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The First Global Resource War

Sean Brodrick
Money and Markets
July 14, 2006

I grew up in a 400-year-old house in Maine. It was once the only house on the road between Kittery and Portland. That's because the rest of the homes around it had been torched during the French and Indian Wars.

Now, most Americans wouldn't be able to tell you why the French and Indian Wars were fought.

It wasn't because Napoleon invaded India ...

It wasn't because rival ethnic restaurants engaged in a knock-down, drag-out, cheese-vs.-curry battle for cooking mastery in turn-of-the-century New York ...

It wasn't because French settlers were trying to wrestle control of Canada away from Native Americans ...

The French and Indian Wars were fought between the French and the British right here in America, and they were fought over natural resources.

The series of horrific bloodbaths took place from 1689 to 1763. Both sides had native allies. Territory was the measure of success, but control of North America's resources - like tobacco, rice, indigo, lumber, and fur - was the prize.

I keep the French and Indian Wars in mind as I watch the next great natural resource battle unfold...

Parallels with the Oil War
Being Fought Right Now

For quite some time, I've said we're already waging World War III - a war over global resources. And as I see it, the two biggest players are the U.S. and China.

The U.S. seems to be lurching toward a showdown over Iran's nuclear ambitions, but make no mistake - it's a war about oil. If the Persian Gulf had no oil, there wouldn't be nearly as big a fuss about Iran, Iraq, or any of the other players developing weapons of mass destruction.

Case in point: North Korea has developed nuclear weapons and the long-range missiles to carry them. Underlying the U.S. reaction: "It's mostly China's problem. Why should we care? The Korean peninsula doesn't have any oil."

China, meanwhile, is plowing ahead regardless of political barriers. In the Sudan, for example, China has largely overlooked genocide to secure oil resources. And China is economically aligned with Iran.

Back in 2004, Iran gave China the rights to explore and exploit Iran's giant Yadavaran oil and gas field. China plans to bring this oil by pipeline across Central Asia. That's why Iran can be fairly sure that China will veto any U.N. resolution that could later be used by the U.S. as a basis for military action.

The U.S., having alienated its allies, will likely have to go it alone in Iran if it comes to military action. But the Iranians aren't waiting for a U.S. strike. They're using their Shiite surrogates in Iraq to attack U.S. forces now.

And that's exactly how the French and English used their tribal allies in the French and Indian Wars.

When the French and Indian Wars flared up, both sides armed their native allies and sent them to wreak havoc on the other side's civilian population. Here's an on-the-scene account of an attack that happened in my hometown of South Berwick, Maine:

"The Indians entered the town and assailed the house of John Tozier, which sheltered at that time fifteen women and children A girl of 18 years discovered the approach of the savages just in time to close the door in their faces. The fastening being imperfect, she held the door until the savages had cut it through with their hatchets.

"Finding that the inmates had escaped, the maddened savages wreaked their vengeance by a multitude of blows upon the poor girl. The garrison was about 150 rods from the house, and the pursuing savages overtook and captured two young children. Next they burned some buildings, but were driven out by the men of the garrison. One of the children captured was killed at once, the other kept in captivity six months . In the following month the savages again assailed the house of Tozier, killed him and carried his son into captivity. Nine men sent to his aid from the garrison fell into an ambush, and three were shot down."

The settlers lived in fear of constant attack, murder, and kidnapping. Sudden death lurked around every corner. People literally disappeared going into town for supplies.

Imagine living through that. Or, imagine living in Baghdad neighborhoods like the one between the Green Zone and the airport. Just this past Sunday, more than 40 people were yanked from their cars or homes and killed.

Both then and now, the wars are over resources. And both then and now, the protagonists include outsiders who are shipping in troops and weapons.

Today's resource war is coming to a head over control of the Persian Gulf region, while the last French and Indian War revolved around control of the Ohio Valley, a key to the lucrative fur trade. The French had it and the British colonialists wanted it. The French were victorious in the early rounds, but the British finally won a decisive battle on the Plains of Abraham outside Quebec City. By capturing the city, they ended the war.

Shortly after the Treaty of Paris, Britain decided to tax the Thirteen Colonies to pay back the money spent in their defense - without American representatives in the British Parliament.

Relations with the colonies went downhill very quickly. And since the French and Indians were no longer a threat, the next drumbeats along the Ohio were those of revolution - the American Revolution. All those colonial soldiers who were trained by the British to fight the French quickly turned their guns on their former allies.

In the end, the British won the war, but lost their prize.

Could the same thing happen today? Sure. Places like Iraq and Afghanistan have become training grounds for anti-American terrorists ... and the prize is still up for grabs.

Lessons for Today's War
Over Global Resources

Lesson #1: We need more allies. To succeed in today's global war for resources, we need help. We need to cultivate allies who will fight our battles with us ... the sooner, the better.

Lesson #2: Keep your eye on the prize. It's time America had a long, hard talk with itself over why our kids are dying over there. If it's to spread democracy, we're really up the creek. Democracy means majority rule, and the majority of Iranians and Iraqis - and Saudis and Pakistanis, for that matter - hate us because we're not like them. We won't change their minds by dropping bombs on them.

Do we want energy independence? Is that the prize? If so, there could be ways - less expensive and more productive ways - to achieve that goal. After all, we don't want to end up like the British - winning the war and losing the prize.

Lesson #3: Pick your battles. In the French and Indian Wars, trying to defend too much territory against constant onslaught was a recipe for disaster. The attackers quickly learned to mass their troops for precision attacks, then scatter - Indian fighting, as it's called. What won the French and Indian War was a series of decisive battles.

Don't get distracted or overwhelmed by the swirling mess in the Middle East. Keep your eyes on what's important: Identify good energy stocks and buy them on weakness.

Lesson #4: Know how to play defense. At least one window in my family's old house had an "Indian shutter" - a wooden door with a hole to shoot through. Those settlers knew the value of a good defense.

Today, being defensive means looking over your portfolio to make sure you're not holding stocks that will be scalped by higher fuel prices.

My current target on oil is $88 per barrel. Despite the latest pullback, I expect we'll hit that in the next six-to-nine months. While I know what stocks I want to buy for that ride up, I also know what stocks I want to sell.

Lesson #5: A little risk can be a good thing. I know what I'm going to do in Red-Hot Canadian Small-Caps: I've already added some great, undervalued energy plays that are potential powerhouses, and I plan to add more.

In fact, I'll be traveling to Vancouver, British Columbia at the end of July, which means I'll return with more hot picks in Canadian natural resources.

These small caps are just the kind of stocks that should outperform going forward.

I'm not saying they should make up most of your portfolio. But with the kind of extraordinary price moves they could experience, I think you want at least part of your total portfolio in these stocks.

If individual stocks aren't to your liking, also consider ...

A good energy mutual fund. One that I like is the Profund UltraSector Oil & Gas (ENPIX). This no-load fund gets three stars from Morningstar and has a total expense ratio of just 1.43% (lower than the category average of 1.54%). The fund is up 13.9% so far this year.

A good Canadian royalty trust. For example, my old favorite Enerplus Resources Fund (ERF) has nearly 3,000 natural gas wells and 2,000 oil wells. What's more, Enerplus pays a hefty dividend - more than 8%!


Yours for trading profits,

-Sean Brodrick

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MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Jennifer Moran, John Burke, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.

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