Share |

When energy and politics collide

Bruce Love is editor-in-chief (wealth) of Campden Publishing.

It's long been the case that if you put three different economists together you will get nine different opinions. With no clear idea on how high the price of oil will go and how badly the current sky high (and rising) prices will impact on a distinctly shaky global economy, those nine have probably multiplied to at least 27, with a few more added to the mix with big caveats "just in case".

This being the case, it has seldom been as hard to make investment decisions. With so much uncertainty even safe(ish) bets, such as gold and cash, come with frightening looking health warnings attached.

Canada's energy trusts, for example, potentially make a very interesting place for families to seek shelter from the ongoing economic storm. They are structured in a very similar manner to REITS in that they are not taxed at the corporate level as long as most of their earnings are distributed as dividends. They therefore tend to invest in oil and gas assets that are past their peak production, but still offer the potential to produce millions of barrels for years to come.

The yields these trusts (examples include Pengrowth, Penn West and Harvest Energy) attain are highly impressive, varying between 10% and 15%. But if it looks too good to be true, it is. Non-Canadian investors are liable for a withholding tax. But much worse (here's the frightening health warning) Canada's Conservative Government, realising the tax concession costs it a small fortune, has proposed taxing them like any other corporation from 2011.

The new tax does not impact on the trusts' overseas investments (so watch for those named cropping up in areas like the North Sea before too long) but it is worth noting that it might not happen anyway. That's because the left wing liberals have tabled counter proposals that would restore most of the trusts' advantages.

There is a certain irony here – Canada's oil producing West is a bastion of conservatism, like Surrey in the UK, Texas in the US and Bavaria in Germany. If it swings left you know there is a political earthquake afoot.

And yet, here are the tax and spend Liberals offering a big favour. Irony aside, the Liberals are currently doing well in the polls and elections are due before 2011. Investors take note.

Click here >>