Energy, Energy Service, Natural Gas & Oil Sectors
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» lcha - Oil Producers Gain Global Clout
Oil ProducersGain Global Clout
From Big Windfall
As Prices Soar, Exporters
Are Saving, Investing More,
Easing Economic Damage
By GREGORY L. WHITE in Moscow and ANDREW HIGGINS in Abu Dhabi
Staff Reporters of THE WALL STREET JOURNAL
October 4, 2005
Soaring oil prices have generated a record windfall for the world's petroleum producers. But they are managing it quite differently than in the past -- helping limit, so far, the damage to the global economy.
Oil exporters like Saudi Arabia are saving far more and spending far less than they did in earlier booms. In most cases, they are controlling state spending and saving or prudently investing much of the money, largely in assets held in the U.S. and Europe.
All that money pouring into financial markets, added to the huge flows coming from Asia's thrifty economies, is enabling Americans to keep spending while borrowing overseas -- thus fueling the U.S. economy.
That has helped keep interest rates low and asset prices high, even as rising oil prices take a toll on airlines, automobile owners and other oil consumers in the U.S. and Europe.
The investment from major oil-exporting countries also makes them increasingly important creditors for the U.S. -- and players in financial markets. According to the International Monetary Fund, major oil producers are now a bigger source of funds for the world than China, Japan and the rest of Asia, which has been the dominant saver.
"The impact is presumably larger than the Asians' on global interest rates," says David Robinson, deputy head of research at the IMF.
"They weren't a factor before, just because the flows were tiny," said Stephen Jen, chief currency economist at investment bank Morgan Stanley in London, referring to oil producers' impact on currency and bond markets in Europe and the U.S. "Now they're important."
The picture is very different from that during the oil shocks of the 1970s. Then, oil-producing nations spent much of their gains rather than invest them -- often on lavish luxuries and costly projects of dubious economic value, some of which were never finished.
"It's a real turnaround from the 1970s," when the IMF was warning oil producers about spending too much, said Mohsin Kahn, head of the IMF's Middle East and Central Asia Department.
In the Middle East and Central Asia, governments are spending an average of about 36% of their additional oil revenue -- compared with nearly 90% in the 1970s and more than 60% in the 1980s.
And today oil producers are earning more than they ever have. In 2005, according to IMF data, oil-exporting nations are expected to earn $383 billion from overseas sales of oil and gas -- nearly twice the inflation-adjusted value of the previous peak, $197 billion in 1980.
Estimates of the total windfall generated for all oil producers world-wide since prices began soaring in 2003 vary. Leo Drollas, chief economist at the Centre for Global Energy Studies in London, estimates consumers will pay $1.2 trillion more in 2004 and 2005 together for oil products than they did in 2003.
Just since the start of this year, oil prices are up nearly 51%. Yesterday, crude oil for November delivery on the New York Mercantile Exchange settled down 77 cents at $65.47 a barrel.
To be sure, the oil price boosts -- and huge transfer of wealth to oil producers -- are causing some pain. Britain's government, blaming in part high oil prices, recently said its economy is likely to grow only around 2% this year, down from its earlier forecast of 3% to 3.5%. Alcoa Inc., the world's largest aluminum producer, cited high energy prices as a culprit last month in issuing a profit warning.
Two big U.S. airlines, Northwest Airlines and Delta Air Lines, recently filed for Chapter 11 bankruptcy protection in part because of surging fuel costs. The U.S. auto industry is increasingly worried that high gasoline prices will choke demand for its profit-rich sport-utility vehicles.
Moreover, the oil situation world-wide remains precarious, as global demand, fed by oil-hungry and fast-growing economies like those of China and India, exceeds supply. Continued high oil prices still could fuel higher inflation, battering consumer and investor confidence and weakening economies around the world.
That's what happened in the 1970s, when central banks raised interest rates in an effort to fight inflation, driving major economies into deep recessions.
Nonetheless, oil's rise has so far had less impact than initially was expected. The IMF last month said the rise in oil prices over the past two years had "limited impact" and probably would shave one to 1.5 percentage points off the world economic growth rate -- about half what IMF economists said they would have forecast based on past oil shocks.
There are several reasons for the less-than-expected impact. For one thing, major Western economies in the 1970s were much more dependent on oil than they are now, amplifying the effect of the era's price increases.
But the oil boom's winners also are contributing by using their cash much differently. Big Western oil companies are recycling much of their huge profits to shareholders through dividends and stock buybacks. Governments in producing countries, reaping the majority of income through direct ownership of oil companies or heavy taxes, are limiting their largesse to focus spending on infrastructure and development projects.
Overall spending has been so restrained that the IMF has found itself in the unusual position of encouraging many Middle Eastern oil producers to spend more on projects that can help diversify their economies and improve health and education. The agency is more regularly known for chiding governments for spending too much. Economists say careful spending ultimately would help the global economy more than the current savings has, as increasing imports by oil producers mean more exports for consumer countries, helping reduce trade imbalances.
Some of this kind of investment is in the pipeline. Saudi Arabia, the world's No. 1 exporter, has been eager to diversify its economy away from oil, for instance, so it is investing $30 billion to become a leading producer of petrochemicals by 2010. At the same time, with demand for oil so high, the Saudis have earmarked $50 billion to expand production of crude oil and natural gas.
And the temptation to spend is building. Saudi Arabia in August approved a 15% pay increase for all state workers. Russia, the No. 2 oil producer, has saved most of its oil earnings in a special stabilization fund held by the central bank, but in recent months authorities have approved billions of dollars in new social and other spending.
Even residents in No. 3 exporter Norway, long known for frugal management, last month voted out a conservative government in favor of one promising to spend more on welfare and other programs.
Throughout the Middle East, where economies outside the oil sector remain underdeveloped, many nations are undertaking big road, utility and factory projects. Many of these developments are being handled by foreign contractors and built with foreign equipment. That has fueled a boom in exports of machinery and services to the region, primarily from the U.S. and Europe, also helping offset the global impact of the oil-price surge, economists say.
Still, oil producers so far are using most of their income to pay off debt and boost savings. Most of that is being done through central banks and government investment agencies that pump the bulk of the money into Western stocks, bonds and other assets.
In Saudi Arabia, "the money is being saved by the central bank, as it should be," said Brad Bourland, chief economist for the Samba Financial Group, a big Saudi bank. The Saudi central bank's foreign assets nearly doubled to $109.5 billion in May from the end of 2003, when they totaled $59.5 billion. Saudi holdings of foreign securities jumped to $63.5 billion from $25.9 billion over the same period.
Some economists think the surging growth of oil producers' investments in the U.S. has become an important factor keeping interest rates low, similar to the effect from Chinese investment of its huge foreign-exchange reserves. In April, then-Federal Reserve governor Ben Bernanke pointed to the surge in oil prices as one source of what he called a "global savings glut" that has been a key force in keeping rates low in the U.S.
Oil-producing countries in the Middle East owned $121 billion in U.S. stocks and bonds as of June 30, 2004, the latest period for which U.S. Treasury data are available. That was up from $84.5 billion a year earlier. Norway, which in June had $180 billion in a petroleum fund for future generations, held $59 billion in U.S. securities on June 30, 2004, up $26 billion from a year earlier. Russia held $48 billion, up $11 billion.
Konstantin Korishchenko, deputy governor of the central bank of Russia, which keeps about 60% of its $150 billion in reserves in U.S.-dollar assets, says the windfalls generated by high oil prices are "a transmission mechanism," helping perpetuate low global interest rates.
Across the Middle East, the oil influx has made local stock markets -- which barely existed during previous oil booms -- among the best performers in the world. The United Arab Emirates' primary composite index is up 108% so far this year, while Saudi Arabia's Tadawul All Share index has risen by 81%.
Having more than doubled since 2003, Saudi Arabia's stock market is now one of the largest emerging markets in the world by value -- larger than China's or India's. Petrochemical giant Saudi Basic Industries Corp. alone is capitalized at $135 billion. Saudi initial public offerings of shares have triggered massive traffic jams as local investors scrambled to get in before prices surged.
-- posted by lcha
» lcha - O'Reilly
Last night O'Reilly once again took the major oil companies to task claiming their record profits amounted to an unfair gouging of the American public. Luckliy the oil side was well represented by a guy that was as strong willed as O'Reilly.BUT, here's my BIG beef with O'Reilly's oil attack. Not ONCE did he mention OPEC. We have an ILLEGAL cartel that controls 40% + of the world oil market and that fact is NEVER even mentioned. At least the record profits the American oil companies are making are going to investors, employees and government taxes.
In the end O'Reilly suggest a partial boycott of oil by everybody conserving 20%. Geez, even the oil companies are recommending conserving oil these days. Glad O'Reilly joined their bandwagon.
-- posted by lcha
» axolotl - Re: High Prices Change How We Spend
There are still several refineries shut down in the Gulf of Mexico area due to the hurricanes. The winter heating season is near and the additional "tax" of high utility bills will burden the consumer. 2006 seems to offer some possible improvements - lower oil prices, change to lowering interest rates, troops begining to return from Iraq, hurricane recovery efforts.-- posted by axolotl
» Normxxx - Re: Re: High Prices Change How We Spend
In response to Re: High Prices Change How We Spend posted by axolotl:Yes; and I am sure my ship will finally come in
But I certainly agree on lower oil prices, change to lowering interest rates, due to the recession...
-- posted by Normxxx
» Normxxx - Running Out of Gas
Ahead of the Curve: Running Out of Gas
By Donald Luskin | 8 October 2005
THERE AREN'T MANY iron-clad rules in investing, but there's one: Bet against anything that the vast majority of investors agree upon. Right now, based on conversations with my clients, who are some of the best and brightest investors on Wall Street, I'm seeing a strong bullish consensus about energy and energy stocks. While I hate to disagree with my clients, this is one of those times when I just have to.
It always pays to bet against the majority, but not because investors are stupid. Quite the opposite. It's because investors are so smart and have such strong incentives to get the facts, that anything they all believe will quickly become reflected in prices. So even when they turn out to be perfectly correct about whatever they believe, you won't make any money in stocks by agreeing with them.
On the other hand, suppose you take the opposite side of the bet. When virtually everybody knows the story about why some company is in trouble, don't sell it — buy it. If they turn out to be right you'll break even because the bad news was already out when you bought the stock at fire-sale prices. But if they turn out to be wrong, which happens a lot in markets, then you'll make a ton of money, because the stock will soar as bad expectations are replaced with not-so-bad realities.
Over the past few weeks I've noticed more and more of my clients speaking with pride — not bragging, but close — about the fortunes they've made this year in energy stocks. I've heard dozens of stories about some obscure oil exploration company that they bought a year ago for 10, and now it's 100. And no wonder. Even the stodgy energy sector of the S&P 500, consisting of 29 mostly large-cap companies, has gained more than 41% year-to-date through Sept. 30, while the overall market was about flat.
There's no end to the stories explaining why this is so. Insatiable demand from China. Greedy SUV drivers. Overzealous environmental regulations. Lack of spare pumping capacity in OPEC oil fields. Lack of refining capacity in the U.S. The world is running out of oil. And of course, back-to-back hurricanes. But none of that matters. When everybody knows all the reasons backward and forward, and when investors get a little too much swagger about their successes, that's a pretty clear sign the game is nearly over.
Just take a look at the price of crude oil. Today it's lower than it was before anyone had even heard of Hurricane Katrina. And of all the oil freed up from the nation's Strategic Petroleum Reserve, only a small fraction has actually been bought by anybody. And oil company stocks have come off their peaks, in tandem. Prices were assuming the worst. If the worst had happened, they couldn't have gone much higher. But the worst didn't happen, and now prices are heading lower. I think they have much further to fall.
There's another even more reliable sign that the energy game is nearly over, and I'm seeing that one, too: fear.
Last week I visited an extraordinarily intelligent and capable hedge-fund manager who's earned a fortune as a trader. He was visibly shaken, his face ashen as he stared into the bank of quote-screens that flank his desk. He was watching the price of natural gas futures surge to all-time highs, explaining in great technical detail the terrible destruction of gas infrastructure in the Gulf as the result of Hurricane Rita.
It reminded me in several respects of that memorable time five years ago, in 2000, when the tech bubble had begun to burst after Nasdaq topped 5000 in March. The dot-com stocks were the first to be wiped out. Die-hard tech investors transferred their loyalties to the so-called "infrastructure plays" — the companies that made and operated the equipment that makes the Internet run. And it was all explained with lots of technical details about the particulars of different kinds of routers, switches and fiber cables.
But in the end, the infrastructure plays of 2000 were no safe harbor from the tech crash. Companies like JDS Uniphase (JDSU) got hit just as hard as companies like Yahoo (YHOO). This time around, natural gas is going to get hit just as hard as oil.
And it doesn't matter how much technical detail you think you know about natural gas, either. In fact, the more you know the worse it is. If you truly know it all, then everyone else knows it too (after all, you're probably no expert on natural gas). So that means whatever you know is already in prices, so you can't profit from it.
Here are some things I know about natural gas. I know from National Gas Intelligence, the news service for industry insiders, that virtually all the local distribution companies already have all their supplies for the winter laid in. So there's no actual shortage. And I know that the Henry Hub, the transmission nexus that's used for delivery of Nymex natural gas futures contracts, was shut down on Sept. 22 and has only begun to come back on line this week. That kind of technical disturbance to a marketplace can cause temporary price distortions as standard delivery arrangements must be renegotiated under stress.
So right now natural gas is more expensive than crude oil per unit of energy. That rarely happens. Crude is almost always more expensive, except for a very small number of very short-lived periods. There's no fundamental reason to think that it will last.
So the message is this: Take profits in your energy plays, and most of all the natural gas plays.
But there's more. If the majority of investors believe that energy prices (and energy company stock prices) are going to just keep on growing forever, then they must also believe that the U.S. economy is in big trouble. In fact, I hear that argument over and over from my clients. The typical investment idea that flows from that is to sell retail stocks, on the theory that higher gasoline and heating bills will keep consumers from spending as much at the store.
Well, maybe it's true. Maybe even energy prices somewhat lower than they are today are going to put a dent in consumers' wallets, and that won't make a pretty sales season coming up here. All the money during the holidays will be made by Exxon Mobil (XOM), not Wal-Mart Stores (WMT). But remember, that concept is so terribly obvious. I just don't see how you can expect to make any money betting on it. Everybody already believes it, so it's already embedded in stock prices.
So you might as well bet against it. If you're wrong, you'll break even. If you're right, you'll make a killing. So bet against the majority. Bet against what everyone knows. Sell Exxon Mobil, and use the proceeds to buy Wal-Mart.
It might just turn out to be a merrier Christmas than anyone can imagine.
______________
The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.
-- posted by Normxxx
» Bill_Duffy - And you think $3.00 per gallon is high?
.Rich Ceppos: The Price of Mobility
From Autoweek
RICH CEPPOS
Published Date: 10/10/05
One thirty-five. Remember that number, because it foretells what we will be driving in the future.
I’m in Germany for the Frankfurt Motor Show as I write this. Over the course of three long days, a slew of important new models are being unwrapped with much fanfare inside the giant Frankfurt Messe event complex. Nice stuff. But the real shocker this time isn’t anything on a turntable, but what I’m seeing at German gas stations.
One thirty-five. That would be one Euro and 35 (European) cents, the current price of a liter of German unleaded according to this morning’s Financial Times. Translated to greenbacks and gallons, the price of German gas is—hold on to your chair—$8.02 per gallon. German Super Plus, the top grade, can go for as much as €1.60—or $9.50 per gallon. Diesel fuel—about 50 percent of European new cars are oil-burners these days—is less, but still an eye-popping $6.52. And you thought we had it rough at the pumps.
Gas prices have surged in Germany recently, much as they have stateside. But more important, they have historically been about triple what we pay in the States. We Americans are just beginning to think about the fuel cost of going to the cleaners or to grandma’s house. For Europeans, it’s been a way of life.
One thirty-five. So how have the Frankfurters and other members of the European Community coped? By embracing ever-more-efficient automobiles with ever-less compromise in room, comfort and performance.
Hence the new-generation diesels, with their bulging torque curves, mannerly ways, low emissions and virtual absence of soot and odor. We’ve gotten a glimpse of those powerplants in America under the hoods of the Mercedes E320 and VW Touareg, and they are impressive.
But it’s more than just engine choice. Europeans have flocked to two classes of automobiles that are currently not available in the States in any numbers but may be soon. They’re called tall cars and MPVs (multi-purpose vehicles), and they pack big-car room into a small-car footprint.
The Renault Megane Scenic was the first tall car of the modern era to find a significant following in Europe, beginning a decade ago. By seating the passengers—five of them—as bolt upright as they would be in dining room chairs, it delivered midsize sedan interior spaciousness but fit into the same size parking space as a Golf. Now every European manufacturer offers these skyscraper sedans.
Back on the Frankfurt show floor I was smitten by VW’s newest tall car, the Golf Plus. Think Golf for people with big hair. Chunky, purposeful looks. Low-profile tires. Luscious leather interior. And turbodiesel motivation that sips at fuel.
This is premium transportation, but with maximum efficiency. Nothing spared, but nothing wasted. It would do the job handily for 95 percent of American families 95 percent of the time.
Need more room? There’s the MPV class: tall sedans stretched just enough to add a third row of seats. These are true minivans; they’re small, tiny next to a Dodge Caravan, but they still seat six or seven. There are many for sale in Europe, and now you can buy one of the best in America: the superb new Mazda 5 (AW, Aug. 22). It’s already selling like crazy.
One thirty-five. No one knows how high gas will go. But it may be that gas-pump shock will get Americans to do what the U.S. government hasn’t had the stomach to: reduce our consumption of fossil fuels. The good news is that, car-wise, we know how.
In fact, the very cars we’ll need are humming past my hotel window right now. The future is out there. What are we waiting for?
-- posted by Bill_Duffy
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