Oil
The unfolding crises in Libya and now in Bahrain have once again highlighted that instability in the Middle East feeds through very quickly into higher oil prices. Libya represents about 2% of the world’s oil supply, and if Gadaffi remains in power then this production may be subject to international sanctions. Bahrain though a very small country is just 60 miles from the largest oilfield in the world – the presence of Saudi soldiers being used to face down protestors in Bahrain is very inflammatory not only to Bahrainis but also to Iran. The world’s requirement for Middle Eastern oil to keep flowing is the key structural weakness of the global economy – in recent decades the USA has managed to reduce significantly the import of oil from the Middle East and increase it from other parts of the world, but the dependency has now switched to many of the Asian economies, which have been the drivers of the world economy in recent years. Brent crude has moved through $100 – apart from the April to September 2008, the oil price has never been this high.
Nuclear
For many countries, after oil the key energy dependency is nuclear. The tragic events in Japan where the natural disasters of earthquake and tsunami have conspired to create a potential nuclear meltdown have brought to the forefront of many people’s minds, the very real risks that nuclear energy brings. In Germany, Angela Merkel has already announced a moratorium on extending the life of Germany’s 17 nuclear power stations, an area of policy which has always been hugely controversial in Germany. In China, it has been announced that it has suspended approval for all nuclear power plants across the country – this accounts for 40% of the world’s planned reactors. Spain, Switzerland, the US and the UK have all announced safety reviews of existing facilities. It seems a fairly reasonable conclusion that future building of nuclear plant will be less than previously expected....will this boost the prospects of Alternative Energy Providers
In recent years, alternative energy technologies have been developing rapidly and becoming increasingly efficient. The increase in the oil price from $70 last May to $115 today has once again improved the economics of the alternative energy industries.
We would expect, in the light of recent events, to see a new and much more positive direction in government attitudes to alternative energy all over the world. Such a new direction should greatly benefit businesses that either promote greater energy efficiency or alternative (non-oil, non-nuclear) energy production.
Surprisingly these industries have not performed well in the stock market in recent years. The sector underperformed in the bear market of 2008 as the oil price collapsed, and also underperformed in the subsequent recovery mainly because European governments were no longer to afford the subsidies they had provided to many of these alternative energy industries. Such underperformance indicates that investors have been losing interest in the sector.
Blackrock New Energy Fund
The Blackrock New Energy Fund is one of the largest and most established funds (source: KB) which invests in this theme – we believe that recent events will be a catalyst to fundamental changes in regulation and government subsidies that will boost initially the share prices and later the profits of companies in this sector. The chart below shows the performance of the Fund and of the MSCI World Equity Index.
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