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Market Minute: The First Cut Is The Deepest.
What Happened: Standard & Poor's lowered the US's credit rating from positive to
negative. It warned the US that time was running out. It said more government
procrastination could risk its AAA rating.
What It Means: The US has the worse Triple A-rated economy in the world. Its
deficit could reach 11% of GDP by 2013. And its total debt could exceed 100% of
GDP.
Why It Matters: Even the biggest economy in the world can't keep piling up debt
forever. The government has been called out. And no longer can US Treasuries be
considered "risk-free." Investors will demand a higher return to lend money to
the US government. An agreement between the Democrats and Republicans to cut
spending by $4 trillion is a start (if it ever happens). But even that may not
be enough to restore faith in the US's economic house. The government went on a
ferocious spending spree when the recent crisis hit. It has taken two years to
reach this "crisis" point. It's not going away overnight.
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that Government bonds go down in price. Find the perfect vehicle to do this in
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The Secret Fossil Fuel Powerhouse
IMV Projects is hiring 10-25 engineers a week. Since January, it has added 100
people to its 500-person work force. There's just one catch.
Many accepted jobs to work on projects that don't even exist.
And IMV's CEO couldn't be happier. "There will be enough work to go around," he
insists.
IMV Projects works in North America's oil patch. And so far its hiring spree is
paying off. Work has shown up in time to keep the new hires busy.
The oil sector is taking flight. High prices are spurring spending and
expansion.
In fact, energy commodities are hitting highs across the board. West Texas crude
oil spilled over $100 two weeks ago and will soon be arriving at its next big
round number: $110 per barrel.
The last time oil prices surged past $100, they kept right on going until they
passed $147.
Gas prices now average $3.83 nationally. A year ago, they were averaging $2.87.
Half a dozen states are already reporting prices over $4.00. And the summer
driving season hasn't even begun.
Coal prices are also bubbling up. They're at $460 a ton, a three-year high.
And heating oil is up to $3.18 per gallon from $1.50 last year this time, more
than doubling in price.
To understand what's going on, you have to realize that the world's biggest
"economic project" is still in its early stages.
The Industrial Revolution 2.0
Why in the world would NYMEX (New York Mercantile Exchange) traders be bidding
up the multi-trillion-dollar commodity market (including traditional fossil
energy commodities) in the middle of such a fragile global economy?
We don't know what those traders are thinking. But it's a safe bet they're not
expecting the world to wean itself off oil or coal any time soon.
The industrial revolution changed the world 150 years ago. But it would have
been impossible without coal.
And now a second round of global industrialization is taking place. I call it
the Industrial Revolution 2.0. Countries from China to India to South Africa are
building highways, putting up skyscrapers, and expanding manufacturing.
Now these commodity traders may not be history buffs. But they must know that
the second and bigger Industrial Revolution can't happen without an ample supply
of oil and coal.
The mainstream news media can't talk enough about solar and wind energy. Even
post-Fukushima nuclear is talked up. But the fundamental truth about world
energy is this...
Fossil fuels supply more than 80% of the world's energy.
We've recently talked about coal's comeback. In a recent issue of Liberty Street
investor, Christian Hill said that "global demand for coal is increasing. Last
decade, coal consumption increased 46%, more than any other fossil fuel. And in
2009, coal provided nearly 30% of the world's electricity, the highest
percentage since 1970."
He's right. Coal, for example, provides China with 80% of its power. Both China
and India have begun to ramp up construction of coal-fired generating plants.
That should almost double world coal consumption over the next two decades.
And oil? We're cutting back in the West. By 2035, we should be using 6 million
barrels a day less oil than we use now. But don't let that fool you. Everywhere
else oil use is gaining. China alone will account for 50% of the world's rising
oil consumption. Its consumption will grow to 13.1 mbd in 2030, up from 3.5 mbd
in 2006. The most prestigious energy consultant in the world, the International
Energy Agency, says that oil will remain the dominant primary energy fuel
through 2035, the end year of its 25-year forecast.
So where will all this oil and coal come from?
The Next Energy Superpower?
Many candidates have been proposed, including Brazil and China. And dark horses
like Mongolia and Indonesia.
Then, of course, there's Saudi Arabia. It has fossil fuel reserves of 309.1
billion barrels of oil equivalent (BBOE).
But there's one country that has more than that. In fact, it has more than Saudi
Arabia, Canada, and Iran combined.
And that country is the US.
The US has 972.6 BBOE. That's three times Saudi Arabia's fossil fuel reserves.
The difference maker is coal. Saudi Arabia has none. The US has 910.1 BBOE.
The US also has 43.4 BBOE of natural gas, much more than Saudi Arabia. And that
doesn't even include America's shale gas reserves. Some estimates indicate we
have enough to last 100 years.
So while President Obama frets over our oil addiction and seeks to reduce oil
imports by one-third...
And the oil majors lobby for looser offshore drilling restrictions as they eye
Alaska's coast...
The US can legitimately claim to be the world's most formidable fossil fuel
energy superpower.
And We Can See the Changes Already.
The United States increased domestic oil production last year for the first time
in a generation.
US coal producers are eyeing Asian markets for the first time. IDE's Managing
Editor, Christian Hill, says "Worldwide coal use is expected to grow 53% by
2030, with China and India responsible for around 85% of the increase. And this
year alone, China and India may boost their coal imports by 78%."
Coal has been written off dozens of times. Just like oil is being written off
now.
But the energy and commodity traders at NYMEX are bullish on America's fossil
fuels.
As I said, we don't know what they're thinking. But maybe they're just adding 2
plus 2 and getting 4. Tight supplies plus plentiful reserves equals a promising
future for oil and coal.
The demise of oil and coal is a myth completely unsupported by what's happening
on the ground. You should look to buy big oil and coal companies on the dip.
Even better, check out the two companies in these sectors that are outperforming
their peers in our Trend Trader portfolio. They're your best bets.
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