“Once economic growth recovers, it is likely we will return to the market conditions of 2008. The price of $140 per barrel oil was not an aberration; it was a warning.An oil crisis is coming that could prove devastating to future economic growth. Given the long lead times of 5-to-10 years from oil discovery to production, we need to act now to avert this outcome.” Words: 862

In further edited excerpts from a speech* delivered at the Money and Oil Conference in London in 2009, John Hess (with Joseph Dancy**), Chairman of Hess Corp., went on to say:***

“In the interest of creating good energy policy, let us establish the facts:

Fact No. 1: Hydrocarbons
85% of the world’s energy comes from hydrocarbons: 35% oil, 30% coal and 20% natural gas. While renewable energy will be needed and should be encouraged to meet future energy demand and contribute to reducing our carbon footprint, hydrocarbons will fuel the world’s economy for decades to come – and oil will continue to be at the forefront. Renewable energy does not have the scale, timeframe or economics to materially change this outcome.

Fact No. 2: Oil demand
Once the economy recovers, it is projected to increase by 1 million barrels per day each year. A key driver is world population, estimated to grow from 6.8 billion today to 9 billion by 2050, largely in the developing countries of the world. With a corresponding increase in living standards, hydrocarbon energy, led by oil, will be needed to support economic development.

The other driver of demand growth is transportation, which accounts for 50% of oil consumption. An interesting statistic to keep in mind: The U.S. has 1000 cars for every 1000 people; China has 10 cars per 1000. As China closes that gap, growth in oil demand will be relentless.

Fact. No. 3: Oil supply
We are not running out of oil. We have produced 1 trillion barrels so far and estimates are that we have about 3 trillion barrels remaining to recover – 2 trillion barrels of conventional resources and 1 trillion barrels unconventional, such as tar sands and heavy oil. The issue is not our endowment of oil resources. It is the world’s production capacity. Resource additions from exploration last replaced annual production in 1987. Part of the challenge going forward is that the easiest oil to access has been discovered. Costs are increasing for new barrels as producers explore frontiers such as the deepwater Gulf of Mexico and Brazil, where wells can be drilled in . . .

Oil field declines are estimated at more than 5 percent per year. That means we have to add at least 4 million barrels per day each year just to keep production flat. When you add this number to the 1 million barrels per day required to meet demand growth, we need an extra 5 million barrels per day each year going forward. . .

Given these facts, we need to communicate the following message:

(1) Hydrocarbons are here to stay.

(2) Oil demand growth will be unrelenting, increasing 1 million barrels per day each year.

(3) We are not running out of oil but growth of production capacity over the next several years will fall short of the incremental 5 million barrels per day each year that we will need to meet demand.

(4) We will ultimately be at risk of supply rationing demand through skyrocketing prices that will threaten economic stability and prosperity. If we do not act now, we will have a devastating oil crisis in the next 5-to-10 years.”

Joseph Dancy, Adjunct Professor, SMU School of Law, agrees** with Hess’ premise stating that “The trends in long term supply and long term demand growth in emerging economies raise concerns about the pricing and availability of sufficient crude oil supplies in the future. Merrill Lynch*** have raised their 2010 crude oil price forecast to $85 per barrel from $75 a barrel. They see global growth above 4% versus a decline in economic growth in 2009. Merrill expects demand for crude oil to increase by 2 million barrels per day to roughly 86.9 million barrels per day.

Energy analyst Neil McMahon of Sanford Bernstein Co. forecasts $100 a barrel prices within the next 18 months, then generally moving up from there. From an investment standpoint they recommend finding firms that are leveraged to oil prices, can grow production, and are flexible enough to find new fields.

The profile of firms that can meet the Sanford Bernstein benchmarks mean that they are mostly recommending small producers, with high beta, which should outperform in this environment for investors looking for growth. Of course, investor strategy depends on an investors risk tolerance and objectives. Larger energy firms may perform well but smaller firms should perform much better. Many larger firms are having difficulties increasing production.

Global consumption and production has been roughly 85-87 million barrels per day until the recent recession—when in fell back to roughly the 84 million barrel per day level. Goldman Sachs also raised their forecast recently for reasons noted above. The International Energy Agency have increased global demand estimates to 86.2 million barrels per day in 2010, up from estimated average demand in 2009 of 84.9 million barrels per day.

The long term trends in the energy sector favor the bulls.”

*http://www.napipelines.com/news/2009/articles/11nov/5.html
**http://www.financialsense.com/fsu/editorials/dancy/2009/1201.html
***http://www.reuters.com/article/idUSTRE5AC1QH20091113

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.

The book is by no means an exhaustive, play-by-play breakdown of the collapse. Instead, it introduces readers to a host of little-known Lehmanites, many of whom vilify the company’s top management, among others. Lehman “was headed directly for the biggest subprime iceberg ever seen,” but unlike the captain of the RMS Titanic, McDonald writes, CEO Dick Fuld and his No. 2, Joe Gregory, didn’t try to swerve. Words: 560

In further edited excerpts from the original review* Adrienne Carter (www.BusinessWeek.com) goes on to say:

There were plenty of warnings. In June 2005, McDonald attended a briefing at 7 a.m. during which Michael Gelband, Lehman’s new global head of fixed income, declared the U.S. real estate market “was pumped up like an athlete on steroids.” With amazing prescience, Gelband said that Countrywide (BAC), New Century Financial, and other aggressive lenders had created $1 trillion in economic activity that was built on “false money” and was sure to falter. Other executives made similar warnings about excessive leverage.

Soon after, McDonald and his colleagues started betting heavily against the mortgage market. As part of their research, they flew to California to spy on subprime brokers, the hypertanned “body builders” pushing dubious home loans. First stop on their mission was the headquarters of New Century, with its parking lot crammed with Ferraris and Lotuses. The “meatheads” told the undercover Lehman traders: “Our job is to sell the mortgage policies,” and after that “it’s someone else’s problem.” McDonald’s group made buckets shorting New Century and its brethren.

Fuld and the others in Lehman’s “ivory tower”, however, ignored the red flags. When the company’s risk expert, Madelyn Antoncic, became bearish in 2006, the myopic CEO started excluding her from meetings on big deals and then he fired her. Others, like Gelband, quit, dismayed their insight was ignored.

Fuld didn’t bother to retreat when the U.S. mortgage market started to unravel in 2007. Instead, he disastrously decided to diversify by scooping up hedge funds and commercial real estate and by making private equity deals with the company relying on borrowed money to do so.

In mid-2008 a group of top executives led a coup that dethroned Gregory and seemingly stripped Fuld of power. The new president restocked the management team, even bringing back Gelband. They tried to save Lehman, “fighting for the bank they all loved” but it was too late. On Sept. 15, Lehman failed.

For all his anger and frustration, McDonald, who was let go in mass layoffs at Lehman in early 2008, never loses his respect or admiration for the institution. Its demise, he writes, “will always make me profoundly sad,” and not just because so many employees’ life savings were “obliterated” and careers “wrecked.”

By offering a view from the eye of the storm, McDonald will make many readers feel something that may surprise them: sympathy for investment bankers.

*http://www.businessweek.com/magazine/content/09_31/b4141061588943.htm

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon.