Book Review: Private Empire – ExxonMobil and American Power by Steve Coll

If you were expecting Private Empire, the latest book by two-time Pulitzer Prize winning author Steve Coll, to serve as a hit piece on ExxonMobil (and 'Big Oil' in general) you’ll be somewhat disappointed.

For anyone unfamiliar with his previous work, Steve Coll’s earlier books include the highly recommended Ghost Wars, arguably the definitive geopolitical account of the activities of the CIA and other national intelligence agencies in Afghanistan and Pakistan from the time of the Soviet invasion up to the eve of the 9-11. Ghost Wars won the Pulitzer Prize in 2004 for general non-fiction and was one of the books a newly elected President Barrack Obama was reported to be reading upon entering office.

Steve Coll describes in an interview with Charlie Rose what lead him to want to write Private Empire and how his original idea for the book was to tell a broader story about the oil industry in the style of Daniel Yergin’s The Prize. He soon realized, however, that he needed a central character and Exxon was for him the only logical choice.

Coll’s portrait of Exxon begins in March 1989 with the Exxon Valdez oil spill in Prince William Sound, Alaska, an event which made the company the most reviled in the United Sates. The book’s timeline spans the subsequent transformation of the company, which was led by CEO Lee “Iron Ass” Raymond, up through its present day stewardship by current CEO Rex Tillerson. Along the way we learn a great deal about Exxon, including its somewhat peculiar cult-like corporate culture, its blockbuster merger with Mobil, its controversial stance and efforts on global warning, the access it enjoyed to political leaders such as Vice President Dick Cheney, its somewhat misleading approach to reporting oil reserves, and the company’s record setting financial success. The book in fact makes for a compelling business case study and students of business history, strategy and management will find much of interest.

The most interesting sections of the book are the ones detailing ExxonMobil’s operations in some of the world’s most politically unstable regions. ExxonMobil’s bread and butter business is to invest billions of dollars drilling holes in the ground in countries like Equatorial Guinea and Chad and then spend the next 30-40 years working to make sure that nothing interrupts the company's return on investment. Coll’s account of the 2004 attempted coup in Equatorial Guinea by a group of British and South African mercenaries, who were supported from some elements within the Spanish government, is one of the most fascinating stories in the book.

Continue reading the full review here.

Video: El-Erian, Buiter, Warsh, etc. on Economic Growth

This is another excellent panel from the Milken Institute Conference. It has a somewhat more investment focus than the previous one posted with discussion/predictions on the Eurozone (Greece in or out), elections, interes rates, etc.

Jeremy Grantham's Full December 2011 Quarterly Letter

JGLetter_ShortestLetterEver_3Q112

Video: Niall Ferguson Says Financial Repression Preventing Full-Scale Italian Bank Run

Niall's latest comments on the Eurozone crisis after the jump:

QOTD from World's Largest Currency Trader, John Taylor: "The euro is going to hell"

Here are some other highlights:

So why should the U.S. dollar appreciate in such a horrid environment? As the world's reserve currency, Taylor says, the dollar has become a reverse indicator of the globe's economic health. "Whenever things are good in the world, [the] currency goes down," since there's ample liquidity. But when the rest of the globe is doing poorly, there's no liquidity and therefore the U.S. dollar is worth more. "That is the most important thing to know about foreign exchange nowadays–it is kind of backwards," he says. 

Greece's default is more a matter of when than if, he says, as the Greek citizenry won't support the austerity measures necessary to stay in the euro zone. There will be a referendum this autumn on some of the recent changes, and the outcome could upend the fiscal cuts already decided upon, Taylor warns. 

He now sees the euro trading between $1.37 and $1 over the next 18 months—nearer to the top side "if the Fed does its best at ruining our currency, and the euro manages to survive somehow." The world is pretending the European debt crisis is fixed, he adds—necessary if you are trading short term, but "long-term, a debt deal isn't going to work. The euro is going to hell. Every time they do things to fix it, it gets deeper and deeper." 

Are there any other currencies worth paying attention to? Taylor is positive on the commodity-based ones, such as the Australian and New Zealand dollars, despite their run-up. "We use commodities to forecast currencies," he notes. For instance, Norway's krone is a function of the price of oil, which he thinks is a solid long-term bet on the next growth cycle. In five years, he says, "we could see oil at $500 a barrel. I would be a buyer on dips of oil." 

Among Taylor's influences is the 1991 book, Generations, by historians William Strauss and Neil Howe, which identifies longer-term cultural and demographic cycles in American life. "Every 80 years, we go through a deleveraging cycle," he says. "It's hard to measure, but that's where we are now. It has to do with the period 2010-20, compared with 1930-40." The so-called Millennials, who were born between 1980 and 2000, "will be the ones to save us, but they'll have no money, no entitlements," says Taylor.

Full article here. 

Video: Jim Chanos' Latest Thoughts on China

Video: Jim Rogers on Greek Default, Operation Twist, SNB Intervention & Why He's Shorting Equities

Rogers on how "Bernanke has been lying to us again" and other thoughts on what's happening right now and where he's investing.

Video: 60 Minutes on High Frequency Computerized Trading

Video: Jim Roders on Commodities, Currencies, Farming, Gold, Tech Bubble and Debt Default

Niall Ferguson: Dump Commodities Now

Looks like the good Harvard professor has made a shift in his personal portfolio.

Link to Niall Ferguson's incredibly well-timed (published April 24) Newsweek article here, which focuses on the dramatic story behind the copper boom and its 181% run-up since February 2009 (compared to gold's 75% increase over the same period).

From the article:

So just why has copper been trumping gold as an investment? The answer is partly that the extraordinarily loose monetary policies adopted by Western governments to combat the financial crisis have driven up the prices of nearly all commodities. 

But the key to the copper story is soaring Asian demand. Asians want modern houses with Western-style wiring and plumbing. They want cars. They want electronic gadgetry. So they want copper. In 2005 China accounted for 22 percent of global copper consumption. In 2009 the figure was 39 percent. Try as they may, the copper miners can’t keep pace. And the supply of copper in the world isn’t limitless. Indeed, if the rest of the world were to consume at just half the American per capita rate (1,389 pounds in an average lifetime), we’d exhaust all known copper reserves within just 38 years. 

Asians were shocked by the price spike of 2004–08, which saw copper prices quadruple; hence their recent rush to invest in copper mines. The big question now is whether this new scramble for Africa is worsening the disease it was supposed to cure. Rampant Asian demand has once again driven up prices. Higher commodity prices are feeding into higher consumer prices. Inflation in China hit 5.4 percent last month. That makes the authorities nervous. The last thing they want is the kind of popular unrest that was sparked by higher prices in North Africa. 

All over the world, central banks are applying the brakes. The European central bank has already raised rates. The Fed seems intent on ending quantitative easing in June. The People’s Bank of China, meanwhile, has not only raised rates but also increased reserve requirements for banks. Remember, this comes as fiscal policy is also being tightened in the developed world—even, belatedly, in the United States. Remember, too, that higher commodity prices act as a tax on consumers in importing countries. Higher prices plus lower growth equals stagflation. 

So far these changes have had little impact. But brace yourself. To my eyes, global monetary and fiscal tightening is a clear sell signal for commodities. That could take the shine off copper—and send a blast of cold air down the ventilation shafts of Zambia’s mines.

Video: Niall Ferguson on Middle East Turmoil, China, U.S. Dollar's Future

The Vital Question on Every Fleeing Dictator's and Oligarch's Mind

Preferred getaway vehicle

Is whether to pack gold, cash or something else entirely (i.e., diamonds, bearer bonds, highly enriched uranium) into your getaway airplane?

Courtesy of commenter Greg S. at the Business Insider, here is the gold vs. cash calculation:

Greg figured a G-5 (a popular business jet) couldn't take off with 'tons of gold'. He estimated that $1 million fits in a small duffel bag and about 100 of those would fill a G5's overhead storage bins. Here's what he came up with:

"Business is slow here, so just for fun I calculated the dollar value of gold and currency that you can stuff into a G5 and still take off with 18 passengers. The useful load of a G5 is 6500lbs and the baggage compartment is listed at 226 cubic feet.

Gold in a G5: [6,500lbs - 18*165 lbs passengers]*16oz/lb*$1300/oz = $73.4 million worth of gold (with no passengers you can roughly double the amount of gold)

Currency in a G5: 226 ft3 * 1728 in3/ft3 / 0.06891 in3 * $100USD = $566.7 million USD (you could still put more in the cabin).

No surprise that it makes sense to leave the gold at home. If you figure that 10-15% of the volume is going to go toward the actual suitcases this means that the entire baggage compartment of that jet was packed full of US cash."

However, commenter Matland calculates that diamonds may be an even better call on a space/weight for value basis:

1 carat diamond = $1,000
1 carat weight about 200 milligrams
31,000 milligrams = 1 ounce
$155,000 worth of diamonds = 1 ounce
$500 million in diamonds = 3,225 ounces12 troy ounces = 1 pound
3,225 ounces =268.75 pounds 

$500 million in diamonds = 268.75 pounds

Just leave out the fat account and bring about four duffle bags of shiny stones.

The Key Reason Electric Vehicles Matter

While most of a recent Seeking Alpha article titled 'Plug-in Vehicles and Their Dirty Little Secret' with 444 comments and counting is correct, there's a lot more to the electric vehicle story than the author's focus on emissions would lead the reader to believe.

EV Emissions and the Present and Future Grid

From an emissions perspective, running your car on electricity is about 25% cleaner than a standard car that gets about 25 mpg. But compared to a hybrid that gets more like 45-50 mpg, electric cars produce more emissions (e.g., carbon).

It's also true that more charging will likely occur at night, when the power produced is more heavily coal-weighted. However, while charging at night is worse from an emissions perspective it is much better from a grid stability and grid transmission perspective.

It's also worth noting that the mix of generation sources that provide power to the grid is changing - it is getting cleaner. Coal's share of the gird (in the U.S.) has gone from ~55% in the late 1980s to ~45% today. This trend will continue, especially as the U.S. continues to retire many of its older coal plants and replaces them with natural gas power plants, and more wind/solar.

The Environmental Protection Agency continues to tighten emissions regulations on power plants, so even newer coal plants (the few that will get built) are much cleaner and more efficient than the current ones. So using today's grid mix in assessing EVs ignores the improvement in emissions we'll be seeing in the future as the grid becomes cleaner.

How Much Do Electric Cars Really Cost?

There is one misleading remark the author makes on cost: in many cases running your car on electricity is actually cheaper than gasoline. $3.00/gal gasoline for a car that gets 30 mpg = $0.10/mile. If that car ran on electricity, it would get about 3 miles / kWh, and so for an electricity cost of $0.12/kWh (the US average), that works out to only $0.04/mile, or 60% less.

But this is only one example. Californians pay a lot for electricity, so it could be more expensive to run the car on electricity. Note: PG&E is working on rate structures that make it cheaper to charge at night, thus helping improve the economics for electric cars.

However, the cost of battery packs is expensive, so if you amortize the cost of the battery pack over the lifetime mileage of the pack, then that cost/mile obviously goes up for EVs. But is it really fair to do that? Do we similarly amortize the cost of a gasoline engine, fuel system, tank, etc? No. But without question, these battery packs are expensive, so the costs of the cars will be higher.

Why Electric Vehicles Truly Matter

So what's really behind all this fuss about rechargeable cars? If it's not about saving money, and not about reducing emissions, then what's left?

Energy security.

The biggest challenge our worldwide energy system faces is the near complete monopoly that oil has on the transportation sector. We heat our homes using a variety of energy sources. We make electricity using a variety of energy sources. But when it comes to the 3rd category of energy consumption (transportation) it is essentially all oil.

And making things worse is the fact that the U.S. imports about 2/3 of its oil, and 40% of those imports come from OPEC. This is not a very encouraging situation for whole host of reasons and warrants a separate article.

Hybrids help reduce oil consumption, which is obviously good for reducing emissions, fuel costs, and it helps reduce dependence on oil imports. But it does little to break oil's monopoly on the auto and overall transportation sector.

We need to find alternatives to oil, and the longer we wait the more painful it will become.

(Note: for more information on electric vehicles check out MIT's EV team page here and this recent report from the MIT Energy Initiative.)

Quote of the Day: Jim Rogers On Why He's Long Cotton

From legendary investor Jim Rogers:

“Paper money is made of cotton, and I’m long cotton, by the way,” Rogers said. “One reason I’m long cotton is because Dr. Bernanke is out there running the printing presses as fast as he can.”

More from Rogers, including his thoughts on gold, can be found here.