Singapore, Dubai, Hong Kong Suited to a Peak Oil World
Has the stock market priced in the prospect of a peak in global oil production? No, says money manager and CFA Robert Rodriguez in a paper called "Absence of Fear". We took his paper and fired off a series of questions to our US-based colleagues. What would the market look like if Peak Oil was priced in? Dan Amoss, the editor of Strategic Investment, chimed in.
"Peak Oil is most certainly not reflected in equity values. The few hundred billion in capital controlled by those in the room isn't managed as if oil/oil services are in a once-in-a-generation bull market. If the market immediately acknowledged the investment implications of Peak Oil, the majors would trade for 25x earnings rather than 7-10x earnings."
All energy stocks - including coal and uranium - would be revalued. Dan continues: "And Schlumberger/NOV/Baker Hughes/Weatherford would be priced somewhere between and Microsoft and Google. And retailers with 6,000-mile supply chains would all trade below book."
Some economies are better prepared to deal with structurally higher energy costs than others. None are totally prepared. The ones that will do best fit into a model that's been described as "digital feudalism". Huh?
Small city-states like Singapore, Dubai, and Hong Kong are much more suited to the challenge of a peak oil world than large nation states. City-states operate on a scale where problems are more solvable. They are dealing with millions, not tens or hundreds of millions.
Economically, city-states focus on trade, tourism, and finance. And because they are not usually endowed with immense natural resource wealth, they have to find other ways to stay open for business and attract capital.
These new city states will be different from medieval city-states. The moats will be digital firewalls that protect secure cross-border transactions. Those who get past the drawbridge will have to bring capital with them, or some other useful talent. But inside the walls will probably be a lot safer - financially and physically - than outside the walls.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Tim A on 20 July 2007:
Surely dependence on trade, tourism and finance industries are liabilities, not assets. Trade requires shipping, tourism requires transport, finance depends on growing economies. These are all going to be impacted by declining energy availability. Isn't demand for these services going to contract?
Comment by Jeoff on 21 July 2007:
I usually like your articles Dan, but this is too simplistic a look on these areas. I would lean on your side in this case of Dubai but certainly not on Singapore, or even more dangerously, Hong Kong. Peak oil would *severely* disrupt their economies and they have virtually no domestic resources to live on.
Comment by Deron Kawamoto on 23 July 2007:
I think that you are correct when looking at the effects of energy scarcity on the first pass. The problem is the second-order effects that I think are likely to swamp the impact of the first-order effects. Economic depression and desperation often cause people and nations to do foolish things.
Major wars often occur at such times and city-states are too small and weak to survive in that environment. Heck, last time Singapore couldn't be defended even with over 100,000 troops from all over the British Empire. What will happen to Dubai if the US pulls out of the Middle East and Iran gets frisky?
Comment by Simon Tay on 23 July 2007:
Thank you for writing for my country however as a peak oiler myself, I see lot's of public denial about this topic and even some regard it as a taboo subject.
Imagine the lack of preparation in my country for peak oil effects? It's going to be tough.
The world is going to be a different world.
We import virtually EVERYTHING.