There is a good chance that you have already been affected
to a degree by the sharp rise in the price of oil. Maybe you
have noticed long lines once or twice at the petrol pumps
and perhaps seen the ‘habis’ sign more often.
This is not just a local phenomenon peculiar to Bali or the
rest of Indonesia. The oil crisis is a global one and one
that is here to stay.
How else might it affect you?
Apart from the effect it may have already had we must be prepared
to see further significant increases in the cost of petrol
and other oil-related products. At present petrol is heavily
subsidized by the government. Indonesian colleagues find it
hard to believe when I tell them it costs half a million Rupiah
to fill a car’s petrol tank in the UK. It is not that
the Indonesian government wants to make life easier for car
owners, most of whom could easily afford to pay a realistic
price for petrol. The problem is that when petrol prices rise,
so do bus fares and the cost of transporting essential goods
to the market, resulting in severe economic pressures on the
poor. The government is in a no-win situation. The subsidy
is hurting the country’s economy but to remove it would
be painful too. At the end of the day, we are all going to
pay more one way or another. There may be other consequences
such as power cuts since a lot of electricity is generated
by oil-burning plants.
Why is all this happening?
Very simply, the world is consuming two barrels of oil for
every one that the oil industry is producing. The situation
can only get worse since America’s insatiable appetite
for oil could soon be matched by that of new emerging giants
such as India and particularly China. Another factor is that
for years the world had excessive refining capacity. This
is no longer the case so that even when there are sufficient
crude oil supplies the refineries cannot keep up with demand.
This can be rectified in the medium term by expanding refineries
and constructing new ones but it all costs money and guess
who has to pay!
What can we do to mitigate the impact?
Escaping to a mountain retreat would be one way but that will
not appeal to many so what else can we do? Firstly we can
take simple precautions by keeping petrol tanks topped up
when supplies are plentiful. Get that bike out for short trips!
If you run a business that relies on a constant supply of
electricity get a good back-up generator. If you are in the
export business be sure to factor in possible sudden increases
in costs.
Can you compensate by profiting from the high cost of oil?
Apart from the oil producing countries it is the big oil companies
that are making windfall profits at the moment. You may think
this is obscene but remember these companies have to raise
huge amounts of money and take enormous risks in their quest
for oil. A major exploration and production venture can cost
billions of dollars with no guarantee of commercial results.
Most wells that are drilled are dry and if the oil price dips
the return on investment can be very poor or negative. So
while buying oil company shares may seem attractive right
now and is probably a good long term strategy you need to
bear in mind that there can also be short term losses.
Are there funds where you can invest in oil?
Yes, there are. For a number of years I have been placing
larger clients into a global energy fund managed by one of
the major institutions. The fund invests in mainly mid-sized
companies involved in exploration, production and refining
activities. These companies are more flexible than the majors
and generally offer better value. The fund had made 59.6%
in the 12 months up to July and 178% over five years. For
someone invested in stock markets that can be negatively affected
by rising oil prices this fund provides an excellent hedge
or counter-balance.
Is there hope for the future?
There are some very good alternative and environmentally friendly
sources of energy such as hydroelectric, solar, wind power
and geothermal. But at this point in time they are not as
economically attractive as oil and need large amounts of investment
money. As the oil runs out they will at some point become
economically viable. Nations will adapt, just as they have
in the past, but in the meantime we are probably going to
see rising prices and countries scrapping over oil resources
like animals fighting over a bone. But when all the bones
are gone the animals will retreat to their lairs and seek
new solutions to their needs. Life will go on, with or without
oil!
Colin Bloodworth is a senior adviser with Financial Partners
International. The opinions expressed are his own. If you
have any questions you may contact him at 021 520 8099 or
colin.bloodworth@financial-partners.biz
