September 18, 2009
Dr. Loren C. ScottLoren C. Scott & Associates, Inc.www.lorencscottassociates.com
The National Economy
Recession (NOT Depression) Environment
RGDP Forecasts(8/09)RGDP Forecasts(8/09) Quarter Moody’s Consensus
08-I -0.7 -0.708-II 1.5% 1.5%08-III -2.7% -2.7% 08-IV -5.4% -5.4%09-I - 6.4% -6.4%09-II -1.0% -1.0%09-III 1.1% 0.9%09-IV 0.2% 2.5%10-I 1.2% 2.5%
10-II 2.0% 2.8% 10-III 2.9% 2.9%
10-IV 3.5% 3.1%
RGDP Forecasts(8/09)RGDP Forecasts(8/09) Quarter Moody’s Consensus
08-I -0.7 -0.708-II 1.5% 1.5%08-III -2.7% -2.7% 08-IV -5.4% -5.4%09-I - 6.4% -6.4%09-II -1.0% -1.0%09-III 1.1% 0.9%09-IV 0.2% 2.5%10-I 1.2% 2.5%
10-II 2.0% 2.8% 10-III 2.9% 2.9%
10-IV 3.5% 3.1%
Index of Leading Economic Indicators
Source: Conference Board
2004=100
RGDP Forecasts(8/09)RGDP Forecasts(8/09) Quarter Moody’s
10-I 1.2% 10-II 2.0% 10-III 2.9% 10-IV 3.5%
11-I 3.8% 11-II 4.9% 11-III 5.3% 11-IV 5.8%
Job Killers:Congress & Obama
Administration
• Higher taxes• Pro-union• Anti-Free trade• Extreme pro-green• More regulation• Government-run health care
Four NBER Indicators
-800
-400
0
400
800
1200
1980 1985 1990 1995 2000 2005
Fig. 1: Monthly Change in US Employment
Source: Bureau of Labor Statistics
Since 1/08:-6,929,000 Jobs (-5.0%) Ur = 9.7%8/09: -216,000
Tho
usa
nd
s
50
60
70
80
90
100
110
120
1980 1985 1990 1995 2000 2005
U.S. Industrial Production Index20
02=
100
400000
500000
600000
700000
800000
900000
1000000
1100000
1980 1985 1990 1995 2000 2005
Real Manufacturing & Trade Sector SalesM
illi
on
s o
f 19
96 D
oll
ars
4000
5000
6000
7000
8000
9000
10000
1980 1985 1990 1995 2000 2005
Fig. 5: Real Personal Income Minus Transfer PaymentsB
illi
on
s o
f 20
00 D
oll
ars
Big Problem
Drop in Private Residential Investment Spending
300
400
500
600
700
800
900
2004 2005 2006 2007 2008 2009
Fig. 1: U.S. Private Residential InvestmentB
illio
ns
of
2000
Do
llars
Since 2006-I:-$467.7 Billion (-57.5%)
Lowest Starts since 1945U.S. Housing Starts and Mobile Home Shipments
(Thousand Units)
0
500
1,000
1,500
2,000
2,500
3,000
1945 1955 1965 1975 1985 1995 2005
Housing Starts
Housing Starts and Mobile Home Shipments
New Home Sales & Existing Home Sales
Thou
sands
Thou
sands
New 1-Family Houses Sold: United StatesSAAR, Thous
NAR Total Existing Home Sales, United StatesSAAR, Thous
080706050403020100
Sources: Census Bureau, National Association of Realtors /Haver Analytics
1400
1200
1000
800
600
400
200
7500
6750
6000
5250
4500
3750
Source: Census Bureau/ Haver Analytics / National Association of Realtors
New
Left Axis
Existing
Right Axis
New 1-Family Houses For Sale: Months Supply
SA, Ratio
0807060504030201009998
Source: Census Bureau /Haver Analytics
12. 5
10. 0
7. 5
5. 0
2. 5
12. 5
10. 0
7. 5
5. 0
2. 5
New 1-Family Houses For Sale: Months’ Supply
Percen
t
Per
cent
Source: Census Bureau/ Haver AnalyticsSA, Ratio
The supply of new single family homes is extremely high
3
4
5
6
7
8
9
10
11
12
13
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Months supply of new single family homesmonths
Consumer & Lender “De-Leveraging Underway
Lending standards for mortgage loanshave tightened considerably
-20
0
20
40
60
80
1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
Senior Loan Officer Opinion Surveynet percentage of domestic respondents tightening mortgage loan standards
Tighter Credit – More Difficult Markets that Depend on Credit
• Housing
0.4
0.8
1.2
1.6
2.0
2.4
2006 2007 2008 2009 2010 2011
Mill
ion
Un
its
(SA
AR
)
Fig. 3: U.S. Housing Starts
2,127,000
Moody's Economy.com, 7/09
2011-IV: 1,439,000
400
800
1200
1600
2000
2400
1975 1980 1985 1990 1995 2000 2005 2010
Housing Starts - U.S.
2,073,000
Th
ou
san
ds Avg.=1,517,000
2010: 785,000
2012: 1,770,000
Source: Moodys Economy .com 6/09
Tighter Credit – More Difficult Markets that Depend on Credit
• Automobiles– 2004-07: 16 mm annually– 09-I: 9.5 mm– 2010: 11.8 mm– 2011: 14 mm
• Commercial investments• Business fixed investments
Excessive Housing Price Inflation Not Evenly Spread Across Country
Metro Areas with Extreme Housing Overvaluation*
(First quarter, 2007)* 34% overvaluation is the trigger point for a major home price correction
Change in House Price Index
By specific area (7/09)
• Las Vegas: -53.7%• Miami: -43.9%• Orlando: -43.9%• Phoenix: -44.9%• Sacramento: -42.4%• Nashville: - 5.3%• Raleigh: - 5.7%• St. Louis: - 6.7%• Baton Rouge area -4.6% (Tom Cook)
Another Big Problem
The credit crunch
The TED Spread• Fear and distrust between financial
institutions.– LIBOR rate (opaqueness v transparency)
• Fear among average consumers– 3-Month T-Bill rate
• The TED spread (norm: 10-12 basis points)– Was 4.64 (4.75-0.11); now 0.69 (0.85-0.16)
• Financial institutions are different depending on where they are
Oil Price Forecasts
The “Onagistic” Approach
0
20
40
60
80
100
1975 1980 1985 1990 1995 2000 2005 2010
Fig. 4: Oil PricesP
rice
per
Bar
rel
2010 2011Average $85 $85Low $70 $70High $100 $100
20
40
60
80
100
120
140
50 100 150 200 250
Pri
ce p
er B
arre
l
1/2/04 to 1/23/09
Weekly Spot Price of Oil - US
$140 barrel oil unsustainable due to demand side response
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: +3.8%
• Worldwide demand: 2004=3.4%; 2005=1.6%; 2006=1.3%; 2007=0.9%; 2008=-0.6%;
2009-I=-2.8% (2009=-2.7% EIA)
Demand Side: Slowing
• US: –2007=0.1%; –2008 = -5.5%
• 78 billion fewer miles driven in November 07 to August 08
• 8/07 v 8/08 miles driven down 5.6%, sharpest monthly drop since government began collecting data in 1942.
–First ½ 2009: -6.8%
U.S. Sales of Large Cars
• 2006: -2.6%• 2007: -10.5%• 2008-1st 7 months:
– Mid-size SUVs: -29.7%– Large SUVs: -33%– Luxury SUVs: -14.7%– Large cars: -31.2%– Luxury cars: -14.5%– Compacts: +10.9%
The Supply Side
• CERA: – 20-30 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)
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
Supply Side
The Lower Tertiary – Gulf of Mexico
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
Other Lower Tertiary Finds
• BP’s Tibor Prospect• Shell/Chevron: Perdido
– Floating platform as high as Eiffel Tower– The first oil to be produced from the LT
• Petroleo Brasileiro: Chinook & Cascade projects– Mid -2010 producing– No 165-mile pipeline to LA coast; 1st FPSO in
GOM instead
Other New Finds
• Petrobras (Brazil)– Tupi Field in 2006 (5-8 bill barrels)– New Carioca field in 2008 (33 bill barrels!!)
• 6k feet of water;10k feet of sand/rock; 6k feet of salt
• Watch Enhanced Oil Recovery (EOR)!
Horizontal Drilling
Other New Finds
• Watch EOR (Enhanced Oil Recovery)– About 78% of oil left in ground using
conventional techniques– A 1% increase would generate 88 bill bbls (3
years of oil production)
• Denbury Pipeline Project– Jackson, MS to Houston
• Leucedia Project in Lake Charles, LA• New technology at coal-fired electric utility
plants for CO2 recovery/sequestration
But things aren’t normal
Two wildcards
Wildcard I: Geo-politics(The real problem)
• Iran’s nuclear ambitions (3.7 mmbd)– US Passed financial restrictions + rhetoric– Firms aiding Iran’s extraction sector financially exposed
• Turks may invade Northern Iraq (+”war premium)• Nigerian unrest (2.55 mmbd; at 1.71mmbd now)• Mr. Putin in Russia (12.4 mmbd)
– Oil investors can own up to 49%
• Chavez in Venezuela (2.1 mmbd)– Dismantled “apertura”– Raised royalty rates– Back taxes during apertura of $4 billion
Wildcard #2:President Obama’s Energy Policy
• $33 billion tax on the extraction industry– Eliminate expensing of intangible drilling costs– Eliminate allowance for percentage depletion
Oil Companies Don’t Pay Taxes
• Robert Shapiro and Nam Pham study of oil company stock ownership
• 43% owned by mutual funds and asset management companies that have mutual funds– 55 million Americans– Medium income: $68,700
• 27% owned by other institutional investors like pension funds– 2004: 2,600+ pension funds run by federal, state and local
governments held $64 billion in oil company shares• 14% held in IRA’s and personal retirement
accounts held by 45 million Americans
120
130
140
150
160
170
180
190
200
5 10 15 20 25 30 35 40 45 50
X 4/09
Fig. 20: Louisiana Weekly Rig Count: July 2008 - July 2009W
eekl
y R
ig C
ount
Obama’s Energy Policy
• $33 billion tax on the extraction industry– Eliminate expensing of intangible drilling costs– Eliminate allowance for percentage depletion
• HR 2454: American Clean Energy & Security Act– National Petroleum & Refiners Association
• $330 mm a year for a 100,000 barrel a day refinery• ExxonMobil in Baton Rouge $1.65 billion
– Passed by 219-212 in House; Senate unlikely to pass
Want clear evidence of global warming?
346TCF 50.6
TCF
12.3TCF
Alaska:Alaska:226.2 TCF226.2 TCF
Recoverable Natural Gas Recoverable Natural Gas Moratorium Areas Moratorium Areas
((Oil = 86 billion BarrelsOil = 86 billion Barrels))
38.2TCF
How can we possibly deal with the challenges ahead?
The Clash of Ideas
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.”
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.”
The Competitionbegins 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%
But these are just technical economic measures
Is there another indicator of economic health?
Another measure of an Economy
September 18, 2009
Dr. Loren C. ScottLoren C. Scott & Associates, Inc.www.lorencscottassociates.com