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business newsThe Best Ideas in Oil, Capacity Utilization, Real Estate and Employment
John Hofmeister talks oil and gas, David Rosenberg sees negatve growth by year end, and David Shilling looks at relationship between employment growth and GDP.
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Oil at $125 a Barrel, Gasoline at $5
John Hofmeister is the former president of Shell Oil and now CEO of the public-policy group Citizens for Affordable Energy. He paints a very stark (even bleak, as he gets further into the speech) picture of the future of energy production in the US unless we change our current policies. First, because of the aftereffects of the moratorium. It’s his belief that the drilling moratorium will effectively still be in place until at least the middle of 2012. There won't even be new rules until the end of 2011, and then the lawsuits start.
Gulf oil production will be down by up to 1 million barrels a day. Imported oil is now 67% of oil usage but will go to 75% by 2012. He thinks crude oil will be up to $125 and gasoline between $4-$5 at the pump. And it will only get worse.
He describes the problem with the electricity from coal production. The average coal plant is 38 years old, with a planned-for life of 50 years. Our energy production capability is rapidly aging, and we’re not updating it fast enough.
He argues that the fight between the right and the left has given us 37 years without a realistic energy policy as policy gets driven by two-year political cycles but good energy planning takes decades. There are 13 government agencies that regulate the energy industry, with conflicting mandates that change very two years. There are 22 congressional committees that have some level of involvement and oversight of the energy industry.
The following table is from data provided by Triple Double Advisors LLC, an energy specialty investment firm in Houston, Texas. John White was sitting next to me and showed me this table, pointing out the poor performance in terms of investor returns from renewable energy sources and the larger returns from Master Limited Partnerships where investors are seeking yield. It seems the market is voting that it doesn't have much confidence in the renewable energy world. Hofmeister suggests that government subsidies for renewable energy will go away under the pressure to get the fiscal deficit under control. Maybe the market senses that. He says we need to create a 50-year plan for our energy policy that transcends the political cycle.
David Rosenberg and Capacity Utilization
I’m a big fan of David Rosenberg (former chief economist at Merrill and now with Gluskin Sheff in Toronto), and have really enjoyed getting to know him the last few years. He’s a fun guy, even if his data is not exactly bullish. It was hard to pull out the best of his charts because he had so many.
The first chart shows that real final sales are the lowest, four quarters after the end of a recession, that they’ve ever been. Average growth is 4%, but we're up less than 1% in the current recovery. The second chart (side by side with the first, below) shows the contribution of various sectors to real GDP growth. You find that of the 3% average growth over the last four quarters, 1.8% was inventory rebuilding. His point (and one I’ve made as well) is that this isn’t sustainable. At some point rebuilding will no longer be as big a factor, as inventories will get closer to equilibrium. And the consumer doesn’t look like he’s going to ride to the rescue.
Rosie thinks we could slip into negative growth by the end of the year.
This next chart shows U-6 unemployment compared to manufacturing capacity utilization rates. Unemployment will have difficulty getting better as long as capacity utilization rates are at what is typically thought of as recession levels.
The next and last chart from Rosie is on housing, showing us the large number of vacant homes and the vacancy rate. Home values are not likely to rise nationwide (there will be some good local pockets) until the vacancy rates come down. Ditto for new home construction and the jobs from that sector. Gary Shilling (see next section) says he thinks home prices could drop another 20%.
Gary Shilling: Commercial Real Estate and Employment
The next two charts are from good friend Gary Shilling (selected out of about 50 he had). The first shows us that the Commercial Real Estate Price Index is down almost 40% from its peak. Judging from the graph, it looks like the free-fall may be over for now, assuming we don’t get into another recession too soon. Is it any wonder that bank lending is down, since so much lending was in commercial real estate and CRE construction?
The last chart shows us the trend line for the relationship between employment growth and GDP. It turns out that you need at least 3% GDP growth to get meaningful employment growth. If growth is slowing down to less than 2%, it’s going to be very difficult to really address the unemployment problems.
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