Things Could Get MESI in 2007

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MELBOURNE AUSTRALIA 2 January 2007 – We spent yesterday considering what our grand entrance for 2007 should be. Perhaps a grand unveiling of something? But we have nothing to unveil. A magnificent fireworks display? Rather difficult to produce in 700 words of text. So in typical Daily Reckoning fashion it is business as usual.

We bolted last week by giving a rudimentary review of 2006. The only thing we can add is that the All Ordinaries did in fact finish the year in extraordinary style, closing up by 10.3 points on Friday for an annual gain of 19.9%. An impressive year by most people’s standards, and certainly better than having it stuck in the bank.

Last week we tried our feeblest to foresee events for 2007. Yesterday, while spending the day unproductively doing as little as possible, we had the opportunity to mull over a couple of things.

First, we liked reading Dan Denning’s MESI energy crisis acronym that we read whilst devouring a tuna salad.

The gist being, are we going to face a monumental energy crisis in 2007? Reading Denning’s article and the news item from Agence France Presse (AFP), which tells us “Belarus signs last-minute deal to avoid Russian gas cutoff”, makes us think that something big in energy could be just around the corner.

Importantly, is Australia’s run of luck about to come to an end, or is it destined to continue on, and on, and on? Imagine it, if demand started to switch from natural gas and coal – of which Australia is a major exporter – to an even greater demand for uranium – of which Australia is a major exporter.

It stacks up even better when we consider who Australia is competing against for uranium exports, Canada and Kazakhstan. When the global community starts to look seriously at a replacement for coal, gas and oil will it look for its supply from an open, market oriented economy, or will it look towards a relic of the communist era? Well, given the West’s cosseting of middle eastern dictatorships (when convenient) we shouldn’t presume too much.

However, news stories such as that from AFP, should also give a fillip to other alternative sources of energy such as solar, wind and hydro. If these industries aren’t able to attract major investment funding from private enterprise now, then it is seriously doubtful that they will ever be able to attract capital until it is too late.

After all, the Russian government can quite easily cut off the supply of gas to Belarus or the Ukraine if it wanted to. The Saudi Arabian, Iranian or Venezuelan governments could do likewise with oil. And, if we are being fair, the Australian or Canadian governments could pass legislation to prohibit the further mining and export of uranium.

But, is any government powerful enough to prevent the sun shining on another country? Or stop the wind from blowing on their neighbour? Or harness the power of waves by stopping them from lapping the shore of the adjacent nation? In all of these we would think the answer would be no. Unless the technology has been developed of which we are not aware. Of course, in the case of hydro power, the power over the source of the water source is key, and could be manipulated.

However, as we have mentioned on previous occasions, history tells us that human nature means that little or nothing is likely to be achieved on alternative energy sources until the crisis point has been reached, or at least when we are on the cusp.

In the meantime, oil and gas companies should continue to perform well as demand continues to increase and supply falters. It all points towards things getting very MESI whether we like it or not.

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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