It is thugocracy that poses the most severe threats to the oil markets and hence the overall economy.  Thugocracy is Brock’s moniker for the anti-free market policies of certain governments.  He singles out Russia’s Putin, Venezuela’s Chavez, and Boliva’s Morales for moves that have threatened to or have actually nationalized oil production and distribution facilities.  The result is that private companies are getting kicked out of these countries. 

A staggering $1 trillion per year must be spent over the next 30 years to develop new oil sources, but “nobody will spend this under the threat of nationalism,” says Brock.  Instead, companies like Exxon spend their capital on share repurchases.  Thugocracy is not limited to oil producers; China exhibits the same behavior in its subsidies for domestic oil prices, which have artificially inflated consumption.

Brock says these countries are “utterly incompetent” of maintaining their current levels of oil production, much less developing new sources.  If world supply cannot go to 100 million barrels per day (from the current level of approximately 86 million), Brock predicts either rationing or wars will result.  “Every year we don’t invest is another year that the markets stagnate,” he says.

“Alternative energy is not a remotely possible solution in the short term,” says Brock.  He cites a Stanford study which showed that alternative energy could at best replace one-third of what might be lost through the failure to adequately develop existing oil reserves.

Economic and Market Forecast

Brock offers the following assessment of the impact of oil prices on world economies:

“We believe that the oil crisis is the single most disturbing development in the world right now.  This is because of the disastrous cumulative effect on future prices of forever delaying investment in big new oil fields during a period of exploding global demand, and during a period when output from old fields will be declining.  Ironically, such fields exist and we know where they are.  All in all, we have reached a point where quantity-rationing of oil may well become commonplace within five years- with all the political and economic problems that rationing entails.”

He further adds that “at the right price there is always more oil – indeed more of everything [his emphasis] – and a proper resource allocation process sees that more is produced.”  The right price is typically lower, not higher, despite growing demand, as has been the case with flat screen TVs.

Since late last year, Brock has forecast a “serious growth recession” for the US economy, lasting through all of 2009.  He sticks by this forecast, although his fears have been heightened by the prospects of a more serious credit crunch. 

In December of last year, Brock offered the following investment advice: “the months ahead represent a time when investors should seek to maintain the value of their capital, regardless of concerns about ‘missing a rally’.”  His advice today:  “Downside risks have appreciably increased, and an investor’s goal for at least the next twelve months should be to preserve capital.”

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