listening post

End of
“Fossil Fuel Age”
will drive
oil-prices up
German banker lends his thoughts on peak-oil,
investment strategies and how the GCC region
is performing.
By Rory Coe n

I
t’s wonderfully ironic that Burkhard P. Var-
nholt didn’t perceive his project in Uganda
growing to the heights it’s achieving today.
The highly accredited investment strategist
noted that had he realised the potential of
his idea, and the lives he could change, he
probably would have lost faith in his ability
to see it through.
Thanks largely to his own investment, vi-
sion and the capacity to ‘cross each bridge
as he came to it’, a hundred orphans or
abandoned children now have refuge in a
Ugandan village, which is also serviced by
a farm, a public health clinic and a primary
school.
Varnholt cut his teeth with Morgan Stan-
ley in London, before he was recognized as
‘Global Fund Leader of the Year’ by Institu-
tional Investor magazine - while he was at
Credit Suisse Private Banking - for his role
in creating transparency in the investment
funds market and promoting an open-ar-
chitecture approach. Between 2001 and
2005, he built up the largest global hedge
fund port-folio, with just under US $90 bil-
lion (QR330 billion) in Hedge Fund Assets
under management.
What’s moving oil-prices?
He is currently the Chief Investment Offi-
cer and Head of Asset Management at Bank
Sarasin & Co. Ltd., which published “Crude
Oil: What’s Moving Oil-Prices in 2011” in
January. The thesis of the report is that
oil-prices will continue to rise and will hit
$120-a-barrel at the end of first quarter of
2012, and will reach $200-a-barrel by 2015.
Although there has been quite a lot of
geo-political tension sweeping across the
MENA region since the published report,
Varnholt doesn’t feel he should revise the
report. In the week of the Libyan uprising
(Feb 21 - 27), the price of a barrel of oil rose
from $88 to $99-a-barrel, an increase of
12.5%, but he doesn’t pay much attention to
short-term factors.
“[Short-term factors] have some merit
obviously; the world economy is going
strong, infrastructure growth continues

34 Qatar Today April 2011

QT-April.indd 34 3/28/11 5:58:13 PM


“the Stone Age didn’t end because we ran
out of stone; it ended because we evolved
to better methods and technologies. In the
same way, the age of fossil fuels will come to
an end because we will discover and develop
– these will drive up the price of oil – and
while geopolitical conflicts and tension
don’t help when one is trying to predict the
future of oil-prices, I’m more of a believer
in long-term potentials and factors, and in
long-term investing,” he said.
Peak Oil
Varnholt is a big believer in the Peak Oil
thesis – the theory whereby we are extract-
ing the maximum amount of oil, so as we
decline from this peak, the price of oil will
inevitably rise – and he backs up this con-
fidence.
“Look at what the Saudis have invested in
their operational infrastructure in the last
decade, and they’re not producing more oil,
they’re actually producing less than they
did in 2000. This tells you one of two things;
there’s less oil available, or it’s harder to get
to it – or possibly a combination of both –
but the latter is the most likely.”
All of this means of course that oil explo-
ration and production is costlier than ever.
There hasn’t been a single oil-field discov-
ered in the last thirty years, so the chances
of discovering one at this stage are almost
negligible.
Overstating Reserves
Varnholt also speaks of how OPEC is struc-
tured so all the members are cutting the
best deal possible for themselves by over-
stating their reserve.
“You get higher production allocations
based on high estimates, so the OPEC mem-
bers have an interest in overstating their
reserve for the ultimate gain. The corollary
of this is that there’s a lot less oil out there
than what people believe.”
To complement his views on the supply
side, he spoke about how the global demand
for oil had become insatiable.
“We have seen the global population
grow exponentially (from 2.5 to 7 billion)
during the last two generations, and this
QT-April.indd 35
better technologies.”
Burkhard Varnholt,
Chief Investment Officer, Bank
Sarasin & Co Ltd
has coincided with an unprecedented pe-
riod of economic prosperity. We have wit-
nessed the rise of the middle-class – which
had never before existed in regions such as
Asia, Middle East, South America and Af-
rica - and this has had an impact on lifestyle
choices. Suddenly people wanted to live in
urban areas, which requires more energy
for mobility and construction.”
It’s essentially a demand/supply question
which is highly inelastic and where there’s
little price sensitivity. Varnholt uses a Stone
Age analogy to explain his thesis for mitigat-
ing or resolving the oil issue. He argues that
the Stone Age didn’t end because we ran out
of stone; it ended because we evolved to bet-
ter methods and technologies. In the same
way, the age of fossil fuels will come to an
listening post
end because we will discover and develop
better technologies. But this won’t happen
overnight, inevitably, and before these new
technologies and innovations quench our
thirst for oil, we’ll be paying some very high
prices for our energy.
Emerging Economies
The emergence of the aforementioned mid-
dle class, coupled with the economic boom
– in countries such as India, China and Bra-
zil – means that their robust growth will
continue, prompting a lot of “hot money” to
flow in to these markets.
Varnholt understands why the Brazil-
ian Government imposed a tax on capital
imports. Hot money comes and goes, but
it’s a mirage of wealth in effect. They’re not
real investments, which stay in the country
and create jobs and generate wealth; it is
fast money which can really destabilize an
economy because it’s so liquid.
He feels that emerging market curren-
cies – publically or discretely – are pegging
themselves to the US dollar for more lucra-
tive trading, but they are doing this at a time
when they are facing rampant inflation, and
their economies are firing on all cylinders.
“The last thing these economies need is
a super accommodative monetary policy;
that’s like pouring oil into fire. Ben Ber-
nanke (US Federal Reserve Chairman)
has been pouring oil into these economies
– which are performing exceedingly well
without it – for the past twelve months, but
it’s not his fault; the fault lies with the other
currencies.”
QE2 (The US Federal Exchange shifted
focus to increase its reserves, and provided
commercial banks with more capital to
lend) will fuel an increase in money supply
to these emerging economies, which will
stimulate inflation and Varnholt believes
that risk assets should continue to be the
ultimate beneficiaries in this environment.
The US is still the biggest consumer of
april 2011 Qatar Today 35
3/28/11 5:58:15 PM
 listening post
“you get higher production AllocAtions bAsed on
high estimAtes, so the opec members hAve An inter-
est in overstAting their reserve for the ultimAte
gAin. the corollAry of this is thAt there’s A lot less
energy. However, these emerging econo-
mies provide a big swing factor.
“If you ask yourself – as an investor –
where do you want to place your bet, then
we are very keen on companies that are
really exposing themselves to emerging
market growth. For instance, if you look
at buying Nestle shares, you have a choice;
what aBout Qatar?
qatar is coming off a very impres-
sive 2010 - largely due to their lng
exports - and varnholt sees this
trend replicating oil-prices. the
price of liquified natural gas (lng)
is going to go high for the same
reason as oil - high price of extrac-
tion and scarcity - even though the
factors involved aren’t always the
same; i.e. they’re infrastructure de-
pendent and industry specific.
“the biggest challenge facing
qatar is managing these natural
resources, and making sure they’re
properly invested for future gen-
erations. great progress has been
made here to reduce red tape and
bureaucracy, but more needs to
be done. attracting new industry,
where intellectual property is the
most valuable asset rather than
the ones played out by capital
goods. these are the investments
that qatar can do to protect its
future, and i feel it is already doing
that. these next few years are very
crucial.”
the Swiss or the Indian ones. The Indian
shares trade at 50 times earnings, while
the Swiss ones trade at 13 times earnings,
so you have to make a conscious call and
that is where active stock selection can be
worth its money.”
Credit the GCC Economies
Varnholt was quick to credit the GCC region
with how they have handled their fortune,
pointing out that they have been extremely
36 QAtAr todAy April 2011
QT-April.indd 36
oil out there thAn WhAt people believe.”
prudent and smart for reducing their de-
pendency on their primary asset; they have
done a great deal to mitigate and diversify
their revenue into other industries.
“It’s enormously impressive what this oil
wealth has created in the GCC Region. Other
countries like Nigeria, Angola and Venezu-
ela would be proud if they had generated a
fraction of the wealth the Gulf Region has
achieved, but instead, they made a mess of
their allocation of oil. Dubai decided to di-
versify – and in doing so burdened them-
selves with a lot of risk – but by and large, I
think the Gulf States have done enormously
well.”
There has been some recent discourse
about the introduction of a common cur-
rency into the Gulf Region. Some feel it
would stabilise the region and prepare it
for the future, others feel they should learn
from the mistakes in the European Union.
Varnhholt didn’t sit on the fence when he
was asked for his opinion on a single com-
mon currency among the GCC members.
“I hope they can avoid that. It’s politically
motivated, as it creates stronger political
ties. What it really does is force the poorer
countries to adhere to the same monetary
and fiscal policies and that’s not neces-
sarily a good thing. Admittedly, the Gulf
economies are very homogeneous – so it
may work – but economic development can
change over time.
“In Europe, for example, they’re very dif-
ferent in what drives them economically,
so when you run into financial difficulty,
like Portugal and Greece – and you have
surrendered your currency – you obviously
cannot devalue your new currency, so the
only thing you can do is lower salaries, and
this won’t resonate well with your citizens,
as we have seen across the Middle East and
North Africa.” Varnholt holds the view that
economic risk should be bourne where it can
be best managed, and that is in the financial
markets and not in the labour markets, but
he’s fully behind the ideology of knocking
down trade barriers and opening currencies.
“It’s a pity the WTO (World Trade Organ-
isation) Rounds came to an inconclusive
end all those years ago, because the world
could have really become economically in-
tegrated. Trade barriers are always a nui-
sance and the more you can reduce them,
the better for everyone.”
kids of africa
burkhard varnholt’s proJect in
uganda is registered in switzerland
and uganda as kids of africa. the
swiss board is populated by many
walks of life, such as physicians,
architects and bankers. the opera-
tion is largely funded by friends of
these associates, anonymous do-
nors – volunteers essentially – only
for which the proJect wouldn’t be
sustainable.
the village was created on a
derelict site on the shores of lake
victoria, which had neither power
nor running water. with the help
of kids of africa, the village is not
only home to many orphaned and
abandoned children, but home to
families who are eager to care for
these children. it’s a village that
promotes loyalty, friendship and
family-values and fosters a real
belief in a bright future for these
children.
As Varnholt nervously eased himself
from his chair, one couldn’t help but notice
his arm in a cast. He explained he injured it
on the ski-slopes in Italy recently. In other
words, he was talking like a man who under-
stood the enzymes of risk.
Conversely, he stressed it would be irre-
sponsible to expand his project in Uganda
– as much as he wanted – as it was privately-
funded and run by volunteers. Any further
expansion might compromise the whole
project and the children it was supporting.
It was a risk he was not willing to take
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