It's time to prepare your portfolio for war.
What is it good for?
Absolutely nothing – Say it again…"
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
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.
from The Past
It's hard to believe how closely oil prices track
global tensions until you see it all laid out in a
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
Portfolio Prepared for Tomorrow's Wars?
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 –
- Israel versus Iran. As mentioned, this one would be a whopper for
oil prices. Mines in the Strait of Hormuz, missiles flying in the Middle
East, outright US support for Israel versus covert Russian and Chinese
support for Iran, the loss of the rest of Iran's oil output – it
would be oil market mayhem and music to oil investors' ears.
- Spreading Syrian violence or international
Syria's war has already sparked sectarian violence in Lebanon and
prompted panic that the Kurds in Iraq, Syria, and Turkey will use the
instability to push for sovereignty… which would cause civil
unrest in Turkey and increased violence in embattled Iraq. There's also
the chance that international forces will intervene in Syria, which
would pit the United States and its allies against Russia and China. Any
of these possibilities would mean increased hostilities, regionally or
globally, and hostilities are a boon for oil.
- War in the South China Sea. Every country that rings
the South China Sea – China, Taiwan, Cambodia, Malaysia, the
Philippines, Thailand, Vietnam, Indonesia, and Brunei – lays claim
to some part of the sea in direct conflict with one or more of its
neighbors. After decades of simmering tensions, newly discovered deepwater oil and gas riches are pushing these
countries toward all-out war. Hostilities have been flaring from all
sides, as exemplified by this quote from a high-ranking Chinese official
describing China's position towards the Philippines: "We are not
ruling out the use of war to prevent further encroachment on our
territory." When there are 200 billion barrels of oil and hundreds
of trillions of cubic feet of natural gas at stake, and when the disputes
are between long-hostile nations, everything is dramatic. And
oil loves drama.
- War in the East China Sea. Very similar story as in
the South China Sea, just with slightly different players. Here the main
combatants are Japan, which has a guarantee of US support if attacked,
and China, which is pushing to prove its dominance in Asia wherever and
however possible. Again, rich fishing and resource opportunities are at
stake. And in case you might have forgotten, Japan and China hate
each other. Not a stable scenario… but were they to go to war,
both nations would need massive volumes of oil.
History tells us that people cannot help but fight.
History also tells us that the bigger the fight, the better the boost for oil
Of course, your portfolio will only profit if it is
prepared. Is your portfolio prepared for the coming wars?
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.
investors supposed to make, protect, and expand their wealth in this
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