All Ordinaries Just Ordinary – Uncertainty Over Oil and Water


MELBOURNE AUSTRALIA 11 December 2006 – Could the All Ordinaries have been any flatter last week?  Well it could, if it had fallen by another 0.2 points it would have been at exactly par for the week.  As it was the All Ords managed to eke out that tiny, miniscule gain to leave it just in positive territory.

It was a similar performance for BHP Billiton (ASX: BHP) which managed to record a three cent gain over the previous week, still leaving it some way off its highs and about 10% above recent lows.

It was left up to Rio Tinto (ASX: RIO) to put on a show – comparatively – with a gain of 2% for the week closing one penny above $76.

On Wall Street, the patchiness of the previous week was replaced with optimism as the Dow Jones Industrial Average continued its efforts to push higher.  By the closing bell on Friday the Dow had gained by 0.2% for the day and 1% for the week to close at 12,307.49 leaving it only 35 points from the all-time closing high achieved on the 17th November.

We noticed that OPEC is meeting again to decide whether or not to cut production given the 20% fall in the crude oil price.  Clearly OPEC are setting out their intentions to make sure crude remains well above USD$50 per barrel.  If they can keep it above USD$60 they will be ecstatic.

Normally that sort of news would be inclined to send us ‘cock-a-hoop’ with excitement about the possibility of a further rise in oil especially with the northern hemisphere winter closing in.  And with the possibility of further terrorist attacks on oil installations such as that committed in Nigeria last week.

But we have had a change of tune.  Not because we don’t think that oil still has potential.  After all, it is a finite resource with no serious alternative in place to replace it when it all runs out in 10, 20, 50 or 100 years.  Or perhaps longer.  The fun thing about oil reserves is that NO-ONE knows exactly how much of the stuff is left.

All we do know is that it is running out, it is becoming harder to find it, and it is becoming more expensive to extract what has been discovered.  Most of the major oil companies are fighting an uphill battle.  They are seriously having to run in order to stand still.  They can’t find enough oil to replace what they are extracting.  Just ask Royal Dutch/Shell (NYSE: RDS.A).

The big players are of course the middle-east nations, especially Saudi Arabia.  With the Saudi’s, they are giving no clue about reserves.  Estimates have been based on information provided more than twenty years ago.  The fact is they have no incentive to let the cat out of the bag.  If they tell us there is more than we think there is then it would likely push the price of crude oil down.  Conversely, if they tell us there is less than we think then although it would push the price of crude oil up in the short term it would accelerate the push to find an alternative to oil.

The best response they think is just to say nothing.  So far it’s working.

But for Australia, oil is not the big news it once was.  What is the point of having oil to heat our homes, or fuel our cars if we don’t have enough water to power or fuel ourselves.  The bushfires in Victoria over the past week have clearly indicated how dry this part of the country is.  Think about it.  When was the last time it really rained hard?  About three weeks ago we recall a couple of days of drizzle.  How many times have you needed to take an umbrella to work this year?  We can recall about five times we have carried one and perhaps used it three times.

We also note the excitement and energy of federal and state governments pushing the cause of saving water and installing water tanks in the home.  Nice gesture, but will it work?  We are doubtful.  Our experience with a water tank that is supposed to capture rain water from the gutters to be used for sanitation is that it is a complete waste of time.  Even if it were to bucket down hard all day, it would not fill the tank and would only take a few days worth of flushes to reduce the level in the tank.

On top of that, you get the fear campaign such as that we saw earlier this year in Queensland against the use of recycled water.  It seems Queenslanders would rather dehydrate themselves to death than drink water that has been safely treated to enable consumption.

We wonder when companies such as BHP Billiton and Woodside Petroleum (ASX: WPL) may turn their attention to the water problem in Australia and realise that from a commercial perspective there is probably a pretty penny to be made.  Governments will be keen to spend their surpluses any way they can rather than hand it back to taxpayers.  Water could be the excuse they have been looking for.

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.

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