The Commodity Investor Q&A
With Matt Badiali
February 27 , 2008
Q: Where does all the money spent on oil go? – A.B.
A: The short answer is OPEC. People in the U.S. get irate because ExxonMobil and the other major oil companies made huge amounts of money the last two years – even though their profit margins are far below finance and tech companies.
However, a truly staggering amount of money flows into the world's largest cartel's coffers. Here is a list of these earnings:
Country |
2007 Earnings
(Billions) |
Saudi Arabia |
$194 |
UAE |
$63 |
Iran |
$57 |
Nigeria |
$55 |
Kuwait |
$54 |
Algeria |
$51 |
Venezuela |
$48 |
Angola |
$44 |
Libya |
$41 |
Iraq |
$38 |
Qatar |
$27 |
Ecuador |
$8 |
Indonesia |
-$4 |
OPEC Total |
$675 |
|
ExxonMobil, the largest oil company in the world, earned a record $40 billion in 2007. That sum wouldn't even get the company into the top 50% of OPEC earners. So for all you Big Oil protesters, if you want to picket someone, picket Saudi Arabia.
Q: Even if the U.S. should go into an extended recession, won't the emerging markets' demand for oil and other material commodities continue to boost prices? - L.H.
A: Absolutely. I think U.S. analysts and financiers have an oversupply of hubris. Part of that is based on history. In the past, the U.S. economy had a huge impact on all the other economies in the world.
However, today several economies are in the process of decoupling from the U.S. – at least its commodity demand. China and India are prime examples. Few people realize the consumption involved in developing infrastructure on the scale that China and India must build.
I heard on the radio show Market Place that China plans to expand its railway network from 45,000 miles to 60,000 miles. That's a lot of steel and timbers. The interesting thing is, the private sector is building this railway, not the government. That is the clearest indicator that the boom in China isn't artificially driven by preparations for the Olympics. This is real growth driven by market forces.
In fact, the China Railway Construction Corp. will go public on the Hong Kong and Shanghai stock exchanges next week. The plan is to raise $5.44 billion to fund the railroad expansions. Among the investors subscribed to the IPO are Yale University and one of Asia's richest men, Li Ka-shing.
So... the short answer is, yes, I believe emerging markets will support high commodity prices, even as the U.S. economy weakens. Recent record prices for oil, coal, and grain support this view.
Good investing,
Matt Badiali
