Rick Rule – Global Resource Investments Founder

Guest Host Stefan Molyneux interviews founder and owner of Global Resource Investments Rick Rule.

At the Casey Research/Sprott Summit When Money Dies, Rick Rule spoke with Stefan Molyneux about energy and gold investments and his outlook for the near-future market overall.

The sold-out When Money Dies summit was a huge success, with attendees and participants alike receiving much to think about. If you missed it, you can still “be there,” via a full set of audio recordings. These are available now, in CD or MP3 format for your convenience.

TRANSCRIPT

Stefan Molyneux: Hi everybody, it’s Stefan Molyneux from Conversations with Casey. I have Rick Rule, the founder and owner of Global Resource Investments. Thank you so much for taking the time.

Rick Rule: Always a pleasure.

Stefan: So, we have lots of gold bugs here, and it may be fair to call you an energy bug. Would that be a term that would work for you?

Rick: I’d plead guilty to gold and energy.

Stefan: Gold and energy, okay. So, your approach is that the supply and demand of energy is global mathematical formulas, that the rising demand for energy for 3.5 billion people who want the Western lifestyle is driving the market. Is that a fair characterization of your approach?

Rick: Certainly. Two things: Western demand, as a consequence of destruction of Western economies, is leveling off, but emerging market demand is increasing. Yes, absolutely. You see year-on-year growth in world import demand – not total demand, but world import demand growing as sort of 2-2.2% a year compounded.

Stefan: Now if, because they say there’s going to be the big correction in China – which given the amount of malinvestment, and if you’ve ever seen the videos of these ghost cities, it’s really quite chilling what they’ve done to real estate down there – do you think that there might be an issue with the leveling-off in demand in the developing worlds as well as in the Western world?

Rick: Yes, it absolutely could occur. The growth in emerging frontier market demand is less a function of government stimulus than a function of – in the last 30 years or 35 years, there’s been gradual political liberalization in emerging markets. Deng Xiaoping famously said, “To become rich is glorious,” and the people took him at his word; and as people become a little more free, they become a lot more rich to the extent that the trends in political liberalization in frontier markets reverse themselves, then certainly the growth that you see in energy demand reverses itself.

The other side of the energy story is much more predictable, which is the supply side. People look at supply constraints in the context of peak oil, which from my viewpoint is more of an economic phenomenon than a physical phenomenon in the near-term. What isn’t subject to debate is that most of the oil in the world is produced by national oil companies – by government entities. The same people who can educate kids, who deliver the mail, can’t produce oil, and around the world the trend that you see in national oil companies is the companies are spending increasing amounts of their free cash flow on politically expedient domestic social spending and constraining reinvestment in the national oil industries, which is immediately constraining their ability to produce.

I can’t tell you what’s going to happen necessarily on the demand side in the near-term in China, but I can tell you pretty conclusively that in the next five years, Mexico, Venezuela, Peru, Ecuador, Indonesia, and probably Iran will cease to be oil exporters. If oil imports grow at 2.2% compounded and the oil exports decline by 25%, the collision of those two trends is pretty ugly in terms of prices.

Stefan: And I thought that was a really intelligent and original insight that you had, because most people talk about peak oil as if it’s an engineering problem or a scientific problem, but the idea that growing restlessness within some of these semi-dictatorship countries is going to lead people to want to turn the firehose of government spending on the people rather than on oil exports, is a very interesting take on it now. Some of the alternatives that you’ve talked about – liquefied natural gas is one and you’ve had some very interesting things to say about nuclear power as well and our dependence upon historical reserves of uranium, I wonder if you could talk a little bit about that?

Rick: Sure. The uranium business has been very good to me over the years, but one needs to be involved in uranium markets when they’re unpopular. In 1998-2002, if people talked about uranium, they talked about it in the context of Hiroshima and Nagasaki – hardly flattering themes for the industry. When the price went up in 2005-2006, the people who had moral objections to uranium suddenly took an economic interest in it and there was a boom and it became interesting. Now we are back to the point again where the uranium price has declined, and of course as a consequence of the events in Japan, uranium is out of favor again and cheap – and cheap is good in terms of energy. It’s my thesis that the lifestyle that you and I enjoy – which is the lifestyle that the rest of the world aspires to – is particularly energy dense and we’ll need all forms of energy. It just so happens that the most efficient form of energy for the most reliable baseline power is nuclear, and the fact that we can buy the feed stock for nuclear energy at wholesale prices in the context of rising energy prices globally needs to be viewed by speculators as a gift.

Stefan: Right. Now do you think, given what happened in Japan and some of the reactions of the European governments – in particular Germany where they’re stomping around, thumping their chests, saying, “We’re off nuclear, we’re off nuclear,” – do you think that’s more posturing for the electorate and the greens at the moment? Do you think that’s a sustainable policy in Europe to go non-nuclear?

Rick: I don’t think it is. If Germany were to succeed in going non-nuclear – and by the way I don’t think they’ll be able to; what they’ll do is they’ll import nuclear energy from Poland, Russia, and France. In other words, the Germans won’t produce nuclear energy in Germany, they’ll pay too much for it. It’s produced at other places.

Stefan: They’ll offshore the risk to another place.

Rick: Of course, of course.

Stefan: Right, right.

Rick: And you run into what Porter Stansfield describes as “the second law of thermodynamics:” The further you are away from a source of energy, the less efficient the energy is. In other words, if you import that nuclear power from Russia, you’re going to lose 15% of the power that was produced in line loss getting it from Russia to Germany. So the Germans are going to impose a pretty substantial tax on themselves, to no benefit whatsoever. I don’t think that’s going to occur. Even the Japanese have said as a policy statement that the only fuel that’s reliable in terms of its energy density for Japan’s energy security is nuclear.

Stefan: I think it’s a fairly reliable gauge of political intention that if a political leader says, “We’re going to do this before the end of my term,” it may happen, but if they say it’s going to happen at some point 10 or 20 years from now, there’s nobody down by that. There’s not any particular risk that could happen.

Rick: Even if you assume that they’re exhibiting good will – which I don’t think you and I would ever accuse them of – reality is going to get in the way of their promise. The fact is that as nervous as people are about nuclear power, in Germany if they walk into a hall and flip the switch and the lights don’t go on, they’re going to come to an accommodation and that accommodation is going to be partly a nuclear accommodation.

It’s also worth noting that Germany is rich enough to be sort of fake green. I regard green as the new pink, and the Germans are also opposed to the burning of fossil fuels. They’re opposed to coal, relying on things like solar. Now solar has two problems in Germany: One is universal, of course – night; and the other is the fact that Germany is not a very sunny place. And the idea that you’re going to rely for your energy security on something that doesn’t work for part of the day and also doesn’t work most of the other days, well it’s a political statement. It has nothing to do with the way that people are going to live.