Playing for Keeps

I’m not much of a poker player â€” I talk too much and I’m too honest. Poker is a game where stone-faced SOBs end up with all the chips. Now, as I watch conflicts sprout up around the globe, I can only hope that we have some stone-faced SOBs on our side of the table.

Reason: The stakes are just too high. Sure, ideological differences are part of the reason for what’s going on in the world today. But I think there’s another, more tangible prize at the heart of it all: scarce natural resources such as oil, natural gas, metals … even water.

If you’ve ever watched a poker match, you’ll know that it’s not always exciting. It’s often more about secret strategies and bluffing than outright action. Likewise, the battle for natural resources doesn’t have to be “hot” all of the time. For long stretches, it might be defined by behind-the-scenes struggles between corporations and the nation-states that back them.

To understand the game, you need to understand the players. So, today I’d like to tell you more about five of the countries that are deeply entrenched in this high-stakes battle …

Russia: The Big,
Bad Bear Returns

President Vladimir Putin seems determined to restore his country to the superpower status it held when he was a KGB officer. He hopes to accomplish this by turning Russia into an energy heavyweight, enriching the country’s new elite in the process.

Some of the moves Putin has been making:

During the depths of last year’s harsh winter, the Kremlin forced the Ukraine to settle a dispute by turning off natural gas supplies to the country.

Russia has also been putting the squeeze on Lithuania, claiming that pipelines to the country are worn out. Russia’s apparent aim: Either to force Lithuania into bankruptcy or to make the country’s big energy and pipeline company, Mazeikiai, seek a merger. The Mazeikiai refinery is the only refinery and largest economic entity in the three Baltic states. It also happens to be Lithuania’s top taxpayer.

Putin awarded a contract to a Japanese company to build a 2,361-mile pipeline from Angarsk on the southern edge of Lake Baikal to Nakhodka, a port from which petroleum could easily be shipped to the Japanese coast, threatening competing contracts with Europe.

Likewise, the Russians have agreed to make huge natural gas shipments to China, and they may allow the Chinese to connect to the Japanese pipeline.

All these actions frighten European nations that count on Russian gas. Heck, Hungary gets 85% of its natural gas from Russia, while Germany, the largest economy in the European Union, gets 40%.

Meanwhile, another major player is turning up the heat …

Iran: A Peacock Picking Fights

Besides Russia, Iran has the largest natural gas reserves in the world. Tehran is also the fourth-largest crude oil exporter, but the country’s fields are aging. That’s why Iran is looking to China and India for investment money.

But Iran’s not stopping there. It’s busy stirring the pot elsewhere, too:

Iraq’s Shiite majority government is falling more and more into Iran’s sphere of influence. In the latest deal, Iran agreed to supply Iraq with refined petroleum products in return for crude oil. And under the surface, Iran is busy funneling arms to insurgents and fueling anger against the U.S.

Tehran is also a major supporter of Hezbollah, winning the hearts and minds of the growing number of Hezbollah supporters throughout the Muslim world.

Iran has also become the unlikely ally of Venezuela. The two countries are bonding through their mutual hatred of the U.S., and Iranian money and expertise is helping develop Venezuela’s heavy oil projects.

Yesterday, as we’ve been warning you, Iran said “NO” to the UN’s demand to cease nuclear research, and now the ball is back in the UN’s court to decide on sanctions. Don’t think for a minute that China is going to be happy about that. They have too much riding on Iran’s economic development …

China: The Rip-Roaring Tiger

China is one of Iran’s biggest oil customers â€” it inked a deal to buy $20 billion worth of Iranian natural gas over 25 years, and China’s state-owned oil company Sinopec has a 50% stake in the development of Yadavaran, Iran’s largest undeveloped oil field.

But that still doesn’t satisfy their voracious appetite. China currently uses about 7 million barrels of oil per day, half of which it imports. Unfortunately, China’s oil demand is expected to more than double by 2020.

China’s government is determined to control its own destiny. With $1 trillion in currency reserves, it has plenty of buying power …

Since the beginning of the year, China has signed deals worth more than $7 billion for stakes in oil and gas fields in Kazakhstan, Nigeria, and Syria. And a state-controlled company is reportedly considering a $2 billion bid for yet another Kazakh property.

China has signed an oil exploration deal with Cuba. Now, China’s state-owned oil company, Sinopec, has moved huge deep-sea drilling platforms to the Gulf of Mexico, less than 50 miles from the Florida Keys â€” an area where U.S. oil companies can’t drill thanks to America’s Outer Continental Shelf (OCS) moratorium. The U.S. Senate passed a bill that would open 8.3 million acres for new energy development in the Gulf of Mexico, but it still has to get through the House of Representatives. So don’t hold your breath.

China has spent more than a billion dollars developing oil assets in Sudan, a country that is off-limits to U.S. companies because Sudan’s government practices genocide against its own people.

Chinese money is flowing into Canada, too. For example, a Chinese oil company bought Canada’s PetroKazakhstan for $4 billion last year.

By the way, China isn’t just spending on oil â€” it’s also spending enormous amounts on other vital materials, particularly metals. The country is buying up mines by the score.

This is why 40% of China’s direct investment now goes into South America. And thanks to recent treaties, Chinese money should soon start pouring into the Australian resource sector.

Of course, China also has to compete with a rather desperate neighbor …

India: A Ravenous Elephant

By 2035, India will be more populous than China. That will make things even tougher for a country that already has to import 70% of its oil.

To prepare, India is rushing to establish bi-lateral deals with Bhutan, Nepal, and Sri Lanka to buy hydropower from those countries. It’s even trying to buy power from Pakistan, a government that sponsors terrorists inside India’s borders.

India also has negotiators in Tehran discussing a strategic pipeline. The country is desperately trying to keep up with China, which closed a $70 billion deal with Iran in fall 2004.

India’s relationship with China is complicated. In December, Indian and Chinese energy firms joined to buy Petro-Canada’s 37% stake in Syrian oil fields for $573 million. And India’s state-run Oil and Natural Gas and China’s Sinopec jointly won a bid for 50% in oil company Omimex de Colombia.

But these two rivals also stab each other in the back. Two Indian companies are co-proprietors of rich natural gas reserves in Myanmar. Imagine their surprise when they learned that Beijing had struck a deal with the Myanmar government for the exclusive rights to those reserves!

The U.S. hopes to develop India as a regional counterweight to China. But as India becomes more powerful … and hungry for energy … we’d better watch our backs.

The U.S.: The Eagle Running on Empty

The U.S. is finally starting to wake up to the game being played. Last year, it blocked China’s purchase of U.S. oil company Unocal because of “national security” concerns.

We should be concerned. The U.S. uses about 25% of the world’s oil, and many of our traditional sources â€” domestic oil fields, Kuwait, Mexico â€” are in decline or close to it.

So, what are we doing? Making deals with some of the most unsavory characters this side of a Star Wars cantina. Just two examples:

In Azerbaijan, U.S. negotiators held their noses and struck a deal with a corrupt and brutal government to build a $3.6 billion pipeline that goes through Georgia to Turkey. The U.S. is very keen on this pipeline because Russia, China and Iran can’t touch it.

The U.S. is also making energy deals in Turkmenistan, a country where the leader is enforcing a personality cult that Kim Jong Il would envy. He’s committed a long list of horrific crimes, including boiling at least one political opponent to death. But that hasn’t stopped Occidental Petroleum and Oil Capital from striking multi-million-dollar deals to develop Turkmenistan’s rich Burun oil deposit and the Turkmen part of the Caspian Sean.

And the U.S. adventure in Iraq, which was basically about oil, hasn’t paid off. Iraqi oil production is still only three-quarters of what it was before the invasion.

Iraq is one of the few places where the war for natural resources has actually turned into a shooting match. And I don’t think it will be the last.

Bottom line: We may see short-term pullbacks, but the long-term trend for natural resources should be much, much higher. The competition is so intense, there’s virtually nothing on the horizon that can turn around its impact: Much higher prices for key commodities.

And since the competition is only increasing, the conflicts are likely to increase as well …

What You Can Do About It

You can hide under your desk as this war for natural resources unfolds, or you can invest now to protect your portfolio … and possibly reap windfall profits.

My Red-Hot Canadian Small-Caps and Red-Hot Asian Tigers subscribers are already well positioned for the next wave.

In fact, next week I’ll be traveling all the way up to Labrador in Canada, where I’ll be looking at a uranium deposit that is being developed by one of the stocks in my Red-Hot Canadian Small-Caps portfolio.

When I get back, I’ll tell you more about what I discovered on my trip. In the meantime, here are two more ideas for you …

#1. Consider Natural Resource Funds. For example, U.S. Global’s Global Resources (PSPFX) doesn’t have a load and its expense ratio is a low 1.3%. Its holdings include Petrobras, Valero, Tesoro, and the Canadian Oil Sands Trust, so it should make the most of the next flood of money into global energy.

I also like the Guinness Atkinson Global Energy Fund (GAGEX). It was best of its class last year, and is truly a global energy fund, with top holdings including Sasol, Petrochina, Royal Dutch Shell, EnCana, and Repsol. The fund has an expense ratio of 1.45%. It has no load, but charges a 1% fee if you redeem it in the first 30 days.

#2. Look into Defense Stocks. As the struggle for natural resources continues to spiral out of control, certain companies stand to benefit.

One such group: companies that make defense equipment. If you want more information, I suggest you read John Burke’s newly-released 16-page report, “The Rising Tide of War.” John not only gives you in-depth analysis on the simmering conflicts around the globe, he also profiles five of his top defense stock picks, along with price targets and recommended stop-loss levels.

I see there’s already been good news for some of the stocks in John’s report …

One made a couple of smart acquisitions that give it an even deeper product line to bring in more of those big defense bucks.

One received a sweet analyst upgrade that praised the stock’s potential and sent it higher. Nice to see other analysts jumping on the bandwagon that John got rolling.

One made a righteous bounce off support that looks as bullish as the running of the bulls at Pamplona!

I don’t want to give away too much about the great picks in John’s report, but I definitely think there will be more good news to come. His picks are just starting to ramp up, and should have a long way to go.

Yours for trading profits,

Sean Brodrick

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About MONEY AND MARKETS

MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Monica Lewman-Garcia, Wendy Montes de Oca, Kristen Adams, Jennifer Moran, Red Morgan, and Julie Trudeau.

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