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Markets: Black Gold
New York: January 07, 2008
By John R. Stephenson

The stock market may be tumbling, but commodities— particularly oil, is cruising higher. This last week saw stock markets under pressure, while oil broke briefly through the $100 per barrel level. Soaring crude oil prices are doing more than costing us big bucks at the pump, they are altering the balance of power in the world. Surging global demand for crude oil is creating huge wealth in oil-rich countries, while enslaving millions in poorer regions.

Countries such as Saudi Arabia and the United Arab Emirates are using their new-found billions to not only to bail out faltering global financial services firms, but to make massive investments in infrastructure. And why not! According to the International Monetary Fund, the value of oil exports from the Middle East and Central Asia will top $750 billion this year, a four-fold increase since 2001.

With all of this new money slopping around the Middle East, savvy investment bankers have been doing deals with the various petrostates of the Persian Gulf, who are looking to deploy their petrodollars abroad. Already, their efforts are paying off. Citigroup Inc. just received a much-needed injection of cash ($7.5 billion) to shore up their shaky finances, courtesy of The Abu Dhabi Investment Authority.

According to London-based Dealogic, the various petrostates in the Middle East have been on a major buying spree globally over the last three years, racking up more than $130 billion in purchases. These countries have been buying up companies, real estate and other assets and exerting influence well beyond their borders.

For the U.S., the rising tide of wealth and influence in the Middle East and other petroleum-producing nations, has hurt their foreign policy attempts. Russia's Vladimir Putin has used his country's oil wealth to consolidate his hold on power in spite of calls for greater transparency and democracy. Venezuela's Hugo Chavez has used his countries oil wealth to help prop up Fidel Castro and to win friends and influence other nations in South America.

Iran has been able to keep charging ahead with its nuclear program in spite of the Bush administration's attempts to pressure the Iranian economy financially. With oil demand surging and prices at sky-high levels, Iran is having no problem finding buyers, such as China, to buy its oil and to sell technology in return. Meanwhile, the Iranian economy and nuclear program keep on humming.

For poor nations, the surge in oil prices has made a difficult situation worse. Most poor countries struggle with spotty or non-existent energy infrastructure. High oil prices further hamper the ability of poor nations to provide cheap and available energy. Without the necessary energy to cook or farm, the gap between rich and poor nations is growing rapidly. According to a report prepared by the World Bank, a $10 oil-price increase translates into a 1.5% decrease in the gross domestic product of the world's poorest countries.

Closer to home, the domestic auto industry is feeling the pinch of higher oil prices. With a full lineup of "bigger is better" cars and trucks, automobile manufacturers in Detroit are stuck between a rock and a hard place. With gasoline prices north of $3 a gallon, consumers have been snapping up smaller, more fuel-efficient cars. For Ford and GM, the timing could hardly be worse. In 1999, Ford sold more than 428,000 Ford Explorers, a midsize sport-utility vehicle. Last year, the company sold just fewer than 127,000 Explorers, a drop in sales of 70.3 per cent. With better quality and expertise in small-vehicle design, the Japanese automakers are poised to take an even bigger share of the US car market.

Big oil companies, such as Exxon Mobil, would seem to be logical beneficiaries of the surging oil price and they are — but not as much as you might think. For most of the 1980s and 1990s, big oil has been downsizing and outsourcing critical functions, such as oilfield services, to smaller, independent companies. With surging oil prices, state-owned oil companies are no longer dependent on the technological know-how of big oil. State-owned oil companies have the cash and expertise in house or available in the open market to develop some of world's major oilfields without the need to partner with one of the world's super majors.

Increasingly, the influence of big oil is in decline. That's due in part to the rise of petroleum rich nations and their national energy companies that are increasingly in control of big prolific reserves. With fewer and fewer discoveries of oil in North America and Europe, Western oil companies are now in control of just 10 per cent of the world's proven oil reserves. The rest is under the control of state-owned oil companies such as PetroChina and Saudi Aramco. For big oil, the sun is beginning to set.

Investors looking to profit from the surge in oil should look to companies that have proven reserves in the ground in areas of the world that have stable politics and have demonstrated production track records.

The banks, brokers and real estate sectors should be avoided for at least the first half of 2008, as their problems are huge and with no obvious solution in sight. There will be a time to walk in blind and snap up companies in these industries, but it isn't now. When the time is right, it will likely be a sovereign wealth fund from a petrostate that snaps up some of America's choicest real estate and brokerages at bargain basement prices.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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