Oil Supply Disruptions Likely - US Military

Following the Joint Operating Environment 2010 report by the US military warning of supply shortages in the oil market of up to 10 mbpd by 2015, the US Department of Defense's latest Operational Energy Strategy report to Congress has again highlighted the risk of disruptions to global oil supplies.

Page 8 of the report states:

The volatility of oil prices will continue to be a budgetary challenge for the Department, and the realities of global oil markets mean a disruption of oil supplies is plausible and increasingly likely in the coming decades. The Services have already taken steps to certify aircraft, ships, tactical vehicles, and support equipment to use alternative liquid fuels, a prudent insurance policy against future oil supply disruptions and high prices.

The reason why I think we should pay attention to what the US military says is that these people tend to take a hard, long-term view of things when it comes to assessing threats to their country.  For example, more than 20 years ago, they were already warning Congress about American foreign dependence on Rare Earth Elements technology in US weapons system.  Of course, now that risk has come to pass has China effectively controls 97% of the REE market.  Given such a track record of long-term thinking, I tend to take their views seriously.

The full OES report can be found here.

A Good Summary of the Troubles in the US

I came across the follow passage from this month's edition of The Dines Letter, published by the legendary investor James Dines.  It provides summary of the challenges facing the US in the coming years, and is the basis for much of my investment think:

A richly-endowed America drained the bulk of its inherited reserves of
crude oil long ago, along with many of its other resources, well ahead of the
rest of the world. Now, with its work force priced uncompetitively higher than
hungrier labor in world markets, it is basically out of business and in
forebodingly deepening trouble. Why is that not more widely evident? By
historic accident the United States owns the world’s "reserve currency" such
that it can print as much money as it chooses, which we described clearly in
our Goldbug! book.

America can still use its great intellectual resources to create games and
social websites, much as a comparably hollowed-out England became the
world’s balladeers (exemplified by Beatle mania) after World War II. But
every action has consequences, and the racket of just printing money and
borrowing has never ended well. America scurries about to spend its wealth
on wars – justified or not – and nobody inquires as to where those dollars
wind up. Worse, to crown the spending, America additionally borrows over
$40 for every $100 it spends, a clearly unsustainable folly.

Unlike George Friedman's more optimistic analysis of the prospects for the country in the next decade, Mr. Dines is decidedly less enthusiastic about his country's future.

In the same article, he also predicts that we will soon see the end of free markets as nations scramble for the remaining resources of the world.  This line of thinking is similar to those of historian Harold James, who sees a general move towards state-directed capitalism, the type commonly practised in this part of the world.

Market Outlook 20110605

In recent weeks, a few friends had asked me whether it was time to put more money into the stock market.  Due to the risks that I see out there, I had told them that I'd prefer to be cautious when it comes to committing funds on the long side.

Some of the risks that I see are:

• Sovereign debt crisis in Europe - risk of bringing down many European banks
• Continued deterioration of the US debt situation
• Slowing global economy, as evidenced by indicators from various countries
• Runaway inflation in many developing countries
• Unrest in the Middle East and the resurgence of the Muslim Brotherhood
• The nuclear disaster in Japan
• Power shortages in China and failure to fix the real estate bubble there

In recent days, even mainstream investment experts such as Mark Mobius of Templeton has publicly talked about the risks of another global financial crisis due to the fact that none of the ills which caused the 2008 crisis has been resolved.

For myself, I continue to favour physical gold as a way to tide through the current period of volatility.  It also has the added advantage of not requiring my constant attention, as I've really been busy with work lately.