Mixed Outlook for the Middle East

03/20/2013 8:30 am EST

Focus: GLOBAL

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

After returning from a trip to the Middle East, Mark Skousen shares what he sees going in on the region, and what may happen to oil prices this year.

Mark, it’s great to have you here at the MoneyShow. I recall...that you were at my first conference in 1978, and I knew you in the mid-70s, back in the days when you wrote the Inflation Survival Letter.

Oh, the Inflation Survival Letter. Boy, those were back in the day.

Are we back there now?

No, we’re really not, because we’re not getting the rapid inflation that we had in the 70s. We’re certainly seeing a rise of inflation, but look at interest rates. Interest rates were much higher back in the 70s than they are now. So we have negative interest rates.

We have negative real interest rates when compared to inflation.
                                                       
Yeah, right.

And for those of us that aren’t trained economists like yourself, the question is back in those days, we had significantly constrained oil supply, did we not? And that really caused the spike in oil prices. You just came back from a trip to the Middle East. What can you tell us about the future of energy prices and other commodities based on today’s supply and demand issues?

Well, I spent a week in Israel. It’s my third visit there, so now I’m an expert, right? Actually, I went with a fact-finding tour with Senator Rand Paul. This was his first visit to Israel, and it was a great experience for him as well as me. He met with [Israeli Prime Minister] Netanyahu and the mayor of Jerusalem and the King of Jordan and got a view of both sides.

But look: he sees a real arms race developing in the Middle East, because when we send 15 F-16s to Egypt, Israel is saying well, we need 20, so I’m not sure there is a real balance there. What I’m concerned about is another crisis building in the Middle East. We’re seeing this terrorist activity continuing. No economic growth to speak of outside of Israel.

Israel was booming economically, and has been for 30 years. I’m very impressed with the economy there. But I’ve been to Egypt and there is no economic progress at all. There is a lot of unrest. There could be some more oil disruptions. They could push the oil price back up again. So yeah, I think it’s a real threat.

You’re not in agreement with Byron Wien and other oil bears who believe that oil prices could descend to the $70s because of all this explosion of domestic production here in the United States and in Canada?

Well, they certainly make a good point on the supply side. I agree with you there is an increase in supply, not only in the United States but around the world. I mean, they are making all kinds of discoveries in the ocean floors, but it’s very expensive to get it out, though.

I think the supplies are going to be growing. The real question mark is on the demand side. The Federal Reserve has a deliberate policy of pushing the dollar down, and oil is quoted in dollars. Gold is quoted in dollars. I have thought that oil prices should go lower but they’re not, and so let the market speak for itself. They continue to rise.

I agree that under normal circumstances, the supply is growing faster than demand and prices should come down. The Middle East factor and the Federal Reserve deliberate inflationary policies suggest that oil prices are going to stay high.

We do have increased economic activity throughout the world as we slowly recover from this global recession.

Well that’s another big thing; that’s our third issue that is very important. I mean in China, the collapse that everybody was predicting has not happened. It continues to expand. The middle class is growing in China. Other Asian countries—India, Vietnam, Taiwan, Korea, look at Korea. Even Russia is making a comeback, and Latin America, all of these countries use these traditional non-renewable natural resources.

As much as they talk about a breakthrough in solar and wind power and fuel cells and so on, it hasn’t happened yet. Natural gas would be a nice change, and we might see some new developments there, but in general I think we’re still depending on the standard traditional sources of energy.

What are your favorite investments in that area?

Well, I really like Enterprise Products Partners (EPD). This is a Houston-based pipeline company. It’s the nation’s largest energy limited partnership, so they’re a great company and they’re expanding.

What’s the yield on that?

It’s about a little under 5%, but they have a rising dividend policy that pays every quarter, so every quarter they raise their dividend. They just raised their dividend 66 cents a share.

Tremendous! Any others?

Yeah, I like SeaDrill (SDRL). SeaDrill is a Bermuda-based company that focuses on offshore drilling equipment and servicing.

The newest rigs.

The newest rigs.

A well-run company. We’ve heard a lot of that company.

Yeah, I know, and they pay a nice dividend too, about 8%.

Terrific! They’re levered, but you’re not worried about the leverage in SeaDrill?

Well, most companies take on debt. That’s just the standard. You have to expand.

Mark, do you have any more in the natural resource area?

Well, I really like these oil and gas firms that are involved with fracking and developing these new sources in the Williston Basin and up in North Dakota. One of them I really like is Vanguard Natural Resources (VNR). That is really growing rapidly and has had a tremendous profit margin, and they’re really expanding, so I really like that company, as well as others.

Related Reading:

Put Your Foot on the Gas, Middle East

$300 Oil Is Closer Than You Think

Debt Squeeze Ahead for Gulf Companies?

Related Articles on GLOBAL