Middle East and your forecasting

[Kathy in FL]

OK...how much is the news shaping your forecasting for the next, say, five years, economically? Are you picturing spiraling gas prices and a climbing CPI?

Just wondering if it was just me...
Kathy in FL

 

[Steve Owen]

Forcasting for five years sound more like guessing to me. I get nervous having to forcast six months. Here's some interesting info you might read about oil, though. It's an op-ed piece in today's NY Times:

http://www.nytimes.com/2002/04/09/opinion/...todaysheadlines

You may have to sign up to be able to see the page, but it's free.

 

[Anonymous]

Forecasting is fun...you are always wrong, but so are the experts. Oil? My best guess is continued volitility. Apache Corp., a gas producer and driller (not a pipeline, not a trader, not a refiner) stated recently that the drop in gas reserves (gas found by drilling) dropped in the U. S. because of irrational trading in the Oil pits of Chicago and NY and the activity of the likes of Enron. Futures marketing was supposed to bring stability and has brought the opposite. Gas prices were $10 18 mo. ago and went to less than $2 (which is about what it costs to find and produce) by late summer. Gas is now over $3 on the futures. Expect rapidly escalating gas prices (gas, not gasoline) next winter if OCT and NOV are below average temperature. The volitile market is discouraging investment in the drillbit and that is what dictates the ultimate price. Gasoline is going to be blessed with gyrations dependent upon the mood of Hussain, Arafat, and Sharron, none of whom cares a whit what the price of gas is.
The cure is to abolish the futures trading of gasoline, oil, and natural gas and allow utilities to make long term contracts for gas. THis was the system prior to about 1984 and it worked much better than the system since.
Also, watch what Merrill Lynch says and do the opposite. They are batting a thousand in the oil prediction business as best I can tell.
My opinion? A good time to buy stable domestic gas exploring companies with 20 + records and local utilities with exploration capabilities, Oneok, ONG, etc. Drillers/producers like Apache, Devon, etc. Domestic service companies like Halliburton, National Lead, etc. will likely profit from increased business after this year, especially if the weather is as cold as 2000-2001. [disclaimer- I own some Halliburton stock, i am acquainted w/ a VP of Devon, etc.]
The Artic National Refuge needs drilled for the sake of stabilizing US production and pressuring OPEC, but since I didn't work in that area, I am ambivalent about drilling it....by the way, the area for drilling was designated by Carter in 1979 and is far from the area where the Sierra Club shows the cutesy little pictures of Caribou prancing on Mountain meadows. The area for drilling has a village, roads, and numerous Army Radar sites strung over a flat barren landscape. The likelihood of damage is minimal, but it is an emotional issue with many.
Ter the ole ex-geologist and oily

 

[Anonymous]

After nearly two months, thought I would note NL has rose from 16 to 18; Halliburton(HAL) from 16 - 18.55, Oneok (OKE) 20-20.77; Devon Energy (DVN) 47 to 52.25; Apache (APA) 55 to 55.68 (is in a trading range); I mistated Okla Gas & Elec as ONG, (OGE) which has been quite volitile over Enron related matters and it has been a loser. Of course, I didn't buy any of these.

This is not to pat myself on the back, so much as to lend general support to my contention the energy supplies are tight again and a repeat of 2 years ago may be in the offing come winter. The natural gas situation is critical with field pressures very low and drilling almost disappeared again. That means cold weather in the Midwest this winter will see pipeline pressures drop. The gas will be in the ground somewhere, but cannot be delivered fast enough to keep the price from going skyward. Natural gas futures are $1 higher than this time last year.

There has become a vast disconnect between gas and oil which used to move in tandem. Oil prices are fixed by Middle East tensions. Gas by domestic supply and weather. Hope for a mild winter.

Curiously, I am seeing people build 5,000 SF homes - most are empty nesters. The cheapo fix is pink panther insulation. Most of the appliances are either still the cheapest [read least efficient] or the largest available. I cannot imagine what the home heating bill is on such a house, but I know my girlfriend paid over $700/mo. for her gas last year with 2 kids and her mother in an older 3200 SF house. Her monthly bills are double what they were 2 years ago. Single moms feel this pinch, especially with 4 drivers in the household, one is college, one to go next year.

A cold winter could increase the mortgage delinquency rates as people choose between heat and mortgage payments.

ter

 

[Steve Owen]

One of my favorite forecasting hits was when I called the most recent recession (that might not have actually been) during a period several months before, when all the bankers and economists were still gung ho on the economy. When the so, called experts started calling the recession a recession, I said "Okay, it's over, the recovery will begin soon - and I think it did in relative terms. Of, course, when I called the recession, I really had something to go on-- a small blip in unemployment, slightly lower construction spending, and upward price pressure on SFR's in certain segments of the market - together with the dot-com bubble that any fool could have foretold was going to pop and several months in a row of relatively lower business construction spending. Now, I hesitate to forecast anything; I just put a comment into my reports that the market is "unsettled" and list the economic signs - continued high unemployment (which is actually low by historic standards), low interest rates, the uncertainties of war, strong housing markets, and iffy stock market. Your gas forecast is interesting, Terrel. Let's hope you are wrong (I have quite a bit of firewood stockpiled).

Here's an interesting forecast on the stock market:

http://www.msnbc.com/news/760636.asp

My favorite sound bite from this article is the following quote:

"...more and more experts are calling our biggest wealth generator—housing prices—a bubble that’s bound to burst."

 

[Fred]

"spiraling gas prices and a climbing CPI"

I am no wiz on forecasting, but you do raise an interesting point. In the 70's when petroleum prices soared it created a recession. Energy costs soaked up so many resources that there wasn't enough left over for other things. This contradicted the counter-inuitivie Keynesian assumptions that are taught in all the colleges, so they had to come up with a new name for it: "staglation."

Now, unlike then, leases are tied to "CPI." If there is another "stagflation" crisis, many business will have trouble keeping contract rent commitments.

Not much of a forecast. but it does point out some of the "risk" using the CPI as a basis for rent increases.