- June 15, 2011
- China is World’s Largest Energy Consumer
World consumption of energy has increased 5.6 percent in 2010, according to BP’s Statistical Review of World Energy. This is the largest increase since 1973, which happened to be a memorable year in energy history. At the time, the U.S. was by far the largest consumer of energy, devouring 1,812 million tons of oil equivalent (mtoe)—more than 30 percent of the world’s total—as the country faced an energy crisis, oil embargo and record high oil prices.
In 2010, another pivotal moment occurred in energy history: The country consuming most of the world’s energy was no longer the U.S., but China.
China’s energy consumption rate grew 11.2 percent from the previous year, pushing the country’s total to 20 percent of global energy consumption. At 2,432 mtoe, China just beat out the U.S. (2,286 mtoe) for the top spot. China’s energy consumption in 2010 was more than double what it was in 2000.
Oil may be the first thing that jumps to mind when you think of energy usage, but coal is actually what powers China’s economy. Coal accounts for roughly 71 percent of China’s total energy use and consumption of coal has shot up 180 percent since 2000 (Read: Coal Use Shines Light on Growth).
China’s rise to the top of the energy pyramid isn’t surprising given China’s growth trend in recent years. The country already holds several “No. 1” positions: China has been the largest producer and consumer of coal and steel in the world. China replaced the U.S. as the world’s largest automobile market after 2009 vehicle sales skyrocketed in the country. And for the first time in 2010, the demand for gold in China was so strong, it outpaced the combined total of the developed West, which includes all of the U.S., France, Germany, Italy, Switzerland, the U.K. and other European countries.
What is surprising is that the trend of rising energy consumption has only just begun, when you compare China’s energy use on a per capita basis to other industrialized nations. In the early years of industrialization, the U.S., Japan and Germany consumed an accelerating amount of energy per person before leveling off. South Korea, whose path many think China will follow, saw its per capita energy usage increase five-fold in less than two decades as the country industrialized.
Despite its growth, China isn’t there yet. Although the country’s per capita consumption has begun climbing upward at a steeper pace around 2005, there is still a rather large gap to close before reaching developed world levels.
But it’s possible. Mix together China’s rising income levels, the government’s social housing plan, and an aggressive transportation effort that will link 700 million people across more than 250 cities, and we could see the next phase of China’s industrialization take shape over the next decade. Regardless, China will likely consume a record level of energy and commodities for the foreseeable future and this keeps us long-term bullish across the whole natural resources spectrum.
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- May 25, 2011
- Why Asia is the Epicenter of Oil Demand Growth
A few weeks back we highlighted the strong link between GDP growth and oil consumption by showing you how oil consumption per capita has risen in selected countries as per capita incomes rise (Read: The Strong Link Between GDP and Oil Consumption).
Specifically, we noted the potential for China’s oil consumption—already the second-largest oil consumer in the world—to catch up on a per capita basis with other Asian countries such as Taiwan and South Korea.
That’s where we think China’s oil consumption is headed, but this chart from Carnegie shows how strong oil consumption per capita growth has been over the past 50 years. Back in the days of Chairman Mao, China’s oil consumption per capita was roughly 0.2 barrels per year (b/y). When Deng Xiaoping took over in 1982, that figure had grown to roughly 0.6 b/y.
Since then, there’s been no looking back. China’s oil consumption per capita has increased over 350 percent since the early 1980s to an estimated 2.7 b/y in 2011. In fact, consumption per capita has risen nearly 100 percent in just the past decade.
Oil consumption per capita in the U.S. currently ranks among the top industrialized nations in the world at 25 b/y. However, today’s consumption levels are approximately 20 percent lower than they were in 1979.
China isn’t the only emerging country to show big increases in per capita consumption; in fact, the growth in consumption for several other countries far outpaces China. You can see from this next chart from Carnegie that consumption per capita in Malaysia has nearly quadrupled since the mid-1960s. Consumption in Thailand and Brazil has more than doubled to roughly 5.7 b/y and 4.8 b/y, respectively.
Meanwhile, many developed countries—especially those in Western Europe, have experienced substantial declines.
Today’s per capita consumption in Sweden is roughly 12 b/y, down from 25 b/y in the mid-1970s. That’s one of the largest declines in the developed world over that time but isn’t the only one. France, Japan, Norway and U.K. all use less oil on a per capita basis than they did in the 1970s.
This trend is why we feel emerging countries, especially Asia, are the epicenter of oil demand growth for years to come.
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- May 20, 2011
- The Dollar and Oil Debate on CNBC Europe
While I was in London earlier this week, I joined CNBC Europe’s Commodities Corner to discuss an earlier post regarding my Three Reasons to Believe in $100 Oil.
Of the three reasons I gave, most striking to this group was my belief that higher oil prices will continue because of a weakness in the dollar. What I explained during the discussion was that a falling dollar causes short-term volatility. As the demand for a particular type of commodity increases and the dollar weakens, or vice versa, investors need to deal with an exaggerated movement in the price of commodities. However, I stressed the short-term nature of these events.
More importantly to the long-term investor, I asserted there should be two main focuses over the next 10 years. One is the supply and demand factors driven by infrastructure needs, not only from China, but also many other emerging markets.
For example, investors should compare the economic situation of the E7 – Brazil, China, India, Indonesia, Mexico, Pakistan and Russia – which are the most populated countries against the G7 which are Canada, France, Germany, Italy, Japan, the U.S. and the U.K. While the money supply growth rate of the G7 countries is less than 4 percent, the rate of the E7 group is at 18 percent. To me this means, over the next five years, asset prices should double.
The second important long-term focus is on government policies for infrastructure spending. One noteworthy example I like to use is the expanding infrastructure projects including high-speed rail in China to connect 250 cities and 700 million people. This is a significant driver for commodity prices.
The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar. 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.
The following security mentioned in the article was held by one or more of U.S. Global Investors family of funds as of March 31, 2011: Kinross Gold.
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- June 8, 2011
- Is Peru’s Humala Jekyll or Hyde for Mining?
The Peruvian stock market has had a very strong reaction to the recent outcome of the country’s presidential election. With Keiko Fujimori’s surprise loss to Ollanta Humala, many Peruvian stocks saw share prices sink before quickly recovering the following day.
Grana y Montero, a large engineering company in Lima, saw its stock endure incredible volatility, reaching a three-month high shortly before the election, and then plummeting nearly 20 percent following election results.
The election has been a topic of discussion among our investment team, as we digest the outcome and discuss the implications a shift in Peru’s government policies would have on the country’s economy and largest industries.
Most of our conversations have focused on the possible ramifications for Peru’s mining industry, as it is vital to supplying the world with many important metals. The country is the world’s largest producer of silver, second-largest producer of copper and zinc, and sixth-largest producer of gold.
We’ve also been impressed with Peru’s recent economic success. The country’s GDP was 8.6 percent in 2010, outpacing Latin American countries including Chile (5.8 percent), Colombia (4.9 percent) and Mexico (4.5 percent). Due to heavy investments in the mining sector and emerging consumer demand, Peru should see its GDP hit 7 percent this year, one of the highest expected in the region.
The problem is most people don’t know where Humala’s intentions lie and opinions vary whether you live in the country or reside in the U.S. According to Bloomberg, investors are worried that Humala “could reverse policies the government expects will attract $50 billion of mostly mining investment and fuel average annual economic growth of 6 percent over the next three years.”
Our global strategist, Jacek Dzierwa, is optimistic for the long-term. He would be surprised to see Humala discard all of Peru’s recent successes and thinks the new president will seek to be more like Brazil’s Lula than Venezuela’s Chavez. But until the country’s finance minister and the head of central bank are named, this Jekyll or Hyde debate will continue to have its effect on markets, particularly mining stocks. As long-term investors, we’re mindful of the volatility but believe it’s not prudent to trade on this news without additional clarity from Peru’s new leader.
The following securities mentioned above were held by one or more of U.S. Global Investors Fund as of 3/31/11: Grana y Montero
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- June 6, 2011
- Three Questions About Global Natural Resources
Frank Holmes and the co-managers of the U.S. Global Investors Global Resources Fund (PSPFX), Evan Smith and Brian Hicks, participated in a special webcast for the Peak Advisor Alliance last week. Here are some candid portions of the Q&A:
Q. How are interest rates currently affecting commodity prices?
A. The magic number for real interest rates is 2 percent. That’s when you can earn more than 2 percent on a U.S. Treasury bill after discounting for inflation. Our research has shown that commodities tend to perform well when rates fall below 2 percent.
Take gold and silver, for example. You can see from this chart that gold and silver have historically appreciated when the real interest rate dips below 2 percent. Additionally, the lower real interest rates drop, the stronger the returns tend to be for gold. On the other hand, once real interest rates rise above the 2 percent mark, you start to see negative year-over-year returns for both gold and silver.
Whether you are Republican, Democrat, Independent or Agnostic, it’s important to realize that it’s not about politics, but about policies. During the 1990s when President Clinton was in office, there was a budget surplus and investors could earn more on Treasury bills (about 3 percent) than the inflationary rate (about 2). This gave investors little incentive to embrace commodities such as gold, and prices hovered around $250 an ounce. Now under President Obama, there is a large budget deficit and we have negative real interest rates, and gold is in great demand.
Interest rates in the U.S. have been near zero since 2008 and we don’t see the Federal Reserve increasing them until at least 2012. The U.S. economy remains in intensive care: Stimulus efforts have been unable to stimulate significant job growth and unemployment remains near 10 percent. In addition, the existing home sales figures released last week reminded everyone that housing is still on life support.
Even though there has been a lot of talk about reducing deficit spending and the U.S. House of Representatives voted against raising the debt ceiling this week, we don’t see any desire from the Federal Reserve to raise interest rates. The government realizes it is extremely dangerous to pull back the reins right now.
Q. How do the financial troubles of European countries such as Greece and Portugal affect gold prices?
A. The market has definitely been more volatile as some of the financial problems started to pop up again in Europe. The re-emergence of these issues is just another example of how many developed economies around the world are overleveraged and heavily burdened by their debt.
Some of the weaker countries, particularly Greece, could end up ditching the euro as their main currency. This would obviously be a destabilizing event for the euro and would result in some short-term strength for the U.S. dollar, thus providing a headwind for commodities. However, the U.S. dollar is plagued by the same problems as the eurozone; i.e., a weak economy and higher unemployment.
Meanwhile, central bankers in emerging markets have excess reserves and are looking for ways to diversify away from these paper currencies. To protect themselves from paper currency devaluation many of them have turned to gold. Last year was the first net positive year for central banks’ buying of gold since 1985. They’ve chosen to own gold over trying to guess whether Portugal or Greece’s debt is the best investment.
This isn’t a completely new phenomenon. Russia announced that it was going to diversify roughly 5 percent of its reserves into gold back in 2005 when gold prices were at $500 an ounce. The tipping point came in 2009 when India purchased 200 tons of gold from the International Monetary Fund (IMF), which effectively set a floor under gold prices at $1,000.
Since then, we’ve seen countries such as Thailand, Bangladesh, Vietnam, Venezuela and the Philippines add to their official gold reserves. Earlier this year, Mexico purchased 100 tons of gold to boost its reserve holdings.
This trend should continue.
Q. With oil prices hovering around $100 per barrel, what is the outlook for oil prices for the next two to five years?
A. We remain bullish on crude oil for one simple, fundamental reason: Demand is greater than supply. We don’t see that changing in the foreseeable future.
One big driver is a rapidly growing demand for cars and automobiles in emerging markets (Read: Booming Global Auto Market Good for Many). There’s also rising demand for oil due to urbanization and rising per capita incomes in emerging economies. As their economies grow and their populations become more prosperous, they want and can afford to upgrade infrastructure and other construction projects which require oil to be produced (Read: Why Asia is the Epicenter of Oil Demand Growth).
However, it is important to manage expectations. As the price of gasoline rises and inflation fears grow, countries such as India have been forced to lower government fuel subsidies. This will cause some demand destruction as consumers adjust to paying more at the pump, a situation not very different from what we’ve seen recently in the U.S. Though it has the potential to spread if inflation gets out of control, we think this dip in demand will only be temporary.
On the supply side, it’s getting more difficult to find new supply and even when large reserves are discovered, they lie deep beneath the ocean floor or in parts of the world where it’s dangerous to operate (Read: Why High Oil Prices Are Likely Here to Stay).
We think these trends appear to be firmly intact and are why we remain constructive on crude oil prices over the next several years.
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.
Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.
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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