The problem is the type of crude Libya has to offer vs. Saudi Crude. Saudi Crude is heavy crude, Libyan crude is light or sweet. The difference is the sulfur content. To get the equivalent of 1 barrel of Libyan Crude, you need 3 barrels of Saudi Crude because there's so much sulfur that needs to be removed. Italy who has had a long standing relationship with Libya which includes developing Libyan oil fields, needs the lower sulfur content crude. Not only would the Saudi option be more expensive, but the refineries in Italy were not constructed to remove that amount of sulfur. In the short run Italy and other European countries may be able to make due, but anything much longer then a short stint puts their energy needs in a dire crisis, which puts their economy in a worse situation. Remember that the countries in Europe that are at the center of contagion fears are the PIIGS, (Portugal, Ireland, Italy, Greece and Spain) and because of each countries internal political problems, the ability to create a bailout mechanism that can support all of the PIIGS if they were to all fail is simply not there. Angela Merkel may very well lose power as voters in Germany have resoundingly voted and their vote says, "No more bailouts-focus on Germany" which makes a larger bailout facility increasingly difficult and Merkel was one of the more hawkish European leaders when it came to expanding a bailout facility. If Spain goes down (and the indications of that happening are starting just as they did in Greece and Ireland as well as Portugal), the current fund will be tapped. It's unlikely the current bailout mechanism could even handle a Spanish default. Add Italy to that and you have a complete disaster with little political will to avert it.
So over the course of the least few weeks, Italy's position with respect to contagion has become very real. The situation with Libyan crude may very well through a teetering Italy over the edge.
On the nuclear front, the days of the myth of safe nuclear power are coming to an end as reports are emerging showing how dangerous events have been covered up to keep the industry afloat. Don't forget that nuclear power provider Exelon was one of Obama's biggest fund raisers. A fact few people realized before the election, so no matter what the talk may be, the government is and has been protecting the nuclear industry. That dynamic is shifting as governments rush to asses their own nuclear safety, this includes several countries taking reactors off line until they are deemed safe.
In Japan, the only country to be attacked with nuclear weapons, there is an extreme sensitivity to the issue, thus the conflicting stories about the situation there and the cover ups that have been taking place. Japan being the world's 3rd largest economy has more problems though then just the nuclear issue. We all know we are living through a historic period of time in which the Middle East is in the middle of a contagious upheaval. what we have seen thus far pales in comparison to what we will see in the coming months and years ahead. Decapitation of a regime is not that hard as we have seen in Egypt and Tunisia, what is difficult, as we have seen in Iraq and Afghanistan is rebuilding a credible, stable government. We all hope for the best; that the democracy will emerge and the middle east will once again regain some form of stability.
How the Middle East Came to Be...
When the Ottoman empire collapsed in 1918, the expansionary British empire drew new borders to protect their interests. The tension between Iraq and Kuwait that ended in Saddam hanging from a noose all started when the Iraqis refused to recognize borders that were drawn creating Kuwait, from the Iraqi point of view, Kuwait was still very much Iraq's just as Taiwan is seen to be China's by the Chinese. The story is much more complicated, but shifting powers, alliances and playing countries against each other created new borders.
After World War 1, Britain governed Palestine under a League of Nations (the precursor to the United Nations) mandate. While Jews and Christians battled each other, their common enemy was Britain and in 1947 Britain asked the UN to take over the leadership of Palestine. After setting up a commission, the UN decided to split Palestine in half, one part for the Jews, one for the Arabs. In 1948, the Jews set up Israel. The surrounding Arab countries didn't accept this outcome which led to an immediate attack and multiple future wars.
Another example was the modern Iraqi borders created by the League of Nations in 1920. These are two examples, but there were numerous examples. The problem can best be summed up by the Iraqi borders.
The borders were drawn unilaterally and this created a situation that created a country with 3 unique religious/ cultural factions, Shiites, Sunnis and Kurds. This led to the dictator states that have defined the middle east for 4 decades. The truth of the situation is only brutal dictators were able to keep these countries together. Now these dictators are being removed one by one. The domino effect has hit nearly every Middle Eastern and Northern African country in some form. So the fall of the regimes may seem like a chance for democracy, but democracy has not always led to results that are favorable to the West, take the 1979 Iranian revolution which created a country like none the western world have ever seen. Be careful what you wish for.
Just looking at Tunisia and Egypt, the events there seem to have calmed and are moving toward a solution, this couldn't be further from the truth. In Egypt the regime is military regime, it has not been overthrown and was set in late 2010 to start making plans to displace Mubarak as he had chosen his son to succeed him, by-passing the military which has chosen every leader since Nasser. The popular revolt was a brilliant cover for the Egyptian military and ultimately, it was the military that forced Mubarak from power; they will not give up power in free an open elections. Protests have already begun again in Egypt as a small contingent realizes this fact. In Tunisia, sectarian violence has erupted. Bahrain is another example of what started as a reform movement has escalated into sectarian violence. The Saudis have entered the country with tanks and soldiers to help protect the minority Sunni regime, but the Iranians could very well intervene on behalf of the Sunni majority just as the Saudis did.
Iraq is probably the best model for what will happen once the "democratic process starts", except the US can not be in each of these countries to protect new regimes, so theoretically, the situation in each of these countries could be far worse then Iraq.
The Japanese Problem...
The Japanese economy is the 3rd largest in the world and holds the 3rd largest position of US Treasuries. The main problem Japan has faced and this is what forced Japan into attacking Pearl Harbor as the US began buying up oil, is that they have few natural resources of their own. 100% of oil in Japan is imported, most of it from the Middle East. This is why Japan is so super sensitive to events and unrest in the MENA. Geographically, the Middle East has several choke points in which the flow of oil can easily be stopped or severely impaired. Now Japan faces a nuclear crisis on top of their oil concerns. As the 3rd largest economy, this WILL have ripple effects across the global financial system.
Reassessing Power Needs.
Reassessing power needs is nowhere more important then in Japan. Clean Coal technology is an obvious choice as they can import coal from stable governments. However, the Japanese are advanced technologically and may very well come up with a solution that is yet to be seen. "Necessity is the mother of all invention" and in Japan's case, this process may be sped up exponentially. However this plays out, I believe the macro effect will be alternative energy will take the stage as the leader of the next bull market.
I've already started compiling a list of stocks in solar and clean coal technology and will be adding others. I want to see how each react in the month ahead and find the leaders or the technologies receiving the most interest. Feel free to send me other stocks in alternative energy you think are worth watching.
As for early this week, I've identified several that look ready to move up, whether they be short term moves or turn into something else will be hard to say. Each of these stocks and industries were on a very different path before the protests in MENA and have changed even more dramatically since Japan, so the long term analysis of these is difficult as fundamentals have rapidly shifted nearly overnight. This is why I'll be compiling this watchlist and looking for the standouts.
On a short term basis, as early as Monday, here are several stocks that I see as benefiting from the new dynamics. Several stocks on the list I've compiled aren't in the alternative energy sector, but stand to make gains should alternative energy take on new urgency due to their unique business models and the connection they have to the energy industry. Steel is one for example.
Here are the charts of the positions I like long going into this week, I can't provide in depth analysis on each, but each shows something that suggests to me a move up this week.
ASTI
ATO
BLDP
CNP
CNX
CSUN
DTE
ENER
EQT
JASO
NST
PNY
SOLR
And a couple of shorts that seem to be ready to turn down....
AMGN
CAT
CSX
