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Last Updated: Monday, 19 December 2005, 22:42 GMT
Costly commodities spark global change
Analysis
By Jorn Madslien
BBC News business reporter

Oil, gas, gold, copper, platinum - 2005 was the year of high commoditiy prices. Now the world is realising that the era of cheap oil and other raw materials is over.

Offshore oil platform
Easy access to oil and gas has become a thing of the past

The financial markets reflect the harsh reality of increasingly scarce resources.

Brent Crude currently trades close to $60 (34) a barrel, up from about $40 a barrel in early January, and from about $25-30 a barrel 18 months ago.

Other commodity prices have also soared, in part because of rising industrial demand from manufacturers, though also due to strong interest from investment funds.

And the boom is far from over.

"We have significantly increased our short-term and long-term commodity price forecasts to reflect our expectation of sustained tight markets and ongoing deficits in 2006," observes investment bank Morgan Stanley in a recent report.

The boom continues

The strength can be seen across most commodity markets.


Energy prices - that is the cost of oil, gas and coal - have been pushed higher by a combination of a growing fear of future supply shortages and soaring demand from the US - and India and China, where industrialisation is pushing ahead at breakneck speed.

Goldman Sachs, which is one of the most bullish players in the market, now predicts the average price of a barrel of oil to reach $68 in 2006, up from $57 in 2005.

Metal prices have also shot up.

Copper, which is widely used in cables, rose to $4,478 a tonne this month, a record high, with some traders now aiming to breach the psychologically important $4,500 level.

"We expect copper to surprise on the upside," says Morgan Stanley.

Platinum, which is used in catalytic converters, rose above $1,000 dollars a troy last month, a near 25-year high.

Iron ore, which is used by steel makers, "has the best fundamentals and strongest long-term price potential in the base metal and bulk commodity universe", observes Morgan Stanley.

Gold and other precious metals have also soared to fresh highs.


Gold is currently trading at about $500 an ounce after hitting a near-25-year high of $541 earlier this month, and bullish industry officials insist the gold rush is far from over.

"Investors are anticipating the price could hit $650 in a year," observes a gold dealer in Ahmedabad in India, one of the largest gold-consuming countries in the world.

And although his estimate lies well above most, analysts share his generally optimism as investors have become anxious to diversify away from equity markets, where many listed companies are burdened by increasing global competition, and by the rising cost of energy and raw materials.

"We remain of the opinion that the equity performance will be bumpy from this point and continue to advocate exposure to selected gold, coal and diversified stocks," observes ABN Amro in a commodities report.

Winners

But in the midst of those that are struggling to pay for it all, there are winners - most notably the world's leading energy companies.

A worker stand next to copper cathode sheets being loaded into a truck at the Dachang refinery in Shanghai
Copper prices rose to a fresh high this month

The boom enjoyed by the sector is illuminated by the US oil giant Exxon Mobil, which posted a quarterly profit of $9.9bn in October, the largest in US history.

Several investment banks, including Morgan Stanley and Goldman Sachs, have moved in as owners of refineries and other physical oil assets.

And large institutional investors, like pension funds and insurance companies, have enjoyed impressive gains after collectively flocking into the commodity markets during 2004 and 2005 - a phenomenon that has sparked warnings that the markets are due for major corrections that would come once these large investors start cashing in their profits.

Governments respond

But the impact of rising energy and other commodity costs is not limited to the private sector: governments are also changing their behaviour as they adjust to new realities.

In his pre-Budget report, Chancellor Gordon Brown blamed high oil prices for a slowdown in economic growth, before raising taxes on oil companies' profits.

We're not going to run out of fuel. We're going to learn to make it out of other things
Don Paul
Chief technology officer
Chevron

Similar measures could be introduced in the United States, where Senators voted in favour of an oil inventories tax rise, which some see as a profit tax.

Other governments are also cashing in on the high oil price.

Venezuela, where populist President Hugo Chavez is keen to boost social spending, has forced foreign oil companies to share more of their revenue with their host nation.

Norway, where the state has an active stake in the oil industry, has for years set aside its oil and gas revenues in a Petroleum Fund, which is set to reach $250bn next year.

Saudi Arabia is investing $50bn in its energy industry with the view to raise production from 9.5 million barrels per day to 12.5 million barrels per day by 2009.

Oil is power

Financial market players often talk about how the market is governed by two factors: greed and fear.

US President George W. Bush is shown the operation of the first North American retail hydrogen filling station by Shell Oil's Rick Scott 25, May 2005
President Bush is keen to reduce the USA's reliance on fossil fuel

The point is particularly poignant for players on the geopolitical arena, where profit motives are balanced by fears of violence and war rather than mere economic loss.

In other words, energy supplies are increasingly seen as a security issue, rather than merely a question of supply and demand in a competitive market place.

Seen in this context, rising energy prices are changing the way world leaders are thinking.

In Russia, President Vladimir Putin is not only busy wrestling control from oil industry oligarchs.

He is also keen to reduce Russia's reliance on neighbouring countries for its exports, so he has overseen the construction of a Gazprom gas pipeline linking Russia with Germany along the bottom of the Baltic Sea (bypassing Ukraine and Poland), and he is keen to develop Murmansk's Barents Sea port as an exit point for liquefied natural gas (LNG) exports.

In the UK, meanwhile, the government is again considering to invest in nuclear power, amidst concern of excessive reliance on imports from unstable regions - that is, Russia and the Middle East.

In the US, President George W Bush has pushed for more domestic exploration, including wildlife sanctuaries in Alaska, while planning to introduce grants to boost sales of hydrogen fuel cell cars.

"For the sake of a growing economy... for the sake of national security... we've got to expand our independence," Mr Bush said in April this year.

Smaller countries are also keen on self reliance. Take Sweden, where nuclear power plants have enjoyed a recent resurgence and where the government is offering attractive tax relief to support the roll-out of expensive infrastructure that supports biofuels as an alternative automotive fuel.

Science is the solution

The idea that biofuels - made from plants such as sugar beet or corn - can re-emerge as an alternative to oil is gaining currency - in Europe, the US and, not least, in Brazil, where the military government first started thinking about biodiesel during the 1970s oil crisis.

Brazil's original state-run biofuel programme - using sugar from sugar cane - was set up for patriotic rather than financial or environmental reasons. It was a great success during the 1980s when more than 90% of cars were designed to run on a mixture of biofuels and ordinary petrol or diesel, though as oil prices fell drivers began to shun biofuels.

Brazil is now working hard to reintroduce biofuel, thus sending demand for sugar cane soaring, which in turn has seen sugar prices in New York double to levels not seen since the mid-1990s.

And the move towards biofuels is just one of many technological and practical solutions to the problems posed by expensive energy and raw materials.

In the petroleum industry, whole armies of engineers are pushing robotics technology to new levels to make it feasible to extract oil and gas from unchartered depths off Africa's coast, or from beneath the icebergs in the Barents Sea.

In the laboratories, scientists are searching for ways to make synthetic fuels from a whole range of raw materials, while in the field their colleagues are pushing the boundaries further in the search for ever more efficient solar and wind power.

The era of easy oil may be over, acknowledges Chevron's chief technology officer, Don Paul, but his message is nevertheless one of high hopes for the future.

"We're not going to run out of fuel. We're going to learn to make it out of other things."

SEE ALSO
US prices plummet as oil retreats
15 Dec 05 |  Business
Rush for gold as price hits $530
09 Dec 05 |  Business
Pension funds eye commodity punts
10 Nov 05 |  Business
Blair reignites nuclear arguments
29 Nov 05 |  UK Politics



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