Carbon based economies could once assume that carbon for energy and for material was unlimited and that it would always be available. Not so today.
In World War II control of African and Middle Eastern oil supplies was an important strategic issue that began to put carbon availability as an issue into clearer view. By the 1970’s an OPEC oil embargo showed that low cost oil was not a total certainty. In the last few years, both supply and price have come into fierce focus. Globalization and global growth in standards of living (essentially carbon dependent) have put geologic supplies of liquid carbon fuels into question. Evolution of terrorism as a new global war with no end in sight has put politically controlled supplies of liquid carbon into flux, along with disruptive price rises.
While there are non-carbon energy alternatives, such as uranium (i.e. Cameco Corp (CCJ)), the world is so entrenched in carbon dependency that it is beyond individual investment time frames to consider substitution on a global scale. While there are enormous coal supplies and technologies to convert coals to liquids and gases (SASOL in South Africa: SSL), these will take many years to implement on a global scale.
There is not necessarily a good or bad level of carbon dependency; however awareness of each country’s carbon dependency could be useful in predicting economic performance under scenarios with varying carbon price levels and available supply.
Some countries may do better in a carbon starved world, or in a scenario where carbon prices or supplies are in crisis. The table below shows some key carbon dependency facts for major countries and regions. Let’s think about what implications this data may suggest.
BRIC (Brazil, Russia, India and China), for example, is anything but a monolith in terms of carbon.
Russia (TRF) and Brazil (EWZ) are major carbon exporters. Brazil exports both non-renewable petroleum and renewable alcohol, whereas Russia produces only non-renewable oil and gas. Russia is in a good carbon situation today, but they are acting recklessly with relationships and they have not shown themselves to be particularly trustworthy in the energy sector — caution is appropriate allocating to Russia.
China (FXI) is about to be, or may already be, the world’s largest carbon consumer and is working very hard to sustain its carbon supplies to drive its economy and maintain civil order, which may depend on growth of its economy. India (INP) is a net carbon consumer, but nowhere near the level of China . India has built an economy based on exporting brains and services, instead of manufactured goods as China has done.
Both India and Brazil consume low percentages of world carbon and have low per capita carbon consumption. That may mean they have lower short term sensitivity to a price or supply crisis, except to the extent that their customers suffer from carbon problems.
Brazil, as a significant non-renewable and renewable carbon exporter and an economy with low carbon consumption per capita, may be in the best situation to withstand a carbon crisis. They are also more insulated from geopolitical risk and war than the other BRIC countries.
The United States (SPY) is the granddaddy of carbon addicted countries and is both economically and militarily sensitive to major carbon supply disruptions. On the positive side, the U.S.A has reduced its overall carbon consumption in 2006 over 2005 — unless the reduction is more a sign of reduced manufacturing instead of efficiency.
Japan (EWJ) also showed a reduction in carbon consumption and that is probably an indication of reduced manufacturing — a negative development for them.
Brazil may be in a better overall position than Canada (EWC) or Australia (EWA) in a carbon crisis due to its low consumption level and its significant alcohol export component. Brazil is not expropriating corporate assets, repudiating contracts, and threatening its neighbors with supply disruption or missiles as Russia is doing. Brazil is not producing dangerous products such as poison pet food or toothpaste or defective tires as China has been doing. Unlike India, Brazil is not next door to a major country (Pakistan) that is in danger of falling under the control of religious radicals that would be dangerously hostile neighbors, and does not have current military boarder conflicts or a history of war with its neighbors. Brazil has been a good price performer and is recently the better price performer in the BRIC complex. For these and other reasons, we overweight our Brazil country allocation.
Disclosure: Author owns CCJ, EWZ and EWA, mentioned in this article
