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Competition for Commodities

Written by Brian Hicks
Posted June 9, 2005

Dear Wealth Daily reader:

There's a reason why Wealth Daily's broad investment thesis is called "3-G."

The 3-G's stand for geology, groundwater, and geopolitics.

Geology represents all of the precious natural resources that are extracted out of the ground, like gold, silver, copper, oil, coal, natural gas, diamonds, etc.

Energy resources, in particular, are the lubrication of the economy. They make things go. Energy = Power. If you have a lot of it, and it's cheap, you can make your economy grow. And the nation, along with its citizens, can enjoy phenomenal wealth.

Without a cheap and abundant source of energy, your nation won't grow.

Groundwater is self-explanatory. It's the water we use to drink, to irrigate our farms, and utilize for other agriculture and industrial applications. Without it, we couldn't exist.

Geopolitics is the grand scheme. It keeps the world under control.

A superpower can use its geopolitical muscle to control the flow of oil, natural gas and even drinking water.

Right now the world is witnessing a grand geopolitical chess match between many players, the main ones being US and China.

The Chinese Century?
"The Chinese are on an aggressive quest to increase their supply of oil all around the world; whether Iran, Sudan or Venezuela, you name it, they are after it,"

-James Lilley, an ambassador to China under President George H.W. Bush.

Frightening, but true.

China is the world's second-biggest oil consumer on the planet.

Currently the United States exceeds China's demand. But for how much longer?

According to the US Energy Department, America devours 20 million bpd while China consumes a 7 million bpd.

Anne Korin, director of policy and strategic planning for the Institute for the Analysis of Global Security recently said:

"Demand for oil in China is growing at a blistering rate, about 30% to 40% a year. To meet that demand, there's going to have to be four to five Saudi Arabias out there. If not, there's going to be a huge crunch."

The U.S. Energy Information Administration estimates that China's daily oil demand will increase to 8 million barrels of oil by the end of 2006.

"China's energy needs are going to be enormous in the future," said Christopher Hill, the State Department's assistant secretary for East Asia and the Pacific.

China could top America's astounding 20 million bpd in 2030.

The Institute for Analysis of Global Security predicts that in only 20 years China will import as much oil as the US.

But I think it might be sooner than most think.

China's official state policy is the "growth imperative." To grow its economy at all costs, and especially before the 2008 Summer Olympics, which it will host in Beijing.

To do so, China has to guzzle crude oil to nourish its breakneck economy.

China is striking deals with oil exporting nations around the world to secure its supply that could leave other nations high and dry.

The US would be the most affected.

State-run Chinese companies have spent billions on oil assets overseas to boost supplies for the country.

Chinese firms are currently striking long-term deals in Canada to tap North America's biggest oil reserves.

Sen. Lisa Murkowski of Alaska, chairperson of the East Asian and Pacific Affairs subcommittee, said the United States faces growing competition from China in Canada. "China has brought the competition for natural resources to our backyard."

Until now, Canada sent almost all its exports to the US.

Canadian and Chinese firms are now cooperating to build a $2 billion pipeline to ship crude oil from Canada's vast oil sands in Alberta to the West Coast to be sent by tanker to China.

Also there are concerns of how China's thirst for oil might merge with larger Chinese political intentions.

China, which already sells arms to Sudan and Iran, could use these sales to push producer nations to divert more output its way.

Tension with the West also might provoke Muslim oil-exporting nations to reroute more oil to China.

"We are concerned that China's need for energy and other resources could make China an obstacle to U.S. and international efforts to enforce norms of acceptable behavior," Hill said

The struggle for resources in the 21st century is going to get nasty.

But there is a bright side. During this competition over scarce resources, savvy investors who recognize the geopolitical posturing will make legendary fortunes owning energy stocks and commodities.

Next week, Mike Schaefer will tell you about a tiny energy company that sits on $50 billion worth of oil in the hottest oil patch in the world, the Alberta oil sands.


Brian Hicks
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