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Books: The Oil Factor

Oil and Energy Issues

Stephen Leeb
Author and President, Leeb Capital Mangement
Wednesday, April 7, 2004; 1:00 PM

With gas prices rising, consumers are looking for low gas prices at the pumps. Last week OPEC announced that it would cut crude oil production by 4 percent. The decision would raise consumer gas prices to record highs. However, oil prices are steadying as worries for supply eases. U.S. prices are now down around $4, or 10.5 percent, from a 13-year closing price high with recent concern over low U.S. inventories.

Stephen Leeb, author of "The Oil Factor: Protect Yourself -- AND PROFIT -- From the Coming Energy Crisis," discusses what consumers need to consider in oil and energy issues.


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Leeb is the president of Leeb Capital Mangement with over 25 years of investment experience with a focus on growth stocks. He is the editor of The Complete Investor and former editor of Personal Finance. He is renowned for top finishes in the Wall Street Journal's and Forbes' annual stock-picking contests and regularly appears on CNNfn, Bloomberg TV and Bloomberg Radio. He is also author of four books including, "Defying the Market."

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

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Stephen Leeb: The primary purpose of my book, "The Oil Factor" is to provide an investment road map for both investors and parents. I believe the incipient energy crisis is going to turn our economy and the investment arena on its head and that the next decade or more will be among the most tumultuous in our history. But I did not write this book simply to alarm investors and parents, but rather because I do not think it too late to remedy the situation. For investors this will mean rolling the clock back to the inflationary 1970's and for parents and citizens it will mean forcing politicians into a massive effort to develop alternative energies of which wind is by far the most promising.

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Washington: What is the predicted time period when fossil fuels as an energy source will be exhausted? Does this include the rising consumption in China and India as their standard of living improves and more cars take to the streets in those countries?

Stephen Leeb: Fossil fuels are likely to be around for another 1000 years. In other words, the question is not whether we will run out but rather when we will run of of the ability to increase production to match surging demand from countries like India and China. I think that we are close to that point right now. This means within the next several years we will no longer have the ability to satisfy the world's demand for oil and natural gas. The result will be ever rising prices for both oil and natural and a complete change in our economy.

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Anonymous: GOP rocks! Won't drilling in alaska solve all our energy problems?

Stephen Leeb: Drilling in Alaska will add only a small fraction of one perent to the world's energy supply. It will by like a tiny band aid on a gaping wound. Bear in mind what we hope to gain from Alaska is far less than we have gained from the North Slope and production in the North Slope is already in decline as is production overall in the U.S.

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Ashland, Wis.: What do you think are the chances that the US Government will start offering tax incentives for investing in stocks or products from companies that research and develop renewable energies?
Thank you for your time.

Stephen Leeb: Unfortunately the only alternative energy that has a chance to make a big difference is wind and the biggest wind company in the U.S. is General Electric, though utility FPL does also have an important stake in wind. I do think that to develop wind it will take massive government and industrial spending in which GE could be a major beneficiary.

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Atlanta, Ga.: Is investing in energy stocks a good way to profit from the expected strength in oil prices over the rest of the year? Are valuations of these stocks still compelling?

Stephen Leeb: Valuations of energy stocks are compelling. For example Devon Energy, the largest North American oil and gas producer is selling at about 3 times cash flow. Wall Street still does not get the seriousness of the crisis in that energy stocks are valued as if energy prices are going to collapse. That is bad news for the economy in that it means we are not taking steps to counter the crisis but good news for investors because when energy prices continue to rise many stocks in this arena should skyrocket while the rest of the market, as a consequence of high inflation, flounders.

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Arlington, Va.: When do you see the gas prices going down? And what can consumers do in terms of controlling gas prices?

Stephen Leeb: Baring an economic recession gas prices are unlikely to come down other than for very short periods of time. Over the foreseeable future energy prices are likely to climb and gas prices are likely to be dramatically higher five years from now.

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Arlington, Va.: How much credibility does OPEC have? Seems its public statements often don't match the action of its members...

Stephen Leeb: OPEC has shown that it has the ability to keep prices high but it has not demonstrated the ability to control prices from going too high. Despite recent "production cuts" OPEC has been producing at nearly full capacity for the last several months. Though spring will see some fall in demand it remains the case that OPEC has very limited capacity to stop oil prices from rising. It is likely that by the winter of 2006 and maybe even 2005 even OPEC at full throttle will not be able to match the world's demand for oil. Our energy crisis, in other words, does not have a political solution involving the strong arming of OPEC.

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Washington, D.C.: What auto technologies are we going to see become prevalent in the next 5 years due to soaring gas prices?

Stephen Leeb: Hybrid cars are a near sure bet to replace current fuel hogs. In this regard it is worth noting that the Japanese are way ahead of the Americans. A company I recommend in my book "The Oil Factor" as an energy conservation play is Toyota and Honda would also qualify. I fear, however, for American auto companies.

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Atlanta, Ga.: Do you foresee more restatements of reserves by oil companies like Shell and El Paso? If so isn't this a downside risk to investing in energy stocks at this point?

Stephen Leeb: This is a very good question that I have toyed with in my energy selections. But I do think that Shell was a special situation. Still it is a fact that more and more energy companies are having a very difficult time increasing production. All the majors are experiencing sharply declining natural gas production in the U.S. Still there are a number that will hold their own over the next few years ranging from Patina to Devon to Conoco and, of course, oil service companies like Schlumberger should also star. In general, any well managed energy company - even if production does start to decline - should be able to prosper from dramatically higher energy prices.

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Fairfax, Va.: Do you think that investing in oil would be volatile for a beginner? First how would you go about it and how secure have the numbers and companies been? Also, would this only help companies like Halliburton. I'm not trying to have my investments intertwine with political parties.

Stephen Leeb: Major oil companies like Chevron and Exxon are among the safest and least volatile stocks around. Indeed even when oil prices fall these companies tend to hold their own. And I do, as I said in my previous reply, think their numbers are okay. As to your comment about politics - right on. The crisis we are facing today totally transcends historic political distinctions.

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Washington, D.C.: How has the war in Iraq affected oil prices?

Stephen Leeb: Oil production in Iraq is nearly back to where it was before the war so from a pure economic view it should not have had an effect. Still because the fighting continue investors have probably assigned a "war premium" to oil and so oil today maybe a couple of dollars higher than if there had not be a war. But keep in mind even if Iraq magically became a democratic state it would not change the longer term view of oil prices. They are in an inexorable uptrend.

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Virginia: The environmentalists are fighting against oil drilling in Alaska and the Gulf of Mexico. Are they funded by the OPEC?

Stephen Leeb: Actually if I had to be it would be the reverse. OPEC's worst nightmare would be a sharp spike in oil prices that would kick the world into a nightmarish recession in which everyone including OPEC would be hurt. OPEC, in my opinion, is desperate to create a situation in which oil prices rise slowly and not dramatically. The stark fact is that OPEC does not have the capacity to do this themselves. I think they will welcome additional sources of oil. People just don't get how serious this is and how much it transcends politics - both international and national.

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Vail, Colo.: Can a politician come up with the will to force legislation on improving fleet mpg? Or will the market forces be allowed to play out and the Detroit auto makers follow the giant SUV's down the tube?

Stephen Leeb: I am afraid this is going to be done by the marketplace and that may be best. Mandating mpg standards would probably not work for a variety of reasons that I have outlined in my book. But as I said before I do think Detroit auto makers are in big trouble and again urge that you look at the Japanese companies like Toyota and Honda.

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Washington, D.C.: How high do you think oil is going in the next 2 years? Or even by the end of this year?

Stephen Leeb: Hopefully this year not much above 40 and not much above 50 -70 next year. But that sail we are one terrorist attack in Saudi Arabia away from hundred dollar oil. Still my best guess is that uptrend in oil will be gradual not sudden and the consequences will be inflation not deflation. But you have to have some insurance on the former and we do make a few recommendations in my book.

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Birmingham, Ala.: Dr. Leeb,

Won't big rises in energy prices be, unfortunately, self-correcting as they slam the brakes on economic growth? Are we already seeing this to some extent in China?

Stephen Leeb: Good question. A huge up tick in energy prices will lead to a recession. But my work shows that energy prices have to jump about 80 percent in a year for it to have a major depressing effect on the economy. Steady increases are inflationary. As far as China goes it is overheating a bit and the government does seem determined to slow down growth to say 7 percent, but 7 percent is still very rapid growth.

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Washington, D.C.: Thank you for your candid assessment of the future price of gasoline. I cannot understand why our government has failed to prepare us for the high price of gasoline that is our destiny. Rather than buy a new SUV I am going to drive the wheels of the my current SUV and then buy a fuel efficient vehicle.

Stephen Leeb: I think that is a great attitude. One question I just don't have an answer for is why our Government - and I mean Democrats and Republicans alike - have been so slow to recognize the gravity of the current situation. Unfortunately history is filled with tragic miscalculations. Arthur C. Clarke, back in 1999 said that the chances of human survival are about 51 percent and that the next decade was going to be among the most crucial in human history. Energy was a major reason. I am not trying to just alarm you for I don't think it is too late to act but time is running very short.

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Wellfleet, Mass.: The "peaking" of easily obtainable oil supplies has been predicted for decades. What are the factors that convince you that we are now at the point where new supply will not keep pace with demand?

Stephen Leeb: As I said before we exited the winter months with virtually no additional oil capacity in the world. Past crises were political this one is physical. The geological evidence of which I write is very strong but so is the economic evidence. Recognize that oil and gas have broken out to new highs in the 2000's which was a period in which economic growth was much slower than the 1990's. In other reasons there are many reasons for believing it is real this time.

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Virginia: What do you think about Kerry's proposed gas policy?

washingtonpost.com: Kerry Unveils His Policy on Gasoline (Post, March 31)

Stephen Leeb: I have not had enough time for fully digest the Kerry proposals but by my first take is that his heart is in the right place. Still to solve this problem we are going to need Democrats and Republicans working together in a way we have not seen at least in my lifetime and I am not that young.

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Washington DC: It seems inevitable that in the near future we will be driving cars with European fuel efficiency and size. Do you agree?

Stephen Leeb: Conservation on all levels is a certainty as oil and gas prices continue to rise. And yes there is an inevitability to driving much more fuel efficient cars.

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Washington, D.C.: Are there energy efficient countries that we can follow their model from? What are other developed countries doing in terms of keeping gas prices low or providing easy transportation or efficient energy sources?

Stephen Leeb: The Europeans are way ahead of us in the most practical alternative wind. Iceland has a 20 or 30 year plan to wean themselves entirely of fossil fuels. We don't have their resources but we do have the Dakotas which are blessed with tremendous amount of wind and very few people. An effort on the order of half a trillion dollars could generate half our electricity from wind and buy us enough time to develop far reaching alternative related to hydrogen and solar.

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Anonymous:
Sir:

I agree with your prediction regarding the effects of global "peak oil." I also believe we must create incentives to rebuild our cities and towns and redirect our auto/truck/highway/suburban economy to an emphasis on rail mass transit and high speed fright and passenger service. Do you see this as an option? Thank you....

Stephen Leeb: This seem like a really good suggestion and could certainly be a consequence of every higher oil and gas prices. The Internet - providing we can keep their electricity consumption down - could be a major positive in this respect.

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Silver Spring, Md.: Re: gasoline prices
What can consumers do? Sit down because this is complicated: Drive less. When you drive, use a fuel efficient vehicle.

Even if you can afford it, buying gasoline drives up prices for everyone.

OK, joke over. We all know what happened to the last President that talked about consuming "less." I am in the energy business and have no faith that politicians of either party will display useful leadership on this issue. Please tell me that I'm wrong.

Stephen Leeb: I wish I could. Solving this problem takes a longer than 8 year vision and has a nebulous political payoff. Still American have fought wars and I think the crisis is of such a magnitude there will be an opportunity to convince citizens that we are in fact in the equivalent of a war. Plus there is the fact that developing an alternative energy infrastructure will create many new jobs. I am trying to see the glass as half full but it is getting harder.

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Harrisburg, Pa.: What is the elasticity of demand for gasoline? Presumably industry economists have been studying this at length. What is the consensus of thought on this, or is there one? I am certain executives are wondering what price maximizes their profitability, and a slow, gradual rise in price might lull a public into paying higher prices. We know Europeans will pay it. Will Americans also pay such high prices, or will they cut their travel and lower demand enough to cut into profitability when gas prices reach certain levels?

Stephen Leeb: I doubt that energy insiders have been studying this. Recall what I said earlier - Wall Street still expects energy prices to decline. Hopefully the price gains will be gradual, but gradual or not consumers will pay them and also cut their travel. I can't stress enough that this crisis is going to turn the economy and the investment arena on its head. Everything is going to change in the next five years.

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Washington, D.C.:

Sir:

What long-term effects will higher energy prices have on the suburban/auto economy? Will it force a reinvestment in sustainable communities and rail transit?

Thank you

Stephen Leeb: That could very easily be a consequence. Energy efficiency will be utter necessity for our survival and we will see this efficiency develop in all aspects of our lives over the next decade and more.

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Greenbelt, Md.: A sensible energy future cannot be created by companies and investors limited to a 3-month vision. Does your company do anything with investments over longer periods of time than quarterly dividend reports? Are there companies that do?

Stephen Leeb: Yes we do invest for the long term and have to say have an excellent record. But in all honesty want to stress the next decade is going to be a lot different than the last. This decade I believe is going to be characterized by tremendous inflation which will benefit some companies tremendously but hurt most others.

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Anonymous: Could you please tell us what oil company insiders are saying about the potential opportunites for them as the result of our invasion of Iraq.

How is this translating into their specific plans, income projections for the future?

Is it something they have to keep a low profile about?

Stephen Leeb: I don't think in view of recent events in Iraq that anyone has any clear idea on how things are going to turn out. But were Iraq stabilized and oil development became a high priority then companies like Schlumberger would be strong beneficiaries.

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Stephen Leeb: I want to thank everyone for participating. I hope you learned as much from me as I did from your excellent questions. Just remember forwarded is forearmed. These are going to be very tough and different times but I think we will be up to task of managing them. Best of luck.

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