[DantesPeak]

$this->bbcode_second_pass_quote('', 'O')il Prices: a Pause, Then Up
MONDAY, OCTOBER 16, 2006
Interview With Charles Maxwell
Senior oil analyst, Weeden & Co.
By SANDRA WARD

YOU WANT AN INDEPENDENT AND INFORMED APPRAISAL of the outlook for energy? Then Charley Maxwell's your man. For almost 50 years, Maxwell in one way or another has been involved in the oil and gas industry: from when he started working for Mobil in 1957 to when he moved to Wall Street in 1968 and was routinely lauded as the No. 1 oil analyst throughout the 'Seventies and 'Eighties. For more than 20 years, he's belonged to an elite group of industry executives and OPEC members that meets at Oxford University twice a year to assess trends. We dialed him up last week at Weeden & Co., the institutional trading company in Greenwich, Conn., that he's called home since 1999. Here are Maxwell's thoughts on the current energy scene.

Barron's: Did somebody say energy crisis?

Maxwell: We often say there are not a lot of advantages to getting old except that we have seen it all before. After a big move upward, there is always some counterreaction. We saw it during the 1973-74 crisis, in the '79 to '86 crisis and then in the two wars with Iraq. These crises were manipulations of the oil market by human beings. War, economic problems, but particularly military considerations, were creating, as they say, facts on the ground that worked into shortages that were real, but they were shortages created by the actions of man not nature. It is terribly important to differentiate between past periods and now.

How is that?

There are four huge impediments to expanding production in a world in which we need to do this. Hubbert's Peak, the theory that says oil production will peak on a global basis, is a natural impediment. It is not yet the predominant factor but as these crises continue it is the one growing exponentially and by, say, 2015 or 2020 I expect it will dominate the outlook.

What then is the biggest problem now?

About three-quarters of the world's production of oil today is lifted by national oil companies. Companies like Saudi Aramco, Petrobras, the Iran national oil company, the Iraq national oil company, the national companies that operate in Algeria and Libya, produce conservatively 75% of the world supply. Most of them were nationalized in the '70s and early '80s and they have real structural problems today. They bring in a lot of money but most of it goes to support the national Treasuries and the various political constituencies that are in favor in the various countries, whether it's the army or a host of other bureaucratic ministries. In the end, in the political battle for budgetary support the national oil companies tend to be a constituency with little or no political influence. All in all, the national oil companies have been shortchanged and held on a poverty diet for a long time.

My point is the people in the Middle East are sophisticated enough to understand this could be Bedouin-to-Bedouin in Saudi Arabia in five generations.

What do you mean by that?

Well two generations ago, many of these people were Bedouins. The majority of people working in the petroleum industry in Saudi Arabia today -- the supervisors and the drillers and so on -- had grandparents who were herding sheep or camels. They fear their great grandchildren could end up doing the same.

Because?

Because the oil will be all gone. The image we have in this country of tumbleweeds running down the streets of abandoned Western mining towns is now beginning to stalk the public consciousness in the Middle East. About three months ago, they realized the second largest oil field in the world, Burgan in Kuwait, had peaked. They didn't expect it and they couldn't believe it. The No. 1 field in the world, the Ghawar, is pretty close to peaking if it hasn't already. These are people who have long believed that Allah was bestowing these oil gifts on them in perpetuity and there would be infinite production. The concept of Hubbert's Peak has only penetrated the Middle East in the last five years in the same way that it has only penetrated Europe in the last five years.

[Jack]

Interesting. I have a subscription, so I read the entire article.

Mr. Maxwell's credentials are impressive; yet, his price projections seem rather optimistic. Perhaps I'm just too much of a doomer.

I guess this suggests we've got 3 years before things start getting uncomfortable (in 2009), and 9 years (in 2015) before we start falling over the cliff. I'd also infer that Mr. Maxwell is more an advocate of a soft landing than most here.

As I said - interesting. Thanks.

[DantesPeak]

$this->bbcode_second_pass_quote('Jack', 'I')nteresting. I have a subscription, so I read the entire article.

Mr. Maxwell's credentials are impressive; yet, his price projections seem rather optimistic. Perhaps I'm just too much of a doomer.

I guess this suggests we've got 3 years before things start getting uncomfortable (in 2009), and 9 years (in 2015) before we start falling over the cliff. I'd also infer that Mr. Maxwell is more an advocate of a soft landing than most here.

As I said - interesting. Thanks.

[Jack]

$this->bbcode_second_pass_quote('DantesPeak', '
')Perhaps this is as far as one can go before being critisized for being too far 'out there' in the business media.

[The_Toecutter]

Trying to project price more than 2 or 3 years from now will have very large margins of error. In 2003, few would have predicted we'd be in the $65 average region for the year.

The chart presented for the next three years seems very optimistic. We have had a long term increasing trend in oil prices, some ups and downs, and there is little reason to believe that this will change(barring the chance of some crisis or disruption that causes the price to suddenly skyrocket, instead of steadily rise). If I had to make a guess for the future, $70-75 for 2007, $85-90 for 2008, $95-100 for 2009.

[AgentR]

$this->bbcode_second_pass_quote('Jack', 'S')o, even though he may be too optimistic - the implications of what he's saying should be (deeply) troubling to the markets. Which begs the question - why are 30 year bonds still selling?

[DantesPeak]

On US bonds -

The US is running a trade deficit of around $850 billion a year, and maybe a current account deficit (trade deificit + accumulated interest on prior debts) of about $950 billlion a year. This money goes to foreigners - especially China and Japan and to a lesser extent Mideast OPEC countries. Where do they put that money to prevent the dollar from falling in value? US bonds and bills.

Granted they favor the shorter maturities (I think 5 years or less in Japan and 10 years or less in China), but the by buying the short term bonds it forces down 30 year bond yields for US investors, like insurance and annuity companies that are have to buy these bonds.

[Jack]

AgentR, Dantespeak - good points; the yield curve is worthy of consideration. Historically, a normal yield curve is low for short term bonds with higher rates for long term issues. A flat yield curve, such as we have now, is a bit unusual. An inverted curve (high short term rates, low long term rates) usually suggests an upcoming recession.

As AgentR points out, the collective view of the long term could be that we'll have a hard recession. But I wonder - could it be that the peak oil cat is out of the bag amongst the players? Could it be that industry is, collectively, choosing not to build as many big, long term projects? Or that they are borrowing less long term money so they don't encumber their income in an earnings-scarce future?

Let's face it, if Barron's gets peak oil and publishes it this clearly, peak is no longer a fringe concept. Could it be that the economic elites that own and control corporate America are fully aware of the situation (including timing???) and are acting on this knowledge?

[The_Toecutter]

$this->bbcode_second_pass_quote('', 'C')ould it be that the economic elites that own and control corporate America are fully aware of the situation (including timing???) and are acting on this knowledge?

[AgentR]

I wonder if this is an Ethereal Message being sent out to the human instinctive blackberry service....

From: US, China, Japan central banks.
To: Currency Speculators

RE: you touch, you die

Please note. It has come to our attention that some of you losers wish to meddle in our pie. So let it be known we have arrived at a $/Y/Yen valuation that we all like very much, and we will bury you in an avalanche of suffering if you even think about poking it.

That is all.

Thank you for your attention.

Such a decision could easily be in the interests of those at the top of each of those economies. China's top absolutely loves stability, Japan just wants to do its thing and not be shot at, and we're as profitably nuts as we've always been. We all need oil and seem to be divying up the pie efficiently enough.

[DantesPeak]

$this->bbcode_second_pass_quote('AgentR', 'I') wonder if this is an Ethereal Message being sent out to the human instinctive blackberry service....

From: US, China, Japan central banks.
To: Currency Speculators

RE: you touch, you die

Please note. It has come to our attention that some of you losers wish to meddle in our pie. So let it be known we have arrived at a $/Y/Yen valuation that we all like very much, and we will bury you in an avalanche of suffering if you even think about poking it.

That is all.

Thank you for your attention.

Such a decision could easily be in the interests of those at the top of each of those economies. China's top absolutely loves stability, Japan just wants to do its thing and not be shot at, and we're as profitably nuts as we've always been. We all need oil and seem to be divying up the pie efficiently enough.

[AgentR]

If something is going to collapse, the Chinese MUST float the Yuan; at which point their export market collapses. I just don't see how they can permit that to happen fast; especially from their side. They have a long, long row to hoe to get their internal demand up high enough to sustain a domestic consumer goods market.

I don't really have a dog in the fight, but it is an interesting puzzle, and my bet remains on a very, very gentle unwind.

China will crush anyone that tries to make it otherwise. If there was a differing policy in play they would have already allowed some real appreciation in the Yuan to occur.

[rogerhb]

$this->bbcode_second_pass_quote('AgentR', 'I')f something is going to collapse, the Chinese MUST float the Yuan.

[AgentR]

$this->bbcode_second_pass_quote('rogerhb', '')$this->bbcode_second_pass_quote('AgentR', 'I')f something is going to collapse, the Chinese MUST float the Yuan.

[DantesPeak]

It's true that market participants have some influence on the yield curve, but the imbalance of the current account deficit ($950 billion) over the budget deficit ($250 billion) has never been so extreme. This may distort the yield curve and send out false signals about the state of the economy.

Also keep in mind that the Treasury determines the amount of bonds issued by maturity and withheld issuing 30 year bonds a few years ago.