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Monday, January 31, 2011

January 31, 2011, David Korn's Summary of Charlie Maxwell Interview

Wow, do I have a treat for everyone!

David Korn writes an outstanding weekly newsletter that includes summaries of Bob Brinker's Moneytalk. This week Bob Brinker's
"Super Star" guest was Charlie Maxwell. In David's just-published newsletter, he has done a complete summary of the Charlie Maxwell interview. (You can download and listen to the interview from KGO810 for free until February 5th. It's in the 3-4pm hour)

Here is David Korn's summary. Posted with his permission:

Introduction: Charlie Maxwell is the 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/Charlie: Bob asked Charlie to discuss how he sees the situation in Egypt impacting the United States. Charlie said about 3.3% of total world production in the oil goes through the Suez Canal which is not all that much. About 19.5% of the oil comes through the Strait of Hormuz which is a greater distance from Egypt but if there is fighting in the Middle East, one way or another there would likely be a closure of the Straight of Hormuz, particularly if Israel and Iran. It is a more remote issue, but one that is very worrisome particularly given Iran's nuclear capabilities.

(Korn) EC: The Strait of Hormuz is the only sea passage to the open ocean for large areas of the Persian Gulf. According to the U.S. Energy Information Administration an average of about 15 tankers carrying about 17 million barrels of crude oil pass through every day. This represents 40% of the world's seaborne oil shipments and 20% of all world oil shipments. It is important!

Charlie: There was a blow up of an ammunition dump over the weekend in Venezuela which Charlie thinks was a major act of sabotage against the Chavez regime. If it is followed by more unrest in Venezuela, that would be another set of cases in which their production could be cut off by civil war. There are also problems in other oil producing nations such as Nigeria, Algeria and even Egypt which produces 700,000 barrels a day which could be closed down. And all of the uncertainty in Iran and Iraq. The Muslim world is full of turmoil right now and it could lead to a general escalade that involves a cut back of oil production and transportation. That would have a serious impact on our economy. The other thing to consider is that Egypt is a force for peace in the Middle East. If an anti-Israel comes into Egypt, they could lead us into war that would force us to take action in the Middle East which would be very hard game for us given what we are doing in Iraq and Afghanistan.

Bob/Charlie: The largest group in Egypt is the Muslim Brotherhood and they are quite united and normally stand as the main opposition. They say that were it not for the interference of Hosni Mubarek in the electoral process we would see the Muslim Brotherhood elect their choice to the top. If that were the case, we would have a group that is anti-Israel in control of
Egypt. The country is bound by an agreement to keep peace with Israel, but one wonders whether that peace treaty is only as good as the paper it is written on if a new regime comes in.

(Korn) EC: The peace treaty, executed in 1979, made Egypt the first Arab country to officially recognize Israel. text of the Treaty between Israel and Egypt can be read at this url:

Israel-Egypt Peace Treaty

Charlie: When you look at the major oil importers such as Canada, US and Mexico, one of the biggest suppliers is Saudi Arabia. Charlie said they also produce very valuable oil so a switch away from Saudi Arabia would involve a huge cost. Other countries that we import a lot include Venezuela where the situation could explode over night with an assassination or attempted assassination of Hugo Chavez. In any event, he is unpredictable and may one day decide to sell all of his oil to the Chinese and they very well may buy it.

Bob/Charlie: What do you see as supply and demand right now? Charlie says right now we have sufficient supplies. We have surpluses of about 3-4 million barrels a day in a world using about 87 million a day. But it suggests that if 1-2 of the large suppliers such as Nigeria or Saudi Arabia or Libya, or Venezuela closed down it could lead us short. People are fearful and begin to horde oil and to do that they require more oil than they want to use each day so they have some extra to put in storage and that puts pressure onto the oil market and prices begin to rise even though nothing might materialize. So we could see above $100 barrel easily and that is costly for all of us because we use lots of oil-based products.

(Korn) EC: The price of Brent crude rose $1.59 to settle at $101.01 a barrel on the ICE Futures exchange in London. This is the first time it has topped $100 a barrel since 2008.

Bob/Charlie: How stable is Saudi Arabia? Charlie said it is quite stable ‹ perhaps the most stable in the Middle East. The grounds for worry would be assassination which is a very common way of changing regimes in the Middle East and any nation is subject to that. There is a family in Saudi Arabia of royals that have been in power since the mid-1920s and have done a pretty good job but there is always those who don't agree with the royals and don't want them there. Bin Laden who is a Saudi is fighting tooth and nail to bring the royal family down. And lest we forget, 1 people were aboard the airliner that smashed into the world trade center were Saudis so we have to remember that within a very stable political environment interested and dependent upon America but nevertheless in life nothing is completely stable and things change all the time that we are not aware of.

Caller: Why isn't the US bringing in its aircraft carriers to let them know we aren't going to let them shut down the flow of oil. Charlie said he thinks President Obama believes we should be quietly suggesting that Mubarek allow more democratic initiatives and this might be the opportunity to push him in that direction. We don't want to seem to be the big bully on the block and that is probably a good idea. We do have the carriers but don't want to play that role yet. There is no yet blockage of the Suez canal so things look ok and if this dies down in a few days the whole thing could subside.

(Korn) EC: Read the article, "Egypt crises a fresh dilemma for Obama policy team"

Caller: Brazil just had the largest discovery of oil. Shouldn't that keep the price of oil down? Charlie said these are wonderful finds, but the biggest fields are in the Middle East and in Venezuela are all in political danger zones and depleting fast. Many of them have reached peak production and as a group will peak in 6-8 years and then as a group begin their decline. So we need a number of Brazils to make up for what we are expecting in declines over the next decade.

(Korn) EC: Charlie is on record stating that agrees with the viewpoint of the renown Shell geologist, Dr. Marion King Hubbert, who predicted that the world oil production would reach a peak and then rapidly decline. Hubbert said the amount of oil given to our planet when it was formed is finite. When an individual field has produced 50% of its oil, you cannot force it to produce more oil on a daily basis. Charlie thinks the we are not far away from when more countries have declining production versus those that have rising production. Charlie thinks we are going to have peak production possibly sometime in the next 10-15 years. When that happens, we will be producing less oil than we consume.

Caller: A caller said she read all over the Internet that the United States is actually exporting oil to other countries but nobody talks about that. Charlie said the truth is the United States exports very little oil and usually it is in the form of specialized products like special lubricants that are not made elsewhere. We export a little liquefied natural gas from Alaska. This is less than 1% of our total production.

Bob/Charlie: What do you know about the big find of oil near Israel? Charlie said it is a huge find and we will need it. However, it is gas not oil. We wish it were oil because gas is expensive to carry long distance in a pipeline and is not a dense energy source but it is big find and there will probably be more found near it. It will be of huge help to Israel.

Bob/Charlie: Canada has not depleted its supplies of oil over the last 100 years and is now in a position to give us a lot of support. They are close, politically stable and have plenty of resources. Oil is flowing into the US through pipelines every day under contracts that are favorable to both countries with no political instability.

Caller: What do you think about the idea of focusing more on natural gas and alternative energies such as what T. Boone Pickens proposes. Charlie says there are a lot of good ideas out there. As far as natural gas, we are working on finding out new ways of getting a lot of natural gas from under the ground. Over the last five years, there have been some incredible new horizontal drilling methods. Using new cracking techniques with sand, we are getting a lot more gas than we got in the past 20 years. We are trying to figure out ways to release gas from shale. Technological developments are going to give us access to natural gas in the future. Natural gas and energy conservation will be significant solutions to our energy problems.

(Korn) EC: Read T. Boone Pickens Plan

Caller: What do you think of our energy policy? Charlie says the country is pretty well divided on what our energy policy should be so we have gridlock on making any major changes. Energy conservation is very important because a barrel of oil saved is much more valuable than a barrel found because we still have to have lifted the oil, transported it and we lose some in transit and it has to be processed, pumped, etc. Thus the barrel saved is a hugely important concept and our country is in a position to invent ways to produce power that is more efficient than has ever been produced in the past.

Bob/Charlie: As long as people can pay $3.50 a gallon for gas, there won't be any pressing demand from the American public for change. It will take an energy crises and it may not be far away.

Caller: Is the answer to our energy problems solar and wind energy? Charlie says these are good ideas, but solar power is only 0.1% of energy produced in the United States. Even if we increase 10-fold, we are only going to have 1%. Charlie said that even by spending a lot of money on it at best over the next 20 years, solar could only provide 1.5%-2.0% of our energy needs, so it is also not something we can rely on.

Bob/Charlie: Charlie said a lot of people think private corporations have a lot to do with the price of gasoline; however, much of the oil is owned by nationalized entities. This is true in China, Nigeria, Venezuela. 80% of the world reserves are owned by national companies, the rest is owned by the Chevrons, Conoco Phillips, etc. These governments are short of money and so they are not active in developing new reserves. So in places like Mexico where we know there are additional reserves, it remains only potential and may take years for governments to get the oil out and to the United States.

Bob/Charlie: Charlie said that West Texas Intermediate crude oil was about $78 a barrel. This year Charlie expects it to be about $85, next year $95 and the following year $115. We are on the road toward higher oil and we have to be prepared because we can¹t find it fast enough and it can't be developed fast enough for the oil we do have.

(Korn) 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:
David Korn's Stock Market Commentary, Interpretation of Moneytalk (Bob Brinker Host), Financial Education, Helpful Links, Guest Editorials, and Special Alert E-Mail Service. Copyright David Korn, L.L.C. 2011
For complimentary issue of David Korn's newsletter go here [LINK]

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