Sliding Back Into Oil

Jon Bruner, 02.02.07

After falling from $61 per barrel at the end of December to $52 on Jan. 11, oil bounced back to $58 in late January, as a cold snap rudely awakened Northeasterners who had been enjoying near-record winter warmth.

Prices could go much higher. “Oil is much more likely to finish the decade at $100 or more [per barrel] than at $50,” argues Stephen Leeb, president of Leeb Capital Management in New York City, and an author of several books on energy markets and investments.

Leeb says that the market has not fully recognized the constraints on the oil supply in Venezuela, Iran and Kazakhstan. Other factors favoring higher prices: rapidly rising demand in countries such as China and India and the location of much of the world’s oil reserves in politically volatile and unstable countries.

Video: Oil At $200 A Barrel?
While Leeb is confident about the long-term outlook for energy prices, he will not set a specific short-term price target. Nevertheless, $45-per-barrel oil prices at the end of 2007 would surprise Leeb more than $65-per-barrel oil.

He dismisses recent speculation that Saudi Arabia will keep prices in the $50 range, pointing out that the desert kingdom has often claimed to be able to set the worldwide price of oil, only to have it become clear that oil’s price is well outside of its control.
Just last summer, for instance, when oil was over $75 per barrel, Saudi Arabia’s taps were wide open, suggesting to Leeb that although the Saudis can keep oil prices from falling, they have limited ability to prevent oil prices from rising.
The group most favored by Leeb is oilfield services companies, which he thinks will do especially well, almost regardless of the price of oil. He notes that demand for their services and technology will rise as oil becomes harder to find and extract. In January, Schlumberger, the largest oil services concern, delighted Wall Street with unexpectedly high earnings.
Leeb foresees Schlumberger delivering strong earnings growth through the end of this decade and into the next. “What other major blue chip company is saying it’s going to have high-teen growth for the remainder of the decade and beyond, and is trading at a historically low price-to-earnings ratio?" asks Leeb. Schlumberger sells for 17 times its Thomson IBES consensus for next-12-month earnings.
Interested in integrated oil? Leeb has Hess as his top pick in this group. He thinks that its upstream activities are the best among the big companies, and that means it can boost its earnings even without a spike in oil prices.
That is not true to the same extent with the big three U.S. oil companies, Exxon Mobil, Chevron and ConocoPhillips. Leeb says that their oilfield operations have less room to expand, but they remain good bets for the long-term investor willing to bet on higher oil prices.
Oil prices that approach $80 per barrel will also stimulate demand for alternative energy, says Leeb, particularly wind power, which is reasonably efficient and available. The largest generator of wind power in the U.S. is FPL Energy, a subsidiary of FPL Group. “People think it’s still a utility, but really, it’s become an attractive growth stock,” says Leeb. FPL also operates solar, hydroelectric and nuclear plants in addition to several natural gas and three oil plants.
And if oil prices stay high, prices for other forms of energy will move in tandem. One good way to invest in coal is to buy shares in railroads that carry lots of it, like Burlington Northern Santa Fe, which transports the bulk of the coal that emerges from the Powder River Basin in Wyoming, the source of the cleaner-burning coal that domestic users prefer.
Burlington Northern also has the largest U.S. intermodal operation for transporting truck trailers on railroad cars. Trains are more efficient than trucks in shipping large quantities of goods over long distances, so if diesel prices go up, then shippers could shift to railroads.
In The Energy Business
Company
Price
2006-2007 Estimated EPS Growth
Next 12-Month P/E
Estimated Long-Term Growth*
Market Value ($Mil)
Burlington Northern Santa Fe
$81.47
13%
15
14%
$28,761
Chevron
74.47
-9
10
8
158,877
ConocoPhillips
67.31
-3
7
9
109,296
Exxon Mobil
75.08
-4
12
10
432,187
FPL Group
57.45
9
18
8
22,938
Hess
54.54
-1
10
10
15,180
Schlumberger
64.39
22
18
23
74,805
Prices as of Feb. 1.EPS: Earnings per shareP/E: Price-to-earnings ratio* Estimated Long-Term Growth: Annualized, estimated for the next three to five yearsSources: FT Interactive Data, Reuters Fundamentals and Thomson IBES via FactSet Research Systems.

http://www.forbes.com/2005/01/10/cx_da_0110doomoil.html

Friday, February 08, 2008

2008: The Demise of Neoliberal Globalization
Political philosophers have long debated about whether governments, corporations or other entities are most efficient in delivering services for groups of citizens or world markets. Neoliberal globalization is an old idea for achieving efficiency that gained prominence in the 1980s, according to sociologist Immanuel Wallerstein, and implies that governments should allow corporations to cross borders freely, resist public ownership of corporations and minimize social-welfare payments to citizens. Economic success did not follow political success in communist regimes, Wallerstein suggests, and discontent accompanies growing income inequality. For the US, the neoliberal policies not only boosted the stock market but also an unwieldy credit bubble, the ramifications of which are yet uncertain. Neoliberal policies have fallen out of favor, Wallerstein notes, and the question remains whether redistribution or Keynesian policies can restore stability in a timely way. – YaleGlobal
Immanuel WallersteinFernand Braudel Center, 4 Feb 2008
The ideology of neoliberal globalization has been on a roll since the early 1980s. It was not in fact a new idea in the history of the modern world-system, although it claimed to be one. It was rather the very old idea that the governments of the world should get out of the way of large, efficient enterprises in their efforts to prevail in the world market. The first policy implication was that governments, all governments, should permit these corporations freely to cross every frontier with their goods and their capital. The second policy implication was that the governments, all governments, should renounce any role as owners themselves of these productive enterprises, privatizing whatever they own. And the third policy implication was that governments, all governments, should minimize, if not eliminate, any and all kinds of social welfare transfer payments to their populations. This old idea had always been cyclically in fashion.
In the 1980s, these ideas were proposed as a counterview to the equally old Keynesian and/or socialist views that had been prevailing in most countries around the world: that economies should be mixed (state plus private enterprises); that governments should protect their citizens from the depredations of foreign-owned quasi-monopolist corporations; and that governments should try to equalize life chances by transferring benefits to their less well-off residents (especially education, health, and lifetime guarantees of income levels), which required of course taxation of better-off residents and corporate enterprises.
The program of neoliberal globalization took advantage of the worldwide profit stagnation that began after a long period of unprecedented global expansion in the post-1945 period up to the beginning of the 1970s, which had encouraged the Keynesian and/or socialist views to dominate policy. The profit stagnation created balance-of-payments problems for a very large number of the world's governments, especially in the global South and the so-called socialist bloc of nations. The neoliberal counteroffensive was led by the right-wing governments of the United States and Great Britain (Reagan and Thatcher) plus the two main intergovernmental financial agencies - the International Monetary Fund and the World Bank, and these jointly created and enforced what came to be called the Washington Consensus. The slogan of this global joint policy was coined by Mrs. Thatcher: TINA, or There is No Alternative. The slogan was intended to convey to all governments that they had to fall in line with the policy recommendations, or they would be punished by slow growth and the refusal of international assistance in any difficulties they might face.
The Washington Consensus promised renewed economic growth to everyone and a way out of the global profit stagnation. Politically, the proponents of neoliberal globalization were highly successful. Government after government - in the global South, in the socialist bloc, and in the strong Western countries - privatized industries, opened their frontiers to trade and financial transactions, and cut back on the welfare state. Socialist ideas, even Keynesian ideas, were largely discredited in public opinion and renounced by political elites. The most dramatic visible consequence was the fall of the Communist regimes in east-central Europe and the former Soviet Union plus the adoption of a market-friendly policy by still-nominally socialist China.
The only problem with this great political success was that it was not matched by economic success. The profit stagnation in industrial enterprises worldwide continued. The surge upward of the stock markets everywhere was based not on productive profits but largely on speculative financial manipulations. The distribution of income worldwide and within countries became very skewed - a massive increase in the income of the top 10% and especially of the top 1% of the world's populations, but a decline in real income of much of the rest of the world's populations.
Disillusionment with the glories of an unrestrained "market" began to set in by the mid-1990s. This could be seen in many developments: the return to power of more social-welfare-oriented governments in many countries; the turn back to calling for government protectionist policies, especially by labor movements and organizations of rural workers; the worldwide growth of an alterglobalization movement whose slogan was "another world is possible."
This political reaction grew slowly but steadily. Meanwhile, the proponents of neoliberal globalization not only persisted but increased their pressure with the regime of George W. Bush. Bush's government pushed simultaneously more distorted income distribution (via very large tax cuts for the very well-off) and a foreign policy of unilateral macho militarism (the Iraq invasion). It financed this by a fantastic expansion of borrowing (indebtedness) via the sale of U.S. treasury bonds to the controllers of world energy supplies and low-cost production facilities.
It looked good on paper, if all one read were the figures on the stock markets. But it was a super-credit bubble that was bound to burst, and is now bursting. The Iraq invasion (plus Afghanistan plus Pakistan) are proving a great military and political fiasco. The economic solidity of the United States has been discredited, causing a radical fall in the dollar. And the stock markets of the world are trembling as they face the pricking of the bubble.
So what are the policy conclusions that governments and populations are drawing? There seem to be four in the offing. The first is the end of the role of the U.S. dollar as the reserve currency of the world, which renders impossible the continuance of the policy of super-indebtedness of both the government of the United States and its consumers. The second is the return to a high degree of protectionism, both in the global North and the global South. The third is the return of state acquisition of failing enterprises and the implementation of Keynesian measures. The last is the return of more social-welfare redistributive policies.
The political balance is swinging back. Neoliberal globalization will be written about ten years from now as a cyclical swing in the history of the capitalist world-economy. The real question is not whether this phase is over but whether the swing back will be able, as in the past, to restore a state of relative equilibrium in the world-system. Or has too much damage been done? And are we now in for more violent chaos in the world-economy and therefore in the world-system as a whole.
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Source:
Fernand Braudel Center
YaleGlobal