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Black Panther, Wakanda, Oil, Saudi Arabia and Commodity Stocks

Updated: Sep 23

In the Black Panther movie, vibranium is a rare material found in the small African nation of Wakanda. Vibranium's unique properties allow it to absorb, store, and release large amounts of kinetic energy making it near indestructible.


Black Panther’s entire suit is made from a vibranium weave that’s impossible to pierce because it robs objects heading his way of their momentum including bullets. This also allows Black Panther to survive large falls when landing on his feet. It's what also makes Captain America's shield such an effective weapon and defense since it’s made from the same material.


According to Marvel Comics, Black Panther also known as King T’Challa used the profits made from selling small pieces of vibranium to turn Wakanda into the most technologically advanced country in the world. It powered almost everything in their country, including their technology and weapons. And as king of the nation, he became richer than even Tony Stark.


A real life example I can think of that would compare vibranium and its impact on the country of Wakanda would be the Kingdom of Saudi Arabia (Saudi Arabia) and how it was transformed by the discovery of oil. THIS IS NOT A POLITICAL POST! I will only be talking about Crude oil (oil) and its impact on Saudi Arabia.


Let’s start with a brief history lesson: Saudi Arabia was formally founded in 1932 when many regions were united into a single state, following a series of battles over the course of three decades. 95% of Saudi Arabia was, and still is, a desert so not much grew there and it was impossible to travel across the country. At the time, its citizens were poor, illiterate and made a living off their livestock or running small shops. This somewhat explains the ultra conservative culture. In 1938, an American geologist discovered oil. This discovery would eventually reveal the largest source of crude oil in the world.


With global demand for oil quickly soaring after World War II, Saudi Arabia began building an extensive network of roads, airfields, pipelines and deep-water ports to accommodate the rapidly increasing flow of oil. Things were going well.


On October 6, 1973 the Arab–Israeli War happened. Egypt and Syria launched an attack against Israel. They were hoping to win back territory lost to Israel during the Arab-Israeli War of 1967. The United States backed Israel and provided billions of dollars in support.  Saudi Arabia, and other Arab Gulf states, supported Egypt and Syria responded by imposing a total embargo on oil shipments to the United States. The price of oil quadrupled quickly and the U.S. economy came to a grinding halt. The war was over in a month. After the war ended, the U.S. realised how powerful Saudi Arabia had become and wanted more friendly relations. Saudi Arabia was making billions of dollars off their oil but needed to build up its country. They wanted to transform from a medieval society into a modern, industrialized economy. They needed to build cities in the desert. This was a golden opportunity for the U.S. engineering and construction industry and they seized it. Saudi Arabia became one of the fastest growing economies in the world. The U.S. also agreed to provide extensive political (google "Trump traditional sword dance") and military support. The Middle East can be a very dangerous place, your neighbours can attack you at any time. Last year Iran fired missiles at a Saudi oil facility. In turn, Saudi Arabia agreed to maintain oil supplies and prices at levels that would be acceptable to the U.S. They have the ability to pump more oil if any countries threaten embargoes keeping the price of oil low.

Today oil is the most traded commodity in the world and it touches almost every sector of the global economy. It is the world’s major source of fuel, energy and serves as a key component in the production of textiles, fertilizers, plastics, cosmetics and even steel. The global economy needs cheap oil. 


Oil prices generally rise during boom periods - as more oil is needed to manufacture and transport products - and fall during economic slowdowns.

The world pays close attention to oil prices and what Saudi Arabia does because they can impact the price of oil if they produce too much or too little. Oil now accounts for 90% of the country's exports and nearly 75% of government revenue. It would be an understatement of the century to say Saudi Arabia’s fortunes are tied to the price of oil. If the price of oil drops the country suffers.

Oil royalty payments enabled the Saudi royal family, the world’s wealthiest, to enjoy an opulent lifestyle: they have furniture and cars made out of gold. They have also improved the lives of their people through major infrastructure and public works projects such as the construction of schools and hospitals. Education and healthcare are free for its citizens. Many Saudi students attend universities in the U.S. and Europe. Also citizens do not pay income taxes which is huge. In Canada, someone earning $100,000 a year can expect to pay over 40% in provincial and federal income taxes.

Saudi Aramco is primarily state owned and is the world's biggest oil producer currently valued at $2 trillion. It has an estimated 270 billion barrels in reserves.

It is by far the world's most profitable company, eclipsing even tech giants such as Apple, Microsoft and Google. The oil company pays a hefty tax rate of 50% to the Saudi Arabian government.

How is Saudi Aramco one of the most profitable companies in the world? The following is priced in US dollars. The cost of conventional oil in Saudi Arabia is well under $10 per barrel including transportation costs (similar to Iran and Iraq but these countries have to deal with US sanctions and ISIS). Worldwide costs range from $35 to $50 a barrel. Currently a barrel of oil is selling for under $40. While most countries like Canada are losing billions at this price, Saudi Arabia through Saudi Aramco is making money.

A lot of that is because of basic geology. It’s easy to get oil out of the Saudi desert. There are no rivers, lakes or large areas of natural vegetation because rainfall is scant to non-existent. There are virtually no trees. The desert also doesn’t support much wildlife. The oil tends to sit in immense, highly concentrated pools close to the surface. You basically need a good shovel to hit oil. Many Saudi oil fields have been in production for decades and there’s still loads of oil left. They keep pumping oil with no added costs. Also they have an established network of pipelines that make it cheaper to transport oil to its seaports and then internationally.


This is why Saudi Arabia is a low cost producer. If the oil market was retail Saudi Arabia would be Wal-mart. What would Canada be then? It would be Sears and let me explain.

Canada's population is about the same size as Saudi Arabia's, both are just under 40 million people. Canada is the fourth largest producer of crude oil in the world but in Canada it is a complicated process to get oil out of the ground. Most of Canadian oil comes from Northern Alberta, BC and Saskatchewan. Which is covered with trees, rivers, lakes, wildlife and numerous cities. That is why oil companies have to comply with strict environmental conditions. This is a good thing. The lack of transportation infrastructure, such as pipelines to port cities, is a major problem since most of our oil is sold to one buyer who sets the price: the US. The cost of natural gas used to produce steam to extract the heavy oil, which is deep in the ground, and other operating costs are much higher than Saudi Arabia. Much higher. In fact, Eastern Canada imports billions of dollars worth of oil every year from Saudi Arabia because its cheaper then to ship it from western Canada.


The problem with the cyclical nature of commodities like oil is that the boom periods tend to attract all kinds of investors, especially gamblers. They become enchanted with the size of the short-term profits. Some of the companies even begin paying dividends and increasing them. This is what happened around 2008 and then 2014 as commodities such as oil had a huge run-up in prices. China was building mega cities and factories at every corner. They were buying up commodities such as oil, coal, zinc, copper, gold and uranium at any price. India was also growing and demand for commodities was high.


Many people started gambling with penny mining and oil stocks. Investment decisions were not based on financials but hope and hype. Then commodity prices started to fall as a global recession hit. Most investors lost their entire investments. Many companies went bankrupt. The price of oil has been dropping since 2014, just ask anyone in Alberta.


This is why commodity stocks are meant to be traded not held for the long term.


If you look at 20 year stock charts of almost all commodity stocks such as Teck Resources (copper, zinc & coal), Exxon Mobil (oil), Barrick Gold (gold), Canfor Corp. (lumber) and Cameco (uranium) you will notice the share prices of these companies haven’t moved much since 2000. They did rise and fall dramatically with the price of commodities during that time. Some traders have made fortunes by buying when commodity prices and stocks were at record lows and selling when the business cycle was at the top but most lost money. You can’t time markets.

The only commodity stock we have is Suncor Energy. Suncor is Canada’s largest integrated energy company, with four large refineries and roughly 1,500 Petro-Canada retail locations. It is worth more than $32 billion today. This is not a penny stock. Owning refineries and pipelines is a major advantage for Suncor, when oil prices fall, for example, refinery margins often rise. We saw a few Suncor refineries in Edmonton and they looked like mini cities. 98% of oil companies do not have their own refineries and gas stations so their profits disappear when the price of oil drops. Also back in March when oil prices were crashing, Saudi Arabia's sovereign wealth fund bought up Suncor shares and are now the company's 14th largest shareholder. That is why we like Suncor.

Suncor was trading at about $8 a share in 2000. Then the price of oil exploded rising from $30 a barrel to $140 a barrel by 2008. Suncor stock benefited and it was trading up to $68 a share in 2008. Today Suncor stock is at $20 a share. The share price has almost tripled since 2000 which is rare for a commodity stock. You have to buy them when nobody wants them and the commodity price is low. Nobody wants to buy oil stocks today. Most of our Suncor stock was bought in the low $20’s. The dividend is currently at 4%. We expect the dividend to rise over the next few years. If we are correct the share price should follow.

There are massive changes happening in Saudi Arabia. Mohammed bin Salman is the Crown Prince of Saudi Arabia and he is 35 years old. It is still a mystery how he was chosen by the King of Saudi Arabia to lead the country a few years ago. The Saudi royal family has 15,000 members with a total net worth of $1.4 trillion. And you thought your family was big. He launched his bold Vision 2030 plan which is supposed to transform Saudi Arabia in the next 10 years.

Mohammed bin Salman is no King T’Challa from Wakanda but as I recall both countries depend on one commodity and are ruled by a monarchy. I didn’t see any elections in the Black Panther movie when King T’Challa’s leadership was challenged, just an old school fight against his evil cousin Erik “Killmonger” Stevens with key people watching. Erik wanted to be king of Wakanda so he could distribute vibranium weapons and technology to operatives around the world. It can all fall apart quickly if the wrong person is in charge of a country with an important commodity the world needs.

This post is dedicated to actor Chadwick Boseman who recently passed away at the age of 43 following a four-year battle with colon cancer. R.I.P Black Panther. Wakanda Forever.



 

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