Physical Commodity Identification and Development is Time and Capital Intensive
Commodity investing requires the recognition that commodities take a long time to bring to market and that commodities often move in different cycles than the business market. A good example of this capital- and time-intensive aspect is the construction of the Baku-Tbilisi-Ceyhan (BTC) oil pipeline.
The BTC pipeline links a large Azerbaijan offshore oil field located in the Caspian Sea (the Azeri-Chirag-Guneshi oil field) to the Turkish port city of Ceyhan in the Mediterranean Sea. Talks about building a pipeline to deliver Azerbaijan’s 32 billion barrels of oil to consumer markets started in 1996.
Many Western countries and energy companies supported the project because the pipeline would tap into a vast new source of oil (thereby lowering dependence on the volatile Persian Gulf region) and would pass through Azerbaijan, recently independent Georgia, and democratic Turkey (thereby bypassing the Russians and the Iranians).
The project faced immediate opposition because of strategic geopolitical maneuvering; in other words, the Russians weren’t happy that a pipeline would be built in what they considered their backyard. Environmentalists also quickly expressed their discontent, fearing the pipeline would disturb precious environmental and ecological zones.
Talks among the various interested parties stretched from 1996 until 1999, when a mutually agreeable solution was reached and the project got the green light. Planning for the construction of the pipeline then began, but actual construction didn’t start until late 2002. The pipeline construction finished in 2006, and oil started flowing from the Caspian Sea to the Mediterranean Sea on May 28, 2006.
In all, it took about ten years to create, design, and execute this project, which has cost $4 billion and employed thousands of workers.
The BTC pipeline is a good example of how long it can take to bring new sources of energy and other precious commodities to consumer markets. And that’s not even counting the decades it took to prospect and explore the Caspian Sea to discover the oil in the first place!
The point is that the world is in serious need of oil and other raw materials to fuel global economic growth. However, the projects that are now being developed will need many years before they’re able to deliver products. Make sure you consider these factors before you invest in commodities.
So what does this all mean to you as an investor? When you’re investing in commodities, you have to think long term! If you’re used to investing in tech stocks or if you’re an entrepreneur involved in e-commerce, you need to radically change the way you think about investing when you approach commodities.
If you’re able to recognize the long-term nature of commodities, you’ll be on your way to becoming a successful commodities investor.