Why Invest in Energy Resources?

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The Raw Materials of Civilisation…

Before we get stuck into the glaring omission in the government’s assessment of Australia’s energy resources – energy could be the single-best investment sector of 2012 – a reminder: today is Wednesday. You know what that means!

Slipstream Trader Murray Dawes has posted his latest technical analysis of the S&P 500 over on his YouTube channel. Markets are surely factoring the prospect of an imminent downgrade in France’s sovereign credit rating. But what else is the price action telling you? Murray says:

The technical picture has deteriorated in the past week. As I said last week a close in the S+P 500 below 1230 is what I needed to see to raise my conviction that we would see more downside towards the recent point of control at 1145 and perhaps lower. We are now entering the strongest seasonal period of the year with an 80% chance of about a 3% rally from now till early January based on past data. My fear is that many people will be long on the back of this but they may be disappointed this year because the technicals are now pointing firmly down. No Santa rally for you! (In voice of the Soup Nazi from Seinfeld)

Nice to see Murray is feeling the Christmas spirit. Click the following link to watch his latest stock market update on You Tube.

The Contest for Scarce and Valuable Energy Resources

Now, thinking ahead, let’s make the contention that 2012 is the year geopolitics becomes the dominant factor on commodity prices, especially oil prices. The logic is simple here. The financial crisis has begotten a political crisis. The worse things get economically and in the banking system, the more political instability there is. But wait…there’s more.

Political instability means an unstable nation state. We already know that the Western Welfare states are economically unstable. With unsound money, they have unsound finances and an unsound long-term fiscal picture (lower tax revenues, forced spending cuts, bigger deficits). In the past, this kind of systemic instability has led to a direct contest for scarce and valuable real resources.

We touched on this point last week in Energy, Resources, and Real Asset Investing. The basic idea is that at some level, national power is based on the ability to generate real wealth. The ability to generate real wealth (through economic production) is based on ownership of, or access to, the raw materials of civilisation. Diggers and Drillers editor Alex Cowie has highlighted the six resources he thinks will be most valuable in 2012.

3 Reasons Why Energy and Resources Should be a Part of Your Investment Strategy

These raw materials of civilisation include bulk commodities, timber, steel, and other resources. But in our view energy commodities are the most important of all for three reasons. First, they take real expertise to find and extract. This makes them high-margin commodities.

Second, energy resources deplete with production and require constant replacement by new resources and reserves. This is true of all commodities, of course. But as global energy demand grows with a larger population, the production of cheap, plentiful resources is nearly over. Scarcity is asserting itself on oil prices. And you can’t have a growing economy without real energy.

Third, oil and energy stocks are one of the only sectors where you, as an individual investor, can get a leg up on the institutional money managers and realistically double your money in a year. The exploration stocks are the ones that can do this. Of course, they are also high-risk enterprises. You either find an economically exploitable resource…or you don’t.

In the context of the ongoing discussion of the Permanent Portfolio, this is a question of both asset allocation and stock selection. The asset allocation question is whether or not energy stocks are good bets in a period of financial deleveraging. This is debateable. But our answer, as detailed in the Australian Wealth Gameplan, is yes.

Which Energy Resource Stocks Will Make Good Investments in 2012?

Then it’s a matter of picking the right stocks. And without going into too much detail, we’d say there is still plenty of money to be made in picking the right Aussie energy exploration stocks. We base that on the proclamation yesterday by Federal Resources Minister, Martin Ferguson. He released the government’s energy white paper yesterday and declared that, “the era of cheap energy is over.”

That much is obvious. But this is the part that should intrigue energy investors. Ferguson also said:

The demand for gas is going to continue to grow, that’s the thing about this country, we’re going to need gas, that’s what’s going to occur between now and 2020, our demand for energy is going to be basically met by wind and gas.

All this talk of wind and gas sounds more like a digestive problem than an energy strategy. But the minister is on the right track with gas. Yet his white paper contains one glaring omission when assessing Australia’s energy resources. See if you can spot it on the map below.

Australia’s Energy Resources

Australia's Energy Resources
Click here to enlarge

Source: Department of Resources, Energy, and Tourism

It’s probably not fair to ask you to spot what’s been omitted. So we’ll just tell you. Unconventional gas resources are not even on the map. Literally. Shale gas isn’t anywhere to be found. At all.

Why This Energy Resource Could Be Your Next Big Investment Win

Of course there IS plenty of shale gas to be found in Australia, especially in the Cooper Basin. And to be fair, the footnotes to the report contained this addendum…

“Since these estimates were published, there have been large new (but yet to be fully demonstrated) discoveries in unconventional gas. There is also considerable potential for further discoveries as these resources become better understood.”

Those resources are already becoming better understood, defined, and quantified. Several promising companies spent a lot of 2011 drilling in their permit areas in the Cooper Basin. They’re beginning to establish how much unconventional shale gas Australia has. That gas could theoretically be sent to Gladstone for export as LNG, or transmitted via the pipeline networks already in place for domestic consumption on the East Coast.

It could also be used to create power plants that run on gas instead of brown coal. Whether that happens is up to domestic politics. And that’s really your big risk as an investor in Aussie energy in 2012: political risk. But then, that’s the world we live in now, isn’t it?

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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5 Comments on "Why Invest in Energy Resources?"

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CJ Anderson
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There’s just one problem with the assumption that gas is the answer to Peak Oil. Around 70-80% of the world oil production is used for transport fuels. Unless you are going to retrofit every car, truck, train, ship and aeroplane in the world to run on gas then no matter how much we extract it will not prevent Peak Oil from occurring. In fact, the retrofitting of our entire transport fleet would consume such a vast amount of oil (as only a tiny fraction of industry currently runs on gas) that we would bring on Peak Oil that much faster,… Read more »
brc
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You’ve got to laugh at the political point of covering a map with wind, solar, geothermal and tidal energy There doesn’t exist any sufficient efficient and cost effective way of using these ‘resources’, nor are the ‘resources’ on tap 24×7 (except perhaps geothermal). The ‘resources’ are located nowhere near population centres and are a bust in terms of export. These ‘resources’ requiring spoiling large areas of wilderness over massive areas, to collect that energy. These ‘resources’ routinely require backup by ‘conventional’ energy sources because they don’t work all the time, and rarely line up with demand. The ‘harvesting’ of all… Read more »
Chris Anderson
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Sorry brc, but I can’t agree. The era of cheap energy is over because we have extracted all the available light sweet crude. Why else do you think the Powers That Be are pushing Alaskan Tar Sands greenfield projects? The tar sands are heavy, thick oil soaked sands and require a massive amount of energy to convert to usable fuel. I can assure you that they wouldn’t be doing that unless they had no other choices.

Bob
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I’m a bit late commenting, but boy, am I ever glad I learned to ride a horse! Not only was it fun, it may yet prove to be very useful! And to anyone spurred (pun intended) into doing the same, please remember the old saying about horses – dangerous at both ends and uncomfortable in the middle!

Eddy Mendes
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I do not agree with the first gentlemen CJA about running cars and trucks on Gas the only reason it is expensive is because not enough people are doing it.It is done reasonably cheaply in some Asian countries We should be aiming to use compressed natural gas in Australia my view is that the government does not encourage it because it will be to hard for them to impose taxes on your home natural gas to use on your car since if we were to use CNG on a car you could install a small compressor at home to fill… Read more »
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