An economic recovery that isn't one. A civil war that isn't one. Cheap oil that is no more. According to Bob Moriarty, resources remain one of the few absolutes in the world. In this The Energy Report interview, Bob explains why he's sticking to resources when many investors are turning to the mainstream markets, and shares long-term opportunities for shale oil in New Zealand and coal bed methane in Indonesia.
The Energy Report: The last time we chatted, you were adamant that the U.S. is not in recovery. Does the Fed's decision to continue tapering prove you right?
Bob Moriarty: Of course. Tapering spends money without improving things. The Dow and the S&P are at record highs. That's a good thing, but only 12% of Americans own any shares at all, including in a retirement fund. At the very best, tapering is helping only that 12%.
The reality is that you're helping the 1%. The 1% is doing very well, but 99% are getting further behind. Plus, we're increasing the debt. One of these days it will blow sky high. I don't know whether the Fed will blow up or if the 10-year Treasury yield will, but this is a very dangerous time.
TER: When we talked to James Dines, he said bonds would take a big hit. Are you worried about that?
BM: Of course. The 10-year Treasury is very important because home mortgage prices are set using that as a base. A little over a year ago, the 10-year Treasury was 1.45%; a couple of weeks ago, it hit 3%.
The theory behind not having a taper was that the yield curve would go down. When Bernanke announced there would be no taper, the yield curve was 2.86%. Now, it's 2.75%. There has been almost no impact. If the 10-year Treasury goes through 3 or 3.25%, we're going to see Armageddon.
TER: Are China and Europe doing any better?
BM: No. China is slowing down. Europe's in the same situation we are. People need to understand that you cannot spend your way to prosperity. You can only save your way to prosperity.
Spending the way to prosperity didn't work for the U.S. and it won't work for the European Union. The E.U. countries need to get government spending in line with how much money the governments collect. It needs to stop cradle-to-grave subsidies for everything and return to economic reality. After 20 years of crazy growth, China is slowing down, which should be very healthy for its economy.
TER: Angela Merkel was just reelected in Germany, but with a less powerful coalition. Does that restrict her ability to impose austerity on countries like Greece and Portugal?
BM: Austerity is one of those emotionally laden words that is absolutely meaningless. Austerity means living within your means. There is no alternative to austerity. Merkel is in a true dilemma, given that the other twopolitical parties in Germany have said they will not form a coalition with her. She won, but she didn't win.
TER: Given all that, is the $100+ per barrel ($100+/bbl) price for oil based on conflict fear rather than economic demand?
BM: We passed peak oil in 2005; $100/bbl is the new normal. In a depression, it might go as low as $80/bbl. If there was a real conflict, you could see oil at $300/bbl or $500/bbl. Peak oil has everybody confused. People think it means there is no more oil. There's still plenty of oil, like shale oil and tar sands oil, but it costs a lot to extract it. The price needs to stay at least $100/bbl for it to be economic. No more cheap oil.
TER: Could a deal with Syria or Iran result in lower gas prices by lessening that conflict fear?
BM: No. I don't think it's a supply-based fear. I think it's an Armageddon fear. The oil price is high because everybody's afraid we're going to start World War III, which could well happen.
TER: With all of that going on, are you still investing in energy companies? Are there any safe places left in the world?
BM: The one area I've written about in detail lately is the North Island of New Zealand. Two companies down there are doing extraordinarily well.
The first is TAG Oil Ltd. (TAO:TSX.V). On the conventional drilling side, TAG is doing very well. In addition, in the East Coast Basin of the North Island, the company drilled a 4,500-foot hole into shale. To give you an idea, this shale is 300–600 meters (300–600m) thick. By comparison, the Bakken shale is 10–20m thick; in Texas, 30–40m.
That is an absolute home run that the company is being very quiet about. There will be an auction in October and TAG will try to add to its land position then. New Zealand will be a big oil story in five years.