- January 25, 2012
- Peering Through Exxon's Looking Glass
The emerging world will push global energy demand 30 percent higher by 2040, according to ExxonMobil’s Outlook for Energy: A View to 2040. The report contains some interesting projections on what may be in store for the energy sector in the coming decades.
The global population is expected to reach a staggering 9 billion over the same period, but it isn’t population growth that will drive the increase in energy demand. Instead, rising affluence and higher living standards in regions such as Africa, Latin America, the Middle East and India will be the biggest factors. ExxonMobil says this is due to “the human desire to sustain and improve the well-being of ourselves, our families and our communities.”
This new affluent class of people is expected to fuel a dramatic increase in the number of households around the world—rising 50 percent to 2.8 billion by 2040. ExxonMobil says growth will be particularly strong in Africa, China, India and Latin America. These areas will account for about 60 percent of all households in the world by the end of the forecast. Additionally, the number of personal vehicles is expected to double to 1.6 billion vehicles worldwide.
Today, roughly 1.3 billion people, one-fifth of the world’s population, lacks access to electricity and these new households will need energy for lighting, heating, cooking, hot water, air conditioning and refrigeration, ExxonMobil says. Filling this gap will lead electricity generation to be the fastest-growing source of energy demand through 2040, up around 80 percent. Other main sources of demand growth for electricity will come from industrial and commercial sectors.
While China is forecasted to remain the world’s largest user of industrial energy, ExxonMobil says the country will see a peak in energy demand around 2030. Meanwhile, Africa and India will become the two main drivers of new demand over this time period as the number of households, retail stores and other commercial activities in those regions increases dramatically. Industrial demand for energy in India is expected to triple by 2040.
The total amount consumed isn’t the only area of the energy sector set to experience changes in the coming decades. ExxonMobil also says “investments and new technologies, applied over many years and across multiple regions, will enable energy supplies to grow and diversify.” While oil will remain the world’s top energy source, natural gas will be the fastest-growing major energy source, with combined global demand rising about 60 percent from 2010 to 2040.
After peaking around 2025, demand for coal will experience its first long-term decline since the start of the Industrial Revolution as OECD countries and China shift toward lower-emitting sources of energy. However, oil, natural gas and coal will still account for about 80 percent of the world’s energy demand in 2040.
These are extended projections, and in today’s rapidly developing world, there will certainly be temporary setbacks and unforeseen events that could affect whether ExxonMobil’s forecast holds true. However, when the world’s largest energy company offers you a glimpse into where they believe the market is headed, you should definitely take notice.
Read ExxonMobil’s Outlook for Energy
The following securities mentioned in the article were held by one or more of U.S. Global Investors Fund as of December 31, 2011: ExxonMobil.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link above, you will be directed to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content.
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- January 20, 2012
- After 2011 Hit, Are Emerging Markets Set to Recover First?
Our team has put together a great table ranking 19 emerging market countries by how their stocks have performed in each of the past 10 years. Most of the E-7 countries—the most populous nations in the world—are listed, including Brazil, China, India, Indonesia, Mexico, and Russia, as well as other resource-rich and growing Asian, Eastern European and Latin American countries.
Many investors tend to focus on how one country performed over any given year, but a year of results is less relevant than what this chart highlights: the concept of mean reversion. This means that over a long period of time, even as returns fluctuate dramatically, performance eventually reverts back toward a mean or average.
Take Turkey for example, which underperformed the other 18 emerging countries in 2002. That year, stocks in Turkey declined nearly 25 percent. Yet, in six of the 10 years shown, Turkey was a top-half performer among emerging nations. Although Turkish companies decreased 20 percent in 2011, we believe that this year Turkey will revert to its long-term average.
We’ve already seen many of the countries, including Turkey, that were hit the hardest in 2011, bounce back in the early stages of 2012. Brazil, which declined 18 percent in 2011, has already made up some ground in the first two weeks of 2012, with an increase of 15 percent as of January 18. Hungarian stocks declined 20 percent in 2011, and have risen 9 percent so far in 2012.
Because emerging countries’ performance can vary due to their currency, inflation, liquidity or government policies, we believe professional active money managers such as U.S. Global Investors are essential for globally minded investors. We follow these interrelated factors and travel to the far corners of capitalism to “kick the tires” to uncover the world’s best investment opportunities.
Download and print a copy of your own here.
Past performance does not guarantee future results.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
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- January 6, 2012
- Chart of the Week—Banning Iranian Oil Imports
It appears that the Iranian government is being offered a choice: give up its quest to build nuclear weapons or risk losing some of the country’s most important oil customers.
The New York Times reports that the European Union (EU) will agree to ban Iranian oil imports by the end of January. Iran is OPEC’s second-largest oil producer behind Saudi Arabia, according to the U.S. Energy Information Administration (EIA), and the third-largest crude oil exporter in the world. Iran is estimated to hold 137 billion barrels of proven oil reserves, nearly 10 percent of the world’s total.
Revenue from oil exports is a key pillar of Iran’s economy. The EIA says the country’s net oil export revenues totaled $73 billion in 2010 and accounted for 80 percent of the country’s total exports.
Europe is one of the main destinations for those imports. This visual from Reuters shows Italy, Spain, Greece and France were top-10 importers of crude oil during the second quarter of 2011.
The EIA says sanctions recently adopted by the EU have already decreased export volumes to Italy and the U.K.
Diplomatic relations between Iran and the West regarding the country’s determination to enrich uranium have been contentious for some time. However, the current rhetoric and new policies such as the banning of Iranian oil imports have upped the ante.
This intense political chess match is one development that could significantly drive oil prices higher in 2012.
By clicking the links above, you will be directed to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
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- December 14, 2011
- Eastern Europe Financial House Stronger than Debt-Ridden Neighbors
For some Eastern European investors, the geographic proximity to the eurozone has been too close for comfort, with the Russian MICEX Index declining about 20 percent year-to-date. However, stronger fiscal and monetary stances in Eastern Europe compared with its western neighbors warrant a second look.
Eastern European countries generally have experienced higher GDP growth along with less debt, so financing costs have less of a negative effect on GDP than in Western Europe. According to research firm UniCredit Research, in most of Eastern Europe, every one percent increase in the cost of funding only detracts about 0.5 percentage points from GDP. Hungary is the only exception. This compares favorably to developed European nations, as additional interest rate expenditures shaves three times more from Greece’s GDP and twice as much from the GDPs of Italy, Ireland and Portugal than in the East.
The Central and Eastern Europe region is also “in a more comfortable fiscal position” when it comes to making adjustments to the primary balance, says UniCredit. These countries’ public debt compared to their GDP is about half that of developed Europe, requiring there to be a lower adjustment to what they borrow or lend, not including interest payments. Countries such as Russia, Estonia and Turkey are running at a slight deficit and have little public debt to GDP, so there is less of a need to make adjustments to their primary balance. UniCredit says, “Poland has outperformed its own targets in 2011 and is well on track for a continued narrowing of its deficit next year,” and Turkey can “use fiscal policy to support economic activity next year if needs be.”
Turkey has increased its fixed capital spending in machinery and equipment, says BCA Research. Whereas other developing nations including Brazil, Mexico and South Africa are not investing in their own countries, capital spending is booming in Turkey, with fixed capital investment as a percent of GDP above 16 percent, a 15-year high.
And while BCA believes there are a few difficulties facing Turkey, including financing its current account deficit, its “structural outlook remains bright.”We believe the fiscal and monetary soundness are important factors that will help Eastern Europe weather the financial crisis better than its western peers. Historically, following major corrections, emerging Europe stocks have rebounded much more strongly compared to the overall MSCI World Index. With company valuations currently depressed, this area is worthy of a closer look today.
Tune into U.S. Global’s Outlook: 2012 Webcast to hear our investment team discuss what to expect from emerging markets, gold and natural resources in the new year. Sign up now.
We also discussed the Russian Elections in last week’s Investor Alert.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
The MICEX Index is the real-time cap-weighted Russian composite index. It comprises 30 most liquid stocks of Russian largest and most developed companies from 10 main economy sectors. The MICEX Index was launched on September 22, 1997, base value 100. The MICEX Index is calculated and disseminated by the MICEX Stock Exchange, the main Russian stock exchange. MSCI World Index is a capitalization weighted index that monitors the performance of stocks from around the world.
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- December 12, 2011
- You Can’t Print More Gold
What do you get when you mix negative real interest rates with stimulative money supply efforts by global central banks?
An exceptionally potent formula for higher gold prices that could send gold to the unimaginable level of $10,000 an ounce. Negative real interest rates and strong money supply growth are two key factors of what I refer to as the Fear Trade.
Negative real interest rates occur when the inflationary rate, or CPI, is greater than the current interest rate. A quick account of the G-7 and E-7 countries shows that the majority have negative real interest rates.
Across the developed G-7 countries, British citizens are the worst off with real interest rates in the U.K. sitting at negative 4.5 percent. U.S investors aren’t doing much better with rates at negative 3.25 percent and the Fed has all but guaranteed rates will remain there. Only Japan has a positive real interest rate among the G-7 and that rate is barely above zero.
Conversely, the most populous nations making up the E-7 have mostly positive real interest rates. However, the grouping’s grandest economic powerhouses, China and India, have negative real interest rates sitting around negative 2 percent.
Simply put, investors in those countries who have parked their savings in cash and low-yielding investments, such as Treasury bills and money market accounts in the U.S., are actually losing money due to inflation.
That can be tough for any investor, but when you’re the central bank of a country with millions of dollars in reserves, it can be catastrophic. This is why central banks around the globe have sought protection by diversifying their foreign-exchange reserves into gold bullion this year.
VTB Capital’s Andrey Kryuchenkov told The Wall Street Journal this week that, “Central banks are diversifying, and it has intensified to a rate that nobody had expected.” Latest estimates predict global central banks will purchase between 475-500 tons of gold in 2011.
This amount of capital flowing into gold has the potential to push prices up a level in 2012. John Mendelson from ISI Group sees gold prices reaching $2,200 an ounce during the first six months of 2012.
While real interest rates look to remain in the red for the foreseeable future, many of these same countries are printing record amounts of “green” with accommodative monetary policies.
U.S. Global’s director of research John Derrick says central banks around the world have focused their attention on stimulating growth. Beginning with Brazil’s interest rate cut in late August through the European Central Banks (ECB) cut early December, there have been 40 easing moves by global central banks, according to ISI Group.
John says this also means we will likely see more quantitative easing in 2012. The Bank of England has already started its quantitative easing, and many experts believe the ECB and the Federal Reserve will follow in its footsteps.
Bloomberg reports that global money supply (M2) is “set to increase the most on record in 2011.” The chart below shows the year-over-year change of global money supply has been gradually moving higher and higher since mid-2010.
The reason global central banks have shifted the printing presses into overdrive is simple: they need the money. My long-time friend Frank Giustra reminded us of this new reality in an op-ed piece for the Vancouver Sun last week. Frank writes:
The bottom line is that the money needed to bail out Europe and to fund America’s spiraling debt and future unfunded obligations is in the ten of trillions. IT DOES NOT EXIST. It has to be created by printing money in massive quantities, and despite all the rhetoric you will hear against such policies, in the end it’s the path of least resistance. Printing money is an invisible tax on savings, much easier to initiate, than, say, raising taxes or cutting back on services and entitlements.
As central banks print money and increase supply, currencies become devalued. Whereas in the recent past, one currency may be reduced in value compared with other currencies, this time there is global competitive devaluation as excess liquidity is put into the system. Historically, this excess liquidity has made its way to riskier assets, i.e. stocks and commodities.
Gold is generally a benefactor of this flight to riskier assets as many investors see it as a store of value. This chart illustrates the interconnectivity of gold and global money supply growth.
However, this image doesn’t tell the whole story. While the price of gold has followed the same upward path as money supply over the past 14 years, it hasn’t been able to keep pace with M2 growth, says the Bloomberg Precious Metal Mining Team.
In fact, if the global money supply were backed by gold, gold prices would be much higher, according to Bloomberg. The yellow line below shows how gold would be greater than $5,000 per troy ounce if just half of global money supply were backed by gold. If all of the money supply in the world were to be backed by gold, the price of one troy ounce would need to rise above $10,000.
It’s unlikely, of course, that this will happen, but it serves as a useful illustration for the disappearing value of the world’s fiat currencies.
Frank reminded readers that we have been down this path before. Frank says, “When great nations mature and over-extend themselves, they revert to the paths of least resistance: borrow and/or print money. They all did it and they all failed; this time will be no different.”
The beneficiary of this type of event has historically been gold.
By clicking the links above, you will be directed to a third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
M1 Money Supply includes funds that are readily accessible for spending. M2 Money Supply is a broad measure of money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds.
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