The Casey Files
Traveling to remote corners of the world has long been a hobby of mine. I've visited over 170 countries and lived in 10 of them.
I don't limit myself to the pretty spots. Wanderlust, together with my long-held belief that before you can really understand a resource investment you should put your boots on the ground, has led me to a fair percentage of the world's hell holes. Social, economic and political backwardness can actually be a plus for mineral and energy exploration companies looking for untapped resources. Rough conditions scare off most of the potential competition, which keeps prospective areas unexplored and opportunities cheap. And the more primitive a place is, the better your chance of going about your business without being swarmed by self-righteous NGOs and nutbar environmentalists at every turn.
Africa, for example, remains one of the world's most mineral-rich areas. But its giant deposits of every manner of mineral have been kept hidden for centuries by tribalism, hostile religions and bungling colonialism... and for millennia have been guarded by pestilence. Yet there is such abundance that even the little that leaks out around the chaotic edges are important to resource-starved world markets.
In the article that follows, David Galland, the Managing Editor here at Casey Research, discusses the implications -- good, bad and profitable -- of the world's increasing and somewhat surprising reliance on African oil.
Uruguay, May 2007
Last year marked the first time ever that U.S. imports of African crude oil surpassed shipments of oil from the Middle East. The trend is continuing in 2007; so far, three African countries (Nigeria, Angola, Algeria) account for 26% of crude oil imports, while three Middle Eastern countries (Saudi Arabia, Iraq, Kuwait) account for just 23%.
Our drift toward dependence on African oil goes hand in hand with dwindling production in Mexico, the U.S.' number-two foreign source... and with the continuing ugly business in Iraq, where oil production is still off about 27% from its pre-war high.
Of course, perpetually troubled as the Middle East is, Africa is no shirker in the chaos derby. That it is now a leading source of oil imports for the U.S. has far-ranging implications, above and beyond providing regular content for the nightly mayhem shows... I mean, news.
On that front, you may have noted -- but probably only in passing -- just a few of the back-page items related to Africa over the past few weeks. For instance...
Nigeria is in the process of transferring power through a "democratic" election. While CNN et al. relate the tales of murder and corruption that customarily accompany third-world voting, when push comes to shove, all most of their viewers care about is cheap fuel. In the case of Nigeria, the key to reliable production now lies in the ability of the newly elected president, Umaru Yar'Adua, to gain sufficient political control to strong-arm his militant opponents.
Unfortunately, while the prospects for law and order in Nigeria are dim, the prospects for just plain order aren't much brighter. So it's no wonder that oil prices jumped on the news of the election outcome; a bookie's odds, if you will, on the likelihood of a coup or widespread unrest in the foreseeable future -- either of which would bring work stoppages and sabotage. And, because as goes the fate of Nigeria, at 2.1 million barrels a day Africa's largest oil-producing nation, so goes the cost of your daily commute.
Elsewhere in Africa, we recently learned that the Ogaden National Liberation Front (OGNF) attacked a Chinese-operated oil field in Ethiopia, leaving 74 dead and taking as many as 5 Chinese hostages. The OGNF is a separatist rebel movement operating along the border of Ethiopia and Somalia. Although a representative of the group claimed the Chinese dead had been "caught in the crossfire," the fact that guns were ablazing in the oil field -- not to mention the hostage taking -- casts those claims in a suspicious light.
And in Algeria, the group formerly known as the Salafist Group for Preaching and Combat (they like to do both at the same time), now renamed as the more serious sounding "al-Qaeda in the Maghreb," recently set off a couple of bombs, killing 17 people who may have been expecting a gentler sermon. The bombs suggest a return to the bad old days in Algeria and a decided acceleration in violence aimed at anyone the Islamists find offensive by their rather strict religious standards. Invariably, the targets include all infidel dogs... aka foreign oil executives and workers.
Regardless, now that Africa's importance to meeting U.S. energy needs has risen to lofty levels, strife on that perennially troubled continent will continue to trigger spikes in crude oil prices and, between spikes, to keep a floor under the price.
With the busy summer driving season looming and U.S. gasoline supplies dropping for 12 straight weeks (see chart below), more of the same turmoil -- a certainty when it comes to Africa -- will likely lead to much higher gasoline prices coming to a pump near you soon. In fact, talk on the street is now for consumers to pay over $3.50 a gallon - and maybe as high as $4.00 -- once the summer driving season kicks in.
And, that, of course, adds further pressure on a U.S. economy being squeezed by the deflating housing bubble. The good news, of course, is that it also provides a steady wind to the sails of our favorite energy companies.
Not to appear callous, but just because the U.S. economy is leaking and may be headed under water, doesn't mean that we as individuals have to go down with the ship.
David Galland is the Managing Director of Casey Research, LLC., publishers of Casey Energy Speculator, a monthly newsletter dedicated to unbiased reporting on rational speculations in the shares of small-cap companies targeting oil, gas, uranium and other energy sources... companies with the very real potential to offer 100% or better returns over a short time horizon.