By Marin Katusa, Chief Energy Investment Strategist
"War.
What is it good for?
Absolutely nothing – Say it again…"
Edwin Starr
I beg to differ. War is fantastic for energy stocks. Even the threat of war can send energy prices soaring.
So for energy investors, war is far from a good-for-nothing – it is great for portfolios.
The best part is that the human race is incapable of getting along. That means there is always one potential war or another sitting just around the corner.
Today is no exception. Think about it – why is Brent oil trading at US$114 per barrel, only a few percentage points away from its highest levels in the last three years? It certainly isn't because of strong European demand, or a soaring Chinese economy, or a pile of Buy orders from Japanese traders.
It's because Iran wants to build a nuclear weapon, and that means that Israel is threatening war (again). This isn't a hypothesis or a fear-mongering tactic – it is a fact. An Israeli attack would prompt Iran to immediately lace the Strait of Hormuz with mines, blocking passage for the 13 tankers carrying 15.5 million barrels of crude that usually transit the strait every day. Oil prices would shoot up overnight.
Just the threat of this war has added a major premium to oil prices for more than a year. There is literally no other noteworthy reason why oil prices have remained so strong in the face of a Europe mired in a deep debt debacle, Chinese economic growth that is now clearly slowing, an entirely sluggish US economy, and a global market that is simply overweight on debt and undersupplied with cash.
History – the best teacher we have – is replete with examples of war boosting energy prices. Wars cut off production, alter supply routes, increase demand, and make markets really nervous.
So while war may be bad in a lot of respects, it's fantastic for energy investors. And anyone thinking along those lines has a long list of reasons to be excited today, because there are a whack of potential wars waiting in the wings.
It's hard to believe how closely oil prices track global tensions until you see it all laid out in a chart.
(Click on image to enlarge)
The first major oil-price spike came in 1973. The direct cause was OPEC shutting off its taps, but why did it do so? Because of the US decision to resupply the Israeli military during the Yom Kippur war.
This was one of the many wars that have transpired between Israel and its Arab neighbors over the Golan Heights and the Sinai Peninsula. This time the war started when Egyptian and Syrian forces crossed ceasefire lines to occupy these contested grounds, which Israel held at the time. But this was in the heyday of the Cold War, so a war between Israel and this Arab coalition was really a proxy war between the US and the Soviets.
This time the proxy war came back to haunt the powerhouses at home. The Arab world loved their compatriots' early successes against Israel. That feeling morphed into hatred for the US when it supplied Israel, which turned the tides and won the war, and that hatred spawned an oil embargo that drove prices up 300% in six months.
Prices were still calming themselves from that storm when the Shah of Iran fled his country in the face of massive protests, to be replaced by the conservative Ayatollah Khomeini. The revolution severely disrupted Iranian oil production and empowered Iran's Shia majority, which set the stage for Iraq's subsequent invasion. Once the violent Iran-Iraq war got under way, both countries pretty much stopped producing oil.
What do you think this religious, ethnic, and regional war did to oil prices? Up, up, and away: oil prices doubled.
Iraq prompted another bout of oil-price anxiety in 1991. When Saddam Hussein invaded Kuwait, oil was priced at $17 a barrel. Within a month, prices had shot up to $36 a barrel.
For a more recent example: the Arab Spring pushed the price of Brent crude from $90 in December 2010 to a high of $127 four months later. That's a gain of 41%.
I could go on, but that's enough history for today. Now it's time to transition from remembering the wars of yesterday to looking ahead to the wars of tomorrow (like the brewing Cold War between the US and China).
The world isn't peaceful right now. War is raging in Syria and spreading to Lebanon; sectarian violence continues to rock Iraq; Western troops keep fighting insurgents in Afghanistan; and death tolls are rising from ethnic clashes in Kenya, to name just a few military actions currently in progress.
But the list of potential wars is far longer – and scarier.
History tells us that people cannot help but fight. History also tells us that the bigger the fight, the better the boost for oil prices.
Of course, your portfolio will only profit if it is prepared. Is your portfolio prepared for the coming wars?
While it's important to prepare your portfolio for potential international conflicts, there are other insidious developments that you have to brace for – notably the disturbing trend of governments centralizing their economies and incurring impossible-to-pay-off debts. It seems like every country is imposing new taxes on citizens and corporations alike… passing onerous anti-business regulations and anti-privacy laws… and racing to debase their currencies in an insane race to stimulate their economies.
How are investors supposed to make, protect, and expand their wealth in this environment?
The answers aren't simple, but the truth is it can be done. A group of esteemed financial experts who will be presenting at the upcoming Casey Research/Sprott, Inc. Navigating the Politicized Economy Summit in Carlsbad, California September 7-9 will show attendees how.
If you can't make it, you can still hear every word of all the recorded presentations with our Summit CD collection. It will feature storied investors like our own Doug Casey and Global Resource Investments founder Rick Rule… best-selling authors John Mauldin and G. Edward Griffin… former US Comptroller General David Walker… and a host of other financial luminaries, including the entire team of Casey Research editors.
Listen in as they shed light on our overly politicized economy and reveal a wide variety of actionable investment advice… including some of their favorite stock picks.
From now until the start of the Summit, you can get early-bird pricing on this valuable investors' collection. Don't wait – once the Summit begins, the price rises substantially.
Venezuela Death Toll Rises After Refinery Blast (Wall Street Journal)
An explosion occurred over the weekend at the 640,000 barrels-a-day Amuay refinery in Venezuela, killing at least 41 people in the worst recent oil-industry disaster in Venezuela. Firefighters are struggling to control the fire despite favorable wind conditions. Officials maintain that the refinery was not damaged, but highlights a growing concern that the oil infrastructure in Venezuela is badly neglected and accidents like this are becoming more likely.
BHP Sells Australia Uranium Deposit to Cameco for $430 Million (Reuters)
The biggest news in the uranium sector in the past six months is that BHP has agreed to sell the Yeelirrie deposit – the largest undeveloped uranium project in Australia – to Cameco Corp. According to its spokesperson, BHP is planning to focus on larger assets which would give better returns for the company. However, Cameco seems to be very interested in the project, and is now focused on updating the resource estimates at Yeelirrie to conform with Canadian standards.
Iran Clings to Asian Oil Market as Sanctions Bite (Yahoo)
Iran is laying out the red carpet for India's prime minister. Manmohan Singh's arrival this week marks the first visit by an Indian leader to Iran in more than a decade, and it comes as Tehran tries to offset the squeeze from Western oil sanctions by courting energy-hungry Asian markets. Oil purchases by India, China, and South Korea have not covered Tehran's oil losses, but they have given Iran a critical cushion of oil revenues. The sales aren't likely to stop: the US cannot pressure its Asian trading partners too hard without risking economic rifts; and China, India, and South Korea are getting a great deal on Iranian oil.
Russia Invests in Diesel as Putin's Oil Boom Peaks (Bloomberg)
Putin is pushing record investment in Russia's refining industry as he advances his plans to increase European dependence on Russian diesel. In 2013 Russia plans to invest $11 billion in its refineries, up 93% on 2012 spending, in order to boost exports of premium, low-sulfur diesel by more than 50%. Profits for European refiners may drop because of the increase in Russian shipments, but more important this is yet another component of Putin's plan to cement European dependence on Russian energy.