Board of Directors April 4, Dr. Loren C. Scott Loren C. Scott & Associates, Inc.

Transcription

1 Board of Directors April 4, 2008 Dr. Loren C. Scott Loren C. Scott & Associates, Inc.

2 The National Economy Recession on Horizon? (50-60% Chance)

3 RGDP Forecasts(3/08) Quarter Moody s Consensus 07-III 4.9% 4.9% 07-IV 0.6% 0.6% 08-I -0.3% 0. 0% 08-II -0.3% 0.2% 08-III 3.5% 2.4% 08-IV 4.0% 2.1% 09-I 3.4% 2.2% 09-II 3.7% 2.9% 09-III 3.8% 2.9% 09-IV 3.7% 3.1%

4 Why Concern About Recession? Retail sales Down slightly in December (-0.4%) BUT back up in January! (+0.3%) Non-Farm Employment

5 1200 Monthly Change in US Employment Dec: +82,000 Jan: -22,000 Feb: -63,

6 Why Concern About Recession? Retail sales Down slightly in December (-0.4%) BUT back up in January! Non-Farm Employment Manufacturing activity

7 64 Institute For Supply Management Purchasing Manager's Index

8 Why Concern About Recession? Retail sales Down slightly in December (-0.4%) BUT back up in January! Non-Farm Employment Manufacturing activity Non-Manufacturing activity

9 68 Institute For Supply Management Non-Manufacturing Business Activity Index

10 IF there is a recession, why should it be short and shallow? This is arguably the most anticipated recession in history.

11 % Change in RGDP 20 Change in RGDP By Quarter

12 Historical Boom/Busts (Months) Period #Cycles Boom Bust Last 25 yrs /82-7/90 92-month expansion 3/91-3/ month expansion (record)

13 In the old days length/depth of recessions were inventory driven

14 Billions of 2000 Dollars 70 Change in Private Inventories

15 Energy Markets Recovery in Gulf of Mexico

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17 Rita Evacuation Instructions for Houstonians Hispanics: I-10 West to San Antonio Cajuns: I-10 East to Lafayette Rednecks: I-59 North to East Texas Yankees: I-45 South to Galveston Longhorns: US290 to Austin Texas Aggies: 610 Loop

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19 Pre-K & R Energy Impacts: Three Regions Offshore production platforms 819 manned, unmanned 1.5 mmbd oil (29% U.S. production) 10 bcfd nat. gas (19% U.S. production +LOOP To onshore via underwater pipelines To receiving units onshore Onshore pipelines Refineries Gas processing plants

20 Post-Katrina & Rita Region 1: Offshore Platforms Ivan Katrina Rita Destroyed Damaged Post-1988: Platforms must be built to sustain 70 waves Naval Research Lab measured 91 wave during Ivan. Another measured at 131!

21 hell MARS Tension Leg Platform after Center for ell MARS Energy Tension Studies Leg Platform before Shell Mars Tension Leg Platform Source: Shell.com

22 Mars Back May 23, ,000 barrels per day of 324,445 shut-in (from 21.4% to 12.2%) 150 mcf of 1,295 mcf shut-in (from 10.6% to 9.3%) = Big Mother!

23 Center for Energy Studies Chevron Typhoon TLP

24 Pipelines Was biggest question mark To check required scarcest resources in oil patch---divers, boats, power Offshore: Latest data Ivan: 102 Katrina & Rita: 655 (20K miles) May 2007: 2-3% still down Spool ship technology helped

25 Onshore Receiving Units 17 refineries in path of both storms All back in production All gas processing plants back

26 Henry Hub, September 25, 2005 Source: LIOGA and LSU Center for Energy Studies

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28 Katrina Spill Data Estimated: Recovered: Evaporated/ dispersed Problematic: 190,000 bbls 65,000 bbls 70,000 bbls 55,000 bbls

29 Katrina Spill Data Almost all from onshore tank farms! 69,000 bbls from Bass Enterprise facility at Cox Bay 15,000 Murphy Oil Refinery (1,000 homes?) Two views on spill data: Greenpeace: 7,000,000 gallons! Grave Impact! Loren Scott view

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31 Recoverable Natural Gas Moratorium Areas 38.2 TCF 346 TCF 50.6 TCF Alaska: TCF 12.3 TCF

32 Oil Price Forecasts The Onagistic Approach

33 Price per Barrel 100 Price of Louisiana Sweet Crude 80 POA-Low = $70 POA-High = $92 POA-Avg = $83-$ Price of Louisiana Sweet

34 Is $100+ Barrel Oil Sustainable? Initial Thought: No Way

35 March 1973 = Real Exchange Value of the Dollar 2002-I to 2007-IV: -22.2% (-$14 a barrel) X X

36 Normal Economics says prices headed down

37 Demand Side: Slowing China s recent track record: 2002: +4.9% 2003: +8.1% 2004: +14.7% 2005: +7.8% 2006: +8.2% 2007: +6.2% 2008: +5%p Worldwide demand: 2004=3.4%; 2005=1.6%; 2006=1.3%; 2007=0.9% US: 2007=0.1%; 2008 = -0.4%p (1 st 6 weeks: -1.1%)

38 mbtu in 2000 Real Dollars 18 Energy Consumption Per GDP

39 Demand Side Effects: Light truck market share has been falling since August 2004 Light truck share of the light vehicle market percent '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06

40 U.S. Sales of Large Cars 2006: -2.6% 2007: -10.5% January 2008: -26.5% February 2008: GM: -19% trucks and SUVs Chevy full-size trucks: -29% Buick Lucerne full-size sedan: -26%

41 The Supply Side CERA: major projects coming on line every year to 2010 (+3-4 mmbd annually) Not speculative based on analysis of fields unfolding GOM, Nigeria, Caspian Sea, Angola, Canadian Oil Sands Total production up to 108 mmbd by 2015 (from 87 mmbd in 2005)

42 Supply Side Venezuela s Orinoco Oil Belt Alberta Canada s Athabasca tar sands Estimated 3.5 trillion bbls World consumes about 30 Billion bbls a year. =100+ years of supply CERA: Up 250% by from 1.8 mmbd to 4.9 mmbd

43 Publicly Announced Lower Tertiary Trend Discoveries in the Gulf of Mexico Prospect Block Operator Discovery Date Trident AC 903 Chevron 2001 Great White AC 857 Shell 2002 Cascade WR 206 BHP 2002 Chinook WR 469 BHP 2003 St. Malo WR 678 Chevron 2003 Tobago AC 859 Chevron 2004 Silvertip AC 815 Chevron 2004 Tiger AC 818 Chevron 2004 Jack WR 759 Chevron 2004 Stones WR 508 BP 2005 Gotcha AC 856 Total 2006 Kaskida KC 292 BP 2006 During the last ten years, the average deepwater field has added over 67 MMBOE of proved and unproved reserves. About 60 billion barrels of oil found in deepwater fields to date. Some 8- to 10 billion barrels have already been produced. Yet-to-find potential could be 114 billion barrels of oil, and 68 billion barrels of oil equivalent (BOE) of gas. [Oil and Gas Investor, May 2006] Source: Minerals Management Service, US Department of the Interior LSU Center for Energy Studies

44 The Jack Field 7,000 of water, 5 miles deep 270 miles SW of New Orleans Chevron, Devon, Statoil partnership Lower-tertiary formation Estimated reserves: 3-15 billion (potentially bigger than Prudhoe Bay) Upper end would increase U.S. reserves 50%! Getting oil to market? Start 2009

45 But things aren t normal

46 Wildcard I: Geo-politics (The real problem) Iran s nuclear ambitions (3.9 mmbd) US Passed financial restrictions + rhetoric Firms aiding Iran s extraction sector financially exposed Turks may invade Northern Iraq (+ war premium) Nigerian unrest (2.1 mmbd; 1/3 rd out now) Mr. Putin in Russia (9.4 mmbd) Oil investors can own up to 49% Chavez in Venezuela (2.2 mmbd) Dismantled apertura Raised royalty rates Back taxes during apertura of $4 billion

47 Dallas Fed Study Link oil reserves to Heritage Foundation Freedom Index 31.1% of oil reserves in repressed societies (Nigeria, Venezuela, Libya, Iran, & Iraq) 13.2% in 16 mostly un-free countries Two-thirds of oil in countries either mostly unfree or repressed and with excessive government control. Conclusion: We re not running out of oil. It is just under countries where market incentives not allowed to work.

48 Wild Card II Weather: Heating Days in Winter? Hurricanes?

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50 NOAA: Hurricane Forecasts Above normal hurricane season 16 hurricanes Suppose 8 enter Gulf 3-4 days shutdown per storm days of lost production About 1/12 th of Gulf output, even with no damage!

51 Want clear evidence of global warming?

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53 Natural Gas Market VERY different from oil market

54 Dollars per 1,000 Cubic Feet 11 US Wellhead Price Natural Gas /05: $10.35 mcf 12/07: $ 6.53 mcf (-35.7%)

55 Factors behind price drop Recovery in Gulf Mild hurricane season in 2006 Record hot winter 2006

56 $ Per MMBTU 9 Price of Natural Gas - Louisiana

57 Natural Gas: The Demand Side

58 Demand Side: Short & Long Run Factors U.S. Consumption: : -7.2% (1.7bcf) 2007: +6.2%!! (+9.9% in electrical power)

59 Millions of Cubic Feet Natural Gas Consumption by Sector Industrial Power Commercial Residential

60 Demand Side: Short & Long Run Factors U.S. Consumption: : -7.2% (1.7bcf) 2007: +6.2%!! (+9.9% in electrical power) Short Run: Demand destruction Watch industrial component 2000: 8,142 bcf 2007: 6,632 bcf (-18.5%) Long Run: Fuel switching Watch your power plants CERA: Will offset need for 5 bcfd now used for power generation

61 Supply Side Considerations Canadian imports: modest decline 2003: 9.2% 2004: +4.9% 2005: +1.3% 2006: -2.9% (-106 bcf) 2007: +4.8% Drop in 2006? Canada uses about 5% of its natural gas in tar sands oil production Raising royalty rates to 50% in Alberta dampening exploration activity

62 Supply Side Considerations U.S. gas production: hurricane recovery + new 2003: 0.9% 2004: 2.7% 2005: -3.0%* (hurricane effect) 2006: 2.4% 2007: 3.3% Barnett Shale (Texas) Fayetteville Shale (Arkansas) Now Independence Hub

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64 Independence Hub Plans: 1 bcf per day, Increase GOM production 10%! Enough to heat 4.8 mm homes! New Technology: Subsea wells Several platforms with derricks and well controls v. Floating pipeline hub 125 miles of umbilicals ---thick flexible tubes that send electricity, orders & chemicals to the wells Hardware out of way of hurricanes & other destructive natural events on water. Mooring lines 2 ½ miles long Repair with unmanned submarines Cost $446 mm---1/4 th of regular tlp

65 Supply Side Considerations LNG Imports: 2005: -3.2% (diversion to Europe & Japan) 2006: -8.2% (-52 bcf) 2007: +24.3% (187 bcf)

66 2007 Natural Gas Volumes Total consumption U.S. Production 23.0 tcf 19.1 tcf Pipeline Imports (CA & MX) 3.8 tcf LNG 0.8 tcf When 5 new LNG import terminals come on line: Peak throughput: 3.72 tcf 60% of peak throughput: 2.23 tcf

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68 Watch the Changing Labor Market!

69 Reminder: Labor Market Changes Ahead Pre-2001: Very tight : Very loose Now & Future: Very, very tight

70 Percent of Firms JOB CREATION PLANS % PLAN INCREASE - % PLAN DECREASE QUARTERLY FEB

71 Percent of Firms UNFILLED JOB OPENINGS % WITH AT LEAST ONE UNFILLED OPENING QUARTERLY FEB '00 '03 '06

72 Percent of Firms PLANNED & ACTUAL LABOR COMPENSATION CHANGES ( NET PERCENT OF FIRMS) Actually Increased Plan to Increase FIRST MONTH IN EACH QUARTER:+FEB '02 '04 '07

73 Trends In Fertility Rates Prior to 1947: : 3.8 Post 1961: 1.8

74 Age Composition: Group %chg % % % % % % %

75 TAX RATES RISING UNEMPLOYMENT RATES FALLING???

76 New Births - U.S

77 Thousands Estimated Number Becoming 19 Years Old The Boomers Labor Shortages Boomer's Children

78 Thousands 4500 Number of Persons Becoming 60 Years of Age X

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82 Georgia U.S. (Thousands) Approximate # 19 Year Olds: GA & US GA19 BIRTH19

83 Approximate Number Becoming 60: Georgia X

84 U.S. (Thousands) Louisiana Approximate # Persons Becoming 19 in LA & U.S X BIRTH19 LA19

85 Louisiana U.S. (Thousands) Louisianians & U.S. Becoming 60 Years Old X LA60 BIRTH60

86 4400 # Becoming 19: US & Pennsylvania

87 PA: # Becoming 60 Years Old

88 Predictable Results Wages rates to rise Older workers stay in labor market longer Substitution of machines for labor Out-sourcing In-migration

89 The Clash of Ideas

90 Karl Marx From each according to his abilities, to each according to his needs The theory of Communism may be summed up in one sentence: Abolish all private property.

91 Adam Smith Competition alone can regulate prices with equity; it alone restricts them to a moderation which varies little; it alone attracts with certainty provisions where they are wanted or labour where it is required.

92 The Competition begins July 27, 1953 North Korea (2003) GDP per capita $1,300 % below poverty - NA % Ag 30.2% South Korea (2003) GDP per capita- $17,800 % below poverty 4% %Agriculture 3.6%

93 But these are just technical economic measures Is there another indicator of economic health?

94 Another measure of an Economy

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97 Board of Directors April 4, 2008 Dr. Loren C. Scott Loren C. Scott & Associates, Inc.