We have a very insightful report from Sprott Asset Management on the Oil Supply and Demand picture and the pricing outlook. There is NO cheap Oil left any more and the competition for the declining supply is rising by the day.
Now we can get another clue why Lithium is at the heart of the race for the security of supply of strategic commodities for the next industrial revolution based on Electric cars.
Lithium Jolt: Exclusive Q&A With Elon Musk And Chris Paine: How The Electric Car Got Its Revenge (TSLA)
"We will not stop until all cars will be electric" - this is Elon Musk's motto and it speaks volume about his ambitions. The company now is closer than ever to become the game changer and the real electric car launch and is firing on all ... electrons."
"Lithium investments story is getting to the headlines again. With the end of the world postponed today in Europe we still have the luxury of market prices for Junior miners and Lithium developers as in the near end of the world scenario. You can not step twice in the same river, but Mr Market has again provided us with a time machine and we can accumulate the Lithium juniors at the very attractive valuation. Catalyst will be the more Electric Cars on the road, soft lending in China and the price of Oil above 80 dollars. Insiders are already signalling that the value is there - at least according to their personal view."
Source: National Bureau of Statistics of China, China Statistical Yearbook; US Bureau of Labour Statistics, National Compensation Survey
The wage comparison table above highlights the differential between US and Chinese workers for select occupations. We have a long way to go before the wage differential between emerging markets and Western economies shrinks enough to stop the flow of jobs and the redirecting of oil exports around the world. As frightening as this may be for the inhabitants of high wage countries like ourselves, it is best to acknowledge the change and to prepare for a reduction in relative purchasing power as these inevitable adjustments flow through the employment, trade and currency markets.
In Figure 12 below, we have added a dashed line representing our revised US consumption estimate to the EIA’s forecasted consumption of barrels of oil equivalent per day (boe/d) for the USA, China and India. This revision is meant to reflect the poor history of EIA projections regarding production and account for the potential decrease in US dollar purchasing power of available future oil supplies. This dashed line is strictly illustrative but it neatly presents our view that the oil supply will remain constrained and concerted consumption growth for both developed and developing nations will not be possible.
The forecasted consumption growth in India and China may well turn out to be accurate but we believe it will unfortunately have to come at the expense of US consumption – as there simply won’t be enough oil to go around. The price will eventually be driven high enough in US dollar terms to force a rebalancing in global consumption.
Figure 12: USA/China/India Consumption Forecasts
Source: US Energy Information Administration, World Petroleum Consumption, Annual Estimates, 1980-2008; 2009 International Energy Outlook report, Table A5: "World Liquids Consumption by Region, Reference Case"
Conclusion – Hedge Yourself
For North American workers and investors, one way to hedge against a decline in living standards is to use your current relative advantage in oil purchasing power to accumulate oil reserves that will be developed in the future. This purchasing power advantage, currently evident in the time a worker in the West must work to earn a barrel of oil, will eventually dissipate, as world labour markets recalibrate and shift wealth from West to East. This will mean that workers in the West will be working for less and the balance of trade will be increasingly settled in commodities, in particular oil, and not in inflated Western labour costs. This strategy of oil accumulation will help to preserve your standard of living, as it ensures each hour of your labour earns you many hours of someone else’s labour at current rates.
The recent market decline and ongoing volatility is affording investors with an opportunity to invest in oil producers and service companies, in particular junior and mid-cap companies, at attractive valuations. Equities are pricing in much lower oil prices over the long-term. Our view is that while there may be additional volatility in the crude oil price in the short-term, long-term pricing will remain high and equity prices will rise to correct this disconnect. Although the newspapers might not be writing about oil as much today, we believe this is a great time to focus on it.
For more information about Sprott Asset Management’s investment insights and award-winning investment capabilities, please visit www.sprott.com.
Kevin BambroughMarket Strategist - Sprott Asset Management LP
Between 2002 and 2009, Mr. Bambrough held a number of positions with Sprott Asset Management, including Market Strategist, a role in which he devoted a significant portion of his time to examining global economic activity, geopolitics, and commodity markets in order to identify new trends and investment opportunities for Sprott’s team of portfolio managers. He is a recognized leader in the natural resource sectors and in 2007 founded Sprott Resource Corp. Since 2009, Mr. Bambrough has also served as President of Sprott Inc., one of Canada’s leading asset managers with $10 billion in assets under management. In 2010, Kevin was ranked as #1 in Casey’s NexTen list of next generation leaders in the natural resource industry. He also received an Honoury Chieftainship from the Blood Tribe in recognition for the valued partnership between the Tribe and One Earth Farms, a company founded by Mr. Bambrough.
Paul DimitriadisChief Operating Officer - Sprott Resource Corp.
Mr. Dimitriadis is Chief Operating Officer for Sprott Resource Corp. Mr. Dimitriadis originates, evaluates and structures transactions, coordinates and conducts due diligence and is involved in the oversight of the company’s operating subsidiaries. He serves on the board of directors of Waseca Energy Inc. and Stonegate Agricom Ltd. He has been with Sprott since 2007. Prior to joining Sprott, Mr. Dimitriadis practiced law at a national Canadian law firm. Mr. Dimitriadis holds an L.L.B. from the University of British Columbia and a B.A. from Concordia University.
1 Eric Sprott & Sasha Solunac, "Peak Oil – Are We There Yet?" (April 18, 2005) Markets At A Glance.
2 ICE Futures Exchange.
3 International Energy Agency, World Energy Outlook 2008 (Paris: OECD/IEA, 2008).
4 George T. Abed et al., "The Arab World in Transition: Assessing the Economic Impact" (May 2, 2011) Institute of International Finance, Inc.
5 Paul Sankey & Winnie Nip, "The Death of Non-OPEC:Oil Production declines Q2 for 40 Major Oils" (August 12, 2011) Deutsche Bank.
6 National Bureau of Statistics of China (www.stats.gov.cn).
Sprott at a Glance
With a history going back to 1981, Sprott Inc. offers a collection of investment managers, united by one common goal: delivering superior long-term returns to our investors. Sprott has a team of best-in-class portfolio managers, market strategists, technical experts and analysts that is widely-recognized for its investment expertise, performance results and unique investment approach. Our Investment Team relentlessly pursues a deeper level of knowledge and understanding which allows it to develop unique macroeconomic and company insights. Our team-based approach allows us to uncover the most attractive investment opportunities for our investors. When an emerging investment opportunity is identified, we invest decisively and with conviction. We also co-invest our own capital to align our interests with our investors.
Our history of outperformance speaks for itself.
Our BusinessesThe company currently operates through four distinct business units: Sprott Asset Management LP, Sprott Private Wealth LP, Sprott Consulting LP and Sprott U.S. Holdings Inc.
Sprott Asset Management LP is the investment manager of the Sprott family of mutual funds, hedge funds and discretionary managed accounts. Sprott Asset Management offers a Best-in-Class Investment Team led by Eric Sprott, world renowned money manager. The firm manages diverse mandates united by the same goal: delivering superior returns to investors. Our team of investment professionals employs an opportunistic, high conviction and team-based approach, focusing on undervalued securities with the greatest return potential. For more information, please visitwww.sprott.com
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Sprott U.S. Holdings Inc. offers specialized brokerage and asset management services in the natural resources sectors.
Global Resource Investments Ltd., our full-service U.S. brokerage firm, specializes in natural resource investments in the U.S., Canada and Australia. Founded in 1993, the firm is led by Rick Rule, a leading authority in investing in global natural resource companies. More than just brokers, the team is comprised of geologists, mining engineers and investment professionals. For more information, please visit www.sprottglobal.com
Sprott Asset Management USA Inc., offers Managed Accounts that invest in precious metals and natural resources. Led by renowned resource investors Eric Sprott and Rick Rule, we offer the collective expertise of Sprott’s investment team. For more information on our brokerage services, please visit www.sprottusa.com
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