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Thursday, September 13, 2007

Moneytalk Guest Charlie Maxwell

Excerpt from David Korn's September 8-9, 2007 Newsletter

On Saturday, Bob had on one of his favorite guests, Charlie Maxwell, Senior Energy Analyst for Weedon & Co. Charlie was educated at Princeton and then Oxford. He has been working in the oil industry since the 1950s. In the 1960s he became an analyst on Wall Street and has been rated the #1 energy and oil analyst on many occasions. Bob heaped heavy praise on Charlie as the best of the best in terms of energy analysts and mandatory listening for Moneytalk trekkies. I summarized the interview below.

Maxwell/Brinker: Bob opened the interview praising Charlie for his predictions on Moneytalk that the price of oil would trade in the $50s to the $70s which has been right on the mark in recent years. Bob asked Charlie if he had changed his forecast. Charlie said we have seen oil go from $25 a barrel in early 2003, to as high as $75 a barrel, with a peak at $78. There was a lot of oil being traded at $75. The rise from $25 to $75 is huge and represents a 200% increase. Nevertheless, Charlie said he thinks supply and demand are roughly in balance today and might stay here for a while, particularly given the weakness that is going on in the U.S. economy. A slower U.S. economy can translate into reduced imports, and thus slow foreign demand from countries like China. This period of transition where we stay in the range of $50s up to $80 a barrel should stay with us for another two years.

Looking forward after the next two years, Charlie gave his forecast as to where he thought the price of oil was going. Charlie pointed out that we have to take into account world population increasing and the demand for more cars in countries such as Russia, India and China -- all this suggests that demand is going up while supply is not. With this as a backdrop, Charlie thinks that by 2010-2011, we could see oil trade at over a $100 a barrel.

EC: Charlie has actually gone on record in the past projecting that West Texas Intermediate Crude would rise to rise to $85 by 2010, $180 by 2015 and $300 by 2020. Based on today's interview, it looks like he raised his 2010 prediction by $15 a barrel.

Maxwell/Brinker: Bob asked Charlie to address Ben Bernanke's view about inflation. Charlie said he thinks the Fed is so cast in the role of fighting inflation that are ignoring the real threat which is deflation. Bob noted that Ben is on record saying that deflation is the biggest threat, but he doesn't act that way. Charlie said he would allow the system to pick up liquidity and began dropping rates by 25 basis points every few months, unless there were serious problems and then he would open the floodgates. Overall, Charlie said he would bet on a 25 basis point cut at the next meeting, and Bob agreed.

Maxwell/Brinker: Bob asked Charlie to comment on alternative ways of getting fuel, like through oil shale and wind power,etc.. Charlie said we have huge reserves of oil shale in places like Colorado. They are extremely expensive to access. It takes almost as much energy to break up the shale to get oil out of it as we derive from it. It's like clean burning coal. We don't have an economic answer yet for oil shale. If you add all this up together, it only accounts for about 2% of world energy. That is such a tiny bit, that even if it grows rapidly to 5%, the problems we are facing from the main sources of energy (oil/coal) make the alternative energy solutions not pragmatic in the short term. The real game for alternative energy will be in the 25-35 year time frame from now. For us, however, the danger lies in the years 2010 to 2020 where we could face serious economic crises if we don't solve the energy problem.

Maxwell/Brinker: Bob asked Charlie to comment on whether hydrogen will ever play an important role in our energy supply. Charlie said he thinks it will in 40- 50 years. Hydrogen is the most plentiful element on the planet, but it bonds so easily and powerfully on a molecular level with other elements that it requires a lot of energy to unbind it. Getting pure hydrogen is therefore expensive, and it costs money to transport and store. We need a lot more research before it becomes useful.

EC: Here is a link to an interesting article addressing hydrogen and peak oil: http://tinyurl.com/yr93jj

Maxwell/Brinker: Bob noted that we use natural gas throughout the country, but we waste a lot by generating electricity by burning natural gas when we should be using it for other things like mass transportation. Charlie agrees and pointed out that the government has allowed the utilities to use natural gas when it was very cheap and so it became embedded as a major part of the utilities fuel (around 21%). For the government to come out now and say we made a mistake is a tough thing to do from a political perspective. Bob said when you use natural gas in a bus system, relative to burning gas or diesel, it is much cleaner and produces half as much pollution as coal. Charlie agreed that natural gas is better, but it is still a hydro carbon fossil fuel. The only fuel we have in sufficient quantity that creates only heat pollution would be the nuclear energy. Charlie said the "green movement" is finally starting to come around to this fact and befriending the nuclear industry. It is clear that electricity will be the dominant form of energy going forward and nuclear energy will have to be the solution.

Charlie said that coal is a real problem. We have obligations to the rest of the world not to pollute so much. But we must also put pressure on India and China to cut back their use. Charlie pointed out that we are now starting to breathe in the refuse from coal burning plants in China and it is starting to pollute our skies.

Bob asked Charlie about the Oxford-based group he is in and to tell the listeners about it. Charlie said the organization is comprised of former ministers of OPEC and other industry executives from 30 countries who meet twice a year to discuss trends within the energy field. Charlie said OPEC is less importance today than 40 years ago, but it is still important. There is an upcoming OPEC meeting on September 11th. If they agree to increase production as they are being asked to do, they could produce another 1-1.5 billion barrels a day, that could provide a base to allow $60 a barrel during the winter months. Charlie, however, thinks they are running scares over the possible recession in the U.S. and they will be afraid to give us greater supplies.

EC: So far, it looks like Charlie might be right about OPEC's decision this coming Tuesday. OPEC's president, Mohammad bin Dhaen al-Hamil, said before leaving for Vienna that "current supplies to the petroleum market are sufficient." Read more at this url: http://tinyurl.com/3bw9nw

Charlie said if he is right, that means we will head into the winter months facing $70+ a barrel for oil which is unfortunate because we are running on the edge of recession that could happen going into the first quarter of next year. Charlie said he is working hard with his group to convince people in OPEC to give us the extra oil.

EC: Charlie seems to be a lot more worried about recesssion than Bob, but Bob didn't challenge him on it.

Caller: Is there anything on the horizon that suggests the technology is available to convert coal to other types of fuel like Germany did in World War II? Charlie said that is called the Fisher Tropsch process. It was discovered in 1923 and is still being used and being improved. The problem is it costs a lot of money to convert coal into natural gas. Then you go from gas to a liquid which is a separate process which requires a loss of about 25% of the thermal value of the gas. But then you have a liquid that is very clean burning and you can make it into a diesel for trucks, or gas for cars. It is low sulpher and high quality. If we were in a war time situation, we could use this process, but it is horrendously expensive under the scale we need it. What if we went to 100 times the scale, could we bring the price down under conditions of tight environmental laws? We don't know yet. The real answer is let's talk about it in 10 years because right now it isn't feasible.

EC: The Fisher-Tropsch process is a catalyzed chemical reaction in which carbon monoxide and hydrogen are converted into liquid hydrocarbons. The name comes from German researches Franz Fisher and Hans Tropsch working at the Kaiser Wilhelm Institute in the 1920s. There are a few companies that have commercialized this technology, including Shell, Rentech, Sasol (in South Africa), Choren Industries (German), Changing World Technologies (CWT) and GTL Corporation in Oklahoma.

Caller: The U.S. charges 54 cents a gallon import tax to bring ethanol into the country which begs the question why don't we bring more sugar into the country to produce ethanol. Then you find out there is a cap on how much sugar we can import. Why do we have an import tax on ethanol? Charlie said the reason is political. It acts as a subsidy to certain portions of our country that are heavy corn producers. There is no economic basis to it. Left to market forces without the tax, we would be importing large amounts of ethanol from Brazil where they produce vast amounts of ethanol at much cheaper costs. Right now, 98% of the ethanol produced in our country comes from corn which is driving up the price of corn and related products. This is hurting many people who rely on corn for a source of food. We are trying to develop other sources to produce ethanol other than corn, and that is where we need to devote our time and energy.

EC: James Surowiecki of The New Yorker wrote an article explaining why subsidies in the sugar and ethanol markets were bad policy at this url: http://tinyurl.com/2f78qk

Caller: The caller asked Charlie about the outlook for gas and oil drilling in ANWR with the new female governor in Alaska. Charlie said she is a pistol and thinks you will see a lot of positive and notable developments in Alaska. The problem is that Alaska is only so big. According to Hubbert's peak theory, when oil production begins declining, even if we add on Alaska, it would only give us about an extra four months. Bob said if we get an extra million barrels of oil each day, wouldn't that help? Charlie said it would help the dollar and trade, it just wouldn't make a big difference in the long term relative to supply.

EC: Sara Palin is the current Governor of Alaska. She is only 42-years old. Recently, she joined efforts to promote an "all-Alaska" natural gas pipeline.

Caller: What has the energy department done in terms of trying to set policy? Charlie said the energy department has its policy set by others. It can't set its own policy -- it is the Presidential administration and Congress that tells the energy department what to do. One problem is that there is such a varying degree of opinions out there. Exxon, for example, which Charlie said is very knowledgeable, thinks there is no problem. Charlie said that sounds incredible because if there was no problem why did oil go from $25 to $75 in the last few years? Exxon doesn't see a Hubbert's peak and thinks production will rise for the next 30-40 years and meet our needs. Others say we can use all the coal we want, but others don't want to use coal because it pollutes. In a Democracy such as ours, all of these different opinions have their own lobbying groups. The energy department says it will execute a policy, but what is the policy? As a whole, our country has not been able to formulate a policy because we just don't know what to do. Perhaps the only way to create one is if it evolves out of a crises, at which time a consensus will quickly be formed.

EC: There is a lot of good information on the U.S. Department of Energy's web site which is at this url: http://www.energy.gov/

Maxwell/Brinker: Bob noted that France is way ahead of the game in terms of building nuclear plants and is getting close to 90% self-sufficient power from nuclear energy. Our country has a dismal record recently for nuclear power. Charlie said it goes back to the environmental movement. Chernobyl scared the wits out of many people, as did Three Mile Island. But lately, safety has increased and the environmentalists are beginning to form alliances with nuclear because it is cleaner than oil and coal. Our coal is the number one polluter in the world, but next year China will take over that role. And the scary thing is China is growing and has little regulation to control that.

EC: I always enjoy it when Charlie Maxwell is on the show. He is a real class act. Charles Maxwell's bio is at this link: http://tinyurl.com/yup3fz
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