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