the National Development and Reform Commission.
Combine that with terrorism, and we have a trifecta of reasons why oil will go far higher.
And there's nothing in the near term that can prevent it.
Naysayers counter my thesis by arguing that high prices will lead to conservation as the economics of driving become unfavorable. We agree – but even that will take time to happen.
The problem is that China and India, in particular, are getting into the game at a time when they have no experience with low prices. So the "higher" prices that are causing the rest of the world fits are largely irrelevant to those two newcomers.
Story continues below…
What's more, in very practical terms, the only time you really have a real drop in consumption and an increase in efficiency is when consumers buy new cars … and airplanes … and machinery.
But here again the avenues to change are limited.
Not only are Americans tapped out and unable to buy new cars, but their credit is as wrecked as are the financial markets that would otherwise accelerate this process of change.
Here in China, it's a different ball game. The savings rate is 40% or more, and consumers are so flush with cash that they're buying new cars and trucks at a breathtaking rate.
That helps explain why the automotive industry here grew 22% last year, putting nearly 9 million new vehicles on the road and substantially boosting the demand for gasoline and diesel fuels.
In recent months, there's been another argument advanced and the talking heads are trying to blame much of what's happening with higher prices on speculators.
That's the financial equivalent of "the dog ate my homework."
What's really driving oil prices is the combination of supply and demand imbalances that I've sketched out here, and a "fear of interruption" prompted by terrorism.
Global traders are doing nothing more than ensuring that they have access to oil no matter how high prices run. Absent an alternative, the reality is that no country on earth can afford to be without oil and the energy that it provides. This means that traders, whose job it is to procure supplies in the open markets, are simply doing what they are paid to do…make sure their clients can get it when they want it.
It's like going to the super market. If there are 1,000 eggs and only 100 buyers, the price of an egg will be lower. But reverse the situation with a single egg and 1,000 buyers and you can bet dimes to dollars the price will sky rocket dramatically as buyers bid against each other to get that single – suddenly precious – off-white orb.
It really is that simple.
At some level, this stinks and I'll be the first to admit that I hate feeling like I've been mugged every time I fill up.
But, as an investor, there are plenty of ways to take the sting we feel out of our wallets as a result of all this.
The simplest is to invest in commodities of all types. Not only are commodities a direct beneficiary of higher oil prices, they also demonstrate a remarkable resilience in the face of inflationary pressures like those we face now. Call it a "value meal" if you will.
It's also a good bet to concentrate on alternative energy. The "tree huggers" who were long maligned as fringe members of our society actually have been right all along, and many will be vindicated in the next few years – especially when it comes to developing the so-called "green technologies."
Personally, I'm glad to see this take place, since it means there is nothing alternative about alternatives any longer.
And we can profit along the way.
["The View From China" is an investing travelogue chronicling Money Morning Investment Director Keith Fitz-Gerald's current journey through Mainland China. Fitz-Gerald last wrote about China's auto industry.
News and Related Story Links:
- Money Morning Investing Travelogue:
The View From China: Despite the Auto Industry's Pedal-to-the-Metal Growth, a Safety Play May Offer the Safest Play.
- Money Morning Special Investment Research Report:
Three Ways to Play Money Morning's Prediction That Oil Prices Will Reach $187 a Barrel.
- Money Morning News Analysis:
Goldman Sachs Follows Money Morning Prediction That Oil Prices Could Approach $200 a Barrel.
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.