Energy Investors Take Note


This looks to me like 2007 all over again, but even worse.

These ominous words hit the finance sphere this week. If you’ve tuned in to the Daily Reckoning lately, you might think it was Family Wealth editor Vern Gowdie repeating his warning of a 90% stock crash. But these words actually belong to William White.

Mr White is the former chief economist for the Bank of International Settlement. More importantly, he was the only ‘official’ economist to call the 2007 crisis before it happened. We know, we know — it’s hard to believe a mainstream economist actually accurately forecast something. But it’s true.

Kudos to Mr White, of course. He’s one up on Ben Bernanke for life. And here’s what he has to say now, as The Telegraph reports:

"All the previous imbalances are still there. Total public and private debt levels are 30 per cent higher as a share of GDP in the advanced economies than they were then, and we have added a whole new problem with bubbles in emerging markets that are ending in a boom-bust cycle," said Mr White, now chairman of the OECD’s Economic Development and Review Committee.

Mr White then went on the record to say that the five years since Lehman Brothers collapsed have been wasted, the global system is more unbalanced than ever and the world is addicted to easy money and largely out of options if the system goes down again.  Jeez, if he fancies a job at the Daily Reckoning, we think we could find a place for him!

All this was before the Fed surprised almost everyone by doing nothing to ‘taper’ QE. Thanks to that, the Australian dollar and stocks, especially the miners, went up. As we pen these notes, the Aussie dollar is just below 95c to the USD.

The Aussie dollar move is interesting. It’s enjoyed a nice rally this month. 

click to enlarge
Source: StockCharts

Whether it stays up there is the question. Greg Canavan over at Sound Money Sound Investments reckons it’s overvalued. He’s hanging on to his US dollar and euro ETF recommendations. He diversified into them before the Aussie hit the skids in April.

The Reserve Bank of Australia is no doubt hoping the market does something similar. It doesn’t want the currency any higher. Neither do Australian manufacturers. A high currency makes them less competitive on price. It will be even worse if their energy costs rise as well.

It would be a tough call to deal with both. The direction of the currency is a tricky one to predict long term. But there can’t be much doubt that higher gas prices are coming to Australia, especially NSW. Check this out from the Australian Financial Review:

The reality is that the state [NSW] may run out of gas in the next couple of years, and even a sudden shift in policy means any new sources of supply are another five to 10 years away. The situation will be exacerbated in 2017 when several major liquefied natural gas projects in Australia come on line.

The other concern is that whatever solution is found, gas will become so expensive in the short term that it will be uneconomic for many manufacturers, which will be forced to close operations.

That was Wednesday. On Friday things settled down a bit when Origin Energy announced a $3 billion deal to buy gas out of Bass Strait from ExxonMobil and BHP Billiton. That locked in some actual gas. But it also locked in a higher oil-linked price for east coast domestic users. The Australian called it the most valuable east coast gas deal to date. But it won’t be enough to fend off higher prices.

‘Current prices of $4 a gigajoule are expected to more than double to what is known as export parity, which is the price in Japan, currently $US15 minus liquefaction and shipping costs.’

Not to be out done, Western Australia industry group DomGas Alliance sounded the alarm this week that WA face shortages by 2020 despite BHP opening a new $1.5 billion gas plant.
They’re talking their book of course, but it does put energy costs and supply right back in the spotlight.

Australia is heading for a US-style clash between domestic users, exporters and government policy. The difference is the US has the luxury of a glut of cheap gas while they sort out their differences. Australia does not.

Over at The Denning Report, Dan maintains that higher gas prices will provide a sweet spot for companies with proven or probable reserves to cash in. He’s backing the projects in his portfolio to start attracting bidding interest. We’re about to find out if he’s right or not.


Callum Newman+
for The Daily Reckoning Australia

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ALSO THIS WEEK in The Daily Reckoning Australia

Super… Who’s Going to Buy Your Shares When You Retire?
By Nick Hubble+

Once retirees sell more super assets than young people are buying, that’s going to put an incredible amount of downward force onto share prices. In fact, the most important force pushing up share prices in the past – the inflow of money into super – will suddenly disappear, and then become a steady drain instead.

Racing Toward the Zombie Apocalypse
By Bill Bonner

What counts is not how much energy you produce, but what you do with it. As stable societies mature, they tend to use their energy less efficiently. Energy is wasted by complying with regulations…paying for lobbyists…filling out tax forms, dodging taxes…and supporting zombies. Yes, zombies proliferate.

Australian Banks in the Firing Line
By Nick Hubble+

Citigroup analysts have completely lost the plot altogether. They are warning that rising house prices could stop the Reserve Bank of Australia from lowering interest rates to combat any increase in unemployment. Rising house prices and unemployment at the same time? Isn’t the whole point of central banking to goose house prices to influence unemployment in the first place? Is this an admission of a new kind of stagflation?

The End of Australia’s Boom Economy
By Satyajit Das

In a Freudian slip, the Reserve Bank of Australia Governor identified a fundamental issue with Australia’s economic model. The mining boom helped maintain income and buying power, as Australia extracted large rewards for its mineral resources, covering up the lack of international competitiveness in many sectors, driven by high costs, poor productivity performance, declining educational achievements and narrow industrial base.

Callum Newman

Callum Newman

Callum Newman is the editor of The Daily Reckoning and Associate Editor of Cycles, Trends and Forecasts. He also hosts The Daily Reckoning Podcast. Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect. To have Callum’s thoughts and insights on the current state of the currency, commodities and stock markets delivered straight to your inbox, take out a free subscription to The Daily Reckoning here.

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5 Comments on "Energy Investors Take Note"

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slewie the pi-rat
slewie the pi-rat
3 years 1 month ago
the BIS? Putin wasn’t enough? beyond partisanship and how much fun the world is having watching the US ‘sink’, why don’t you all just hold your breath? the checks are in the mail. ain’t it awful? how? don’t ask. don’t tell. even if they shut down DC {yeah, BAYbee!}, the checks will still be in the mail. ok: i hope. if we do collapse [or explode; or both], there is plan to liquidate The Louisiana Purchase. i can get you in the ground floor if you are flexible about gators, and don’t mind being slightly below sea level. we DO… Read more »
Stephen N, Jacobs
3 years 1 month ago
From The Daily Reckoning Australia- Energy, this to remember, and this is all that one really needs to remember: Atomic energy produces electricity in reactors at two cents per kilowatt/hour, and that is 1/25th the cost of what it costs to produce electricity in solar cells and 1/36th the cost of what it costs to produce electricity in granite rock cells or in wind turbines. Much of what the environmentalists have dragged into this discussion about energy and the world’s needs is not even worth discussing. The world’s energy needs are going to be filled by atomic first, then low-sulfur… Read more »
Stephen N, Jacobs
Stephen N, Jacobs
3 years 1 month ago

Some economics for this energy debate:

atomic power 2cents per kwh
natural gas approx. 4cents per kwh
coal approx. 5cents per kwh
hydro-electric approx. 8cents per kwh
solar power approx. 50cents per kwh
geological power approx. 72cents per kwh
wind power approx. 72cents per kwh *Colo.Spgs.has a lower cost.

3 years 1 month ago
3 years 28 days ago

Stephen N, some more for you:

Halflife of plutonium: 24,000 years
Safe storage options for plutonium: none

but hey a quick buck is way more important that your kids getting cancer.

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