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The oil world's new bullies
(Page 2) of 2
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Throwing their weight around
But look where that increased production will have to come from -- from the big proven and unproven reserves on the territories of the bullies or lands effectively controlled by them. Iran, for example, hopes to increase production from roughly 4 million barrels a day in 2005 to 5.6 million barrels a day in 2010. Venezuela's Orinoco River Basin contains an estimated 235 billion barrels of heavy oil -- unproven reserves equal to 90% of Saudi Arabia's proven reserves.
And Russia effectively controls access to increased production from the nations of Central Asia. So, for example, the same day that brought news from Lukoil that it would increase production from Kazakhstan by 40% by 2010 brought news from Chevron that it had accepted Russian demands and appointed the Kremlin's choice to head the consortium controlling the pipeline that ships oil from Kazakhstan across Russia for export.
The bullies' leverage on the world's energy supply is even greater if you consider that some of the world's biggest oil fields outside the control of the bullies or of OPEC are mature and look like they're headed into decline. While predicting a field's peak is always tricky -- oil companies such as Apache (APC, news, msgs) have proven very adept at getting extra oil out of mature fields -- since new technologies have been remarkably effective at prolonging the life of "mature" fields -- oil experts say that the big oil fields of the North Sea and Alaska peaked in 2000 and 1988, respectively. So the bullies' share of global oil production will climb even higher thanks to lower production from those fields.
The new oil bullies are showing no reluctance about throwing their weight around. Russia has threatened to cut off energy supplies or to jack up prices to force some of its neighbors to give Gazprom control of pipelines that move natural gas from Russia to European markets. Gazprom, its deputy chief executive Alexander Medvedev, told European Union officials, would retain its export pipeline monopoly for decades.
Iran is clearly counting on the oil deals it has signed with China to insure Chinese support in its battle with the United Nations and the United States over its nuclear weapons program. So far that's working just fine. China and -- no surprise -- Russia have resisted calls for a U.N. Security Council resolution condemning Iran. Venezuela has seized oil fields from Total (TOT, news, msgs) and ENI (E, news, msgs), and President Hugo Chavez has sent cheap oil to Cuba, Nicaragua and other Latin American countries in an effort to limit U.S. clout in the region.
Giving in -- or not -- to the bullies
So how do you deal with an oil bully?
Exxon Mobil has decided to take its ball home and wait for the bullies to self-destruct. In Venezuela, the company refused to renegotiate deals and simply walked away from projects. There's some evidence that in the long run Exxon Mobil's strategy will work. Production from the national oil company PDVSA is down about 60% under Chavez due to poor management in the oil fields.
Most oil companies aren't sitting on reserves the size of Exxon Mobil's, and they don't have the $29 billion cash balance that Exxon Mobil showed at the end of 2005. Chevron, for example, which has been struggling to show production growth despite a raft of new discoveries, has concluded that it needs to get along with the bullies somehow. Besides agreeing to put the Kremlin's man in charge of a key pipeline, the company has entered into talks in Venezuela that will increase taxes and royalties and cut production but still keep the company in the game.
At home: A declaration of dependence
The countries of the European Union have decided to strike the best deal that they can with the Russians now while they tax and invest in solar, wind and nuclear projects to reduce their future dependence on Russia for natural gas. So, for example, Portugal, hardly one of the richest countries in Europe, requires utilities to pay 0.31 euros -- about 37 cents -- a kilowatt hour for electricity produced from solar projects. (Electricity costs in the United States run about 10 cents to 14 cents per kilowatt hour.) Germany, Italy and Spain have similar programs. The immediate pain is worth it, European countries like these have concluded, to get rid of these bullies.
And the United States? Government policy is a dreadful combination of the laughably irrelevant with the downright dangerous. On Earth Day, President Bush touted hydrogen-powered cars as a future solution to our oil addiction -- and his administration has requested $5 billion over the next five years for hydrogen research that may result in a marketable hydrogen vehicle someday. Meanwhile, the administration has proposed a fiscal 2007 budget that would slash funding for research to improve energy efficiency -- today -- by 20% from 2006 levels.
And to get angry drivers off their backs, Republicans in Congress have proposed sending out $100 checks so drivers can keep buying gas to fill their cars at the pump.
That will sure fix these bullies. Raise gas prices to $3 a gallon, huh? Well, we'll pay that. And we just dare you to raise it some more.
It's a message oil bullies -- old and new -- will certainly understand. It's just not the one that we ought to be sending.
New developments on past columns
The 7 next big things in tech
Not a bad quarter, that second quarter of the 2006 fiscal year, given the turmoil in the U.S. auto industry. Johnson Controls (JCI, news, msgs) beat the Wall Street earnings consensus by 8 cents a share, thanks, mostly, to a 7-cent-per-share boost from a lower tax rate. But the news announced on April 19 from the two "alternative energy" sectors that the company has bet its future on -- building efficiency (what used to be called the controls segment) and batteries -- were far better than the overall report. Revenues in the building-efficiency segment -- heating, cooling and the sophisticated control systems to get the most of each of those out of every energy dollar -- grew by 74%, and backlog increased by 8% to $3.3 billion. Revenue in the battery segment climbed 29% from the second quarter of fiscal 2005. Margins in the battery business fell to 9% from last year's 10% because of higher lead costs. The company has managed to raise prices so that these higher costs will get passed onto customers but customers only begin picking up the tab with a six-month lag. In the auto interiors segment, the part of the company's business most exposed to the woes of the U.S. auto industry, Johnson Controls managed to hold its own with revenue falling 4% from the same quarter of fiscal 2005. For all of fiscal 2006, the company essentially repeated earlier earnings guidance: Fiscal-year earnings will be $5.25 to $5.35, the company projects, up from the earlier projection of $5 to $5.15 a share thanks to a boost of 22 cents to 24 cents a share from a lower effective tax rate. As of May 2, I'm raising my target price for Johnson Controls to $88 a share by June 2006. That's up from a previous target price of $86 by January 2007. (Full disclosure: I own shares of Johnson Controls in my personal portfolio.)
The state of coal stocks is strong
On April 27, Consol Energy (CNX, news, msgs) reported first-quarter earnings of $1.33 a share (12 cents a share above the Wall Street consensus forecast) and revenue of $986 million (up 21% from the first quarter of 2005 and 6% above the Wall Street consensus.) Demand for coal from utilities continues to rise -- thanks to a roughly 50% cost advantage versus natural gas -- and demand for the cheaper high-sulfur coal that Consol Energy produces is especially strong. With 30% to 40% of utilities already having spent the money to add scrubbers to remove sulfur from their emissions, buying lower-cost high-sulfur coal is a no-brainer. Coal-industry analysts expect that 60% of utilities will have added scrubbers within five years. In January American Electric Power (AEP, news, msgs) signed a 15-year contract with Consol Energy for high-sulfur coal. In February Duke Energy (DUK, news, msgs) signed a similar deal. As of May 2, I'm increasing my target price for Consol Energy to $96 a share by September 2006 from my previous target of $92. (Full disclosure: I own shares of Consol Energy in my personal portfolio.)
Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For suggestions to help navigate the treacherous interest-rate environment see Jim's new portfolio Dividend stocks for income investors. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares of the following equities mentioned in this column: Consol Energy and Johnson Controls. He does not own short positions in any stock mentioned in this column.
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