The Global End Game for "Liquid Gold"

November 20, 2001

Government pronouncements notwithstanding, the ongoing bombing campaign in Afghanistan is all about oil (a point we recently emphasized in a GOLD-EAGLE editorial) and the stakes are as high as ever. New light is continually being shed upon this developing scenario with each passing week, and we feel it is our duty to share as much of this information with you as possible. Above all the din of propaganda and patriotic rhetoric, one fact stands out loud and clear: The great global end game is being fought around the Caspian Sea and the treasure it contains.

A bit of background is necessary to understand this "game" and its objective. The California-size Caspian, center of the last great oil rush of this century, laps across a huge mine of liquid gold. Some 200 billion bbl, or about 10% of the earth's potential oil reserves, are thought to lie under and around the sea. At today's prices that could add up to some $4 trillion worth. Because the Caspian lies in a perilous part of the world, however, laying hundreds of miles of pipeline through its myriad obstacles carries a huge price tag and enormous risks.

The world's energy companies began scrambling for the coveted oil and gas as soon as the Soviet Union broke up in 1991, and the biggest oil firms in the U.S., Europe, Russia, Japan, China and South America have bought into the action, forming consortiums and joint ventures with local companies to generate the massive start-up costs. Some of the wells are already pumping, and oil will soon be flooding out of the Caspian reserves. But the vexing question for the oil drillers has been one of transport, specifically, how to bring the stuff to energy-hungry consumers in Asian markets?

The battle for Caspian oil can be likened to the "Great Game," a term made famous by Rudyard Kipling, who used it to describe the 19th century struggle for influence and control between the British and Russian empires. But another Great Game it is. As U.S. News & World Reports noted in 1998, "Washington wants Caspian oil to flow through many pipelines so that no single lines run through Russia, as they already do, but Russia should not be able to turn a valve and shut off all or most of the Caspian flow."

According to U.S. News & World Reports May 4, 1998 issue, cover CIA officers, some well-trained petroleum engineers, have traveled through southern Russia, Azerbaijan, Kazakhstan and Turkmenistan to sniff out potential oil reserves. Informed of the agency's report, then-Secretary of State Madeleine Albright remarked that working to mold the area's future was "one of the most exciting things that we can do." In other words, bombing campaigns like the one currently underway in Afghanistan is an "exciting thing" that will yield huge profits to multinational oil firms and, with Washington's help, will help "mold" the future of this area not to mention destroy billions of dollars in property and end thousands of lives.

One reader wrote to ask us our opinion of the Caspian Sea oil campaign. He says, "For some time, I have thought there had to be either a strategic military gain or an oil pipeline gain as the real objective with the Afghanistan campaign. Why else would Russia be so eager to cooperate and come along side to help?" He goes on to ask, "In light of your article, I'd like to ask a few questions"

1. How long would it be before one could expect to see the Caspian Sea Oil on the market?

Answer: The oil will be on its way by next year. Already, the oil and natural gas prices have factored in this expected flood of petroleum to the world market. A survey of the leading integrated petroleum giants, such as ExxonMobil and Royal Dutch Pete, show huge declining trends in their stock prices, which attests to the expected bulge in oil and gas supply over existing demand. The market typically functions on a rate of change anticipatory basis; that is to say, it isn't current supply and demand that moves prices but rather anticipated supply and demand. And the stock prices of these leading oil concerns have factored in the expected flood of Caspian oil that will be pouring into the market over the next several years.

2. What affect would the development of the Caspian Sea oil have on the oil market at large? How long would it be before the markets reflect the new Caspian Sea oil?

Obviously a negative one in terms of price at least in the short-term. The initial piping of Caspian oil into Asian markets will have a depressing effect on oil prices (indeed, it already has). Once this oil becomes assimilated and Asian industrial capacity begins absorbing sufficient amounts of it prices will then stabilize and China -- the world's largest and most fierce military power -- will demand more and more of it in order to accommodate her massive-scale military and industrial activities. This will eventually tilt the market on the demand side and send prices higher.

3. What would you expect to see affected first in price -- the oil market, or developing oil companies share prices?

The first place to always be impacted by anticipated changes in supply and demand of any given commodity is the equities market associated with the commodity and not the physical commodity itself. In this case, the stocks of oil and gas drillers will first show signs of insider activity before the price of oil and gas itself since insiders always act on inside information by either buying or selling stocks. The stock market is more responsive to anticipated changes in supply and demand than the commodities market. Physical inventories of commodities take longer to be effected by such changes and commodity prices are therefore less responsive. This explains, for example, why the prices of gold mining stocks normally rise ahead of physical gold prices.

4. How could one find out which integrated oil companies, exploration/operation companies, and oil field service and equipment companies would be involved?

Very simply -- by consulting the charts. The chart is nothing more than a complete distillation of the entire supply/demand picture along with anticipated short-term and long-term changes in the factors influencing prices. In other words, the chart is a "crystal ball" of sorts for predicting price movements in the near future and tell us all we really need to know about any given market and the fundamental situation surrounding it. Without a doubt, the oil stocks will afford traders with substantial opportunities for profit with a relatively low risk/reward ratio over the next several months. The oil and gas sector, along with gold and silver mines, are industries that we will be keeping a careful eye upon in upcoming weeks and months in The Bear Market Report. Our subscribers will be the first to learn of expected buying and short selling opportunities that arise in these extremely attractive and fast-moving markets.

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including most recently “2014: America’s Date With Destiny.” For more information visit www.clifdroke.com.

The California Gold Rush began on January 24, 1848 when gold was found by James W. Marshall at Sutter's Mill in Coloma.