The higher price for crude was helped along with Goldman Sachs announcement last week that oil could hit $105. This week, CIBC World Markets warned that oil prices could hit $100 or higher. The result of this furor over oil evaporated the liquidity on many non oil resource stocks as investors contemplated what higher oil prices will mean to their portfolios.

The probability of even higher oil prices is a mix a many factors not the least of which include OPEC's limited ability to crank up production, a lack of tanker capacity, and limited refinery capabilities.

Given that the risk in the oil market is already at an unprecedented high, an oil price spike is a real possibility particularly given a major natural disaster, or an act of terrorism centered on an oil producing area.

Last year the International Energy Agency stated that with every $10 increase in the price of oil, world GDP would fall by .5% or $255 billion. Other studies show a strong link between crude oil prices and inflationary trends that can lead to global recession.

So with this scenario, resource investors are at once frozen into an analysis paralysis - neither buying nor selling - but just watching for signs of how the global economy will react to higher oil prices. Many eyes are focused on the world's newest big resource consumer - China.

As I mentioned in my article, China and the Final War for Resources, "You name the commodity and China's buying it and consuming it in HUGE quantities. Last year they consumed nearly half of the world's cement, twice the world's consumption of copper, and nearly a third of the world's coal, 90% of the world's steel plus nearly every other commodity you can think of has been in greater demand by China."

So far this year demand for raw materials in China is still very strong.

Growth in China's economy for the first two months of this year shows exports are up 37%, industrial production up 17%, retail sales up 14% and investment in factories and infrastructure are up 24.5%.

This bodes well for resource stocks across the board.

Specifically with copper, world-wide inventories are low, and all other things being equal with the global economy, this should continue the current bull market in copper.

Zinc is another interesting situation where LME inventories are 580,000 tonnes above average but are expected to drop to 250,000 tonnes by year end. Five refineries have shut down over the last three years (one in Australia and four in Europe) which is a major reason for higher projected prices over the coming months.

And over the next 12 months coal producers will also see record breaking revenues as new contracts are locking in huge profit margins due to a lack of supply.

For example, British Columbia is the second biggest producer of coal in the world right behind Australia and the province just announced two huge coal deals with Asian steel mills for more then $100 U.S. per tonne - an increase of $54 tonne over last year!

One B.C. based company, Elk Valley Coal Partnership just announced a five year deal that should expand steelmaking coal output by 30%. Elk Valley Coal Corp., owned jointly by Fording Coal Trust and Teck Cominco, is the second-biggest player in the coking coal field, providing an estimated 21 per cent of global supplies.

In February, Fording Coal Trust announced that Elk Valley Coal had negotiated prices averaging $122 a tonne for the 2005 coal year, compared with an average $52 a tonne for 2004.

So in summary, with China still showing signs of strong buying of raw materials and with the global economy showing solid GDP growth of 3.5% I would have to conclude any decrease in demand for resources not on the horizon - at this point in time at least.

The wild card, as I have been mentioning for the last few years, is the ever widening U.S. Trade and Budget Deficits. That's a topic for another report but needless to say, I am continuing to monitor that situation closely.

Bill Ridley
Publisher
OnlineInvestorsNews
www.jameswinston.com

8 April 2005