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http://www.bloomberg.com/apps/news?pid=20601072&sid=ac26rm_fYH8Q

California Climate Fight May Break Campaign Spending Record
By Simon Lomax and Mark Chediak

April 16 (Bloomberg) -- A dispute between environmental groups and refiners Tesoro Corp. and Valero Energy Corp. over global warming laws in California may flare into a political campaign with a price tag exceeding $150 million.

The Texas-based companies want California voters to decide in November whether the state’s program for cutting greenhouse gases should be delayed until the economy dramatically improves. Environmental groups say the pollution controls will create jobs and should start in 2012 as planned.

The record for campaign spending on a ballot initiative was set in 2006, when industry groups and environmentalists, backed by film producer Steve Bing and venture capitalist John Doerr waged a $154 million battle over oil taxes. That mark could be surpassed this year with California’s global warming law on the line, said Louise Bedsworth, a research fellow at the Public Policy Institute of California.

“It’s likely to be one of the most expensive propositions that the state has had,” Bedsworth said in a telephone interview from San Francisco.

California’s Global Warming Solutions Act, signed into law by Governor Arnold Schwarzenegger in 2006, aims to cut the state’s output of carbon dioxide and other greenhouse gases linked to climate change to their 1990 levels by 2020.

Some companies with operations in California have said they’re worried about the cost of the legislation, known by its bill number, AB 32, and the threat of losing market share to competitors in other countries and U.S. states that aren’t similarly regulated.

Money Coming In

According to the California secretary of state’s office, Valero has contributed $500,000 and Tesoro $100,000 to the California Jobs Initiative Committee, which has proposed a ballot initiative to delay AB 32 until the state’s unemployment rate falls from its current 12.5 percent to 5.5 percent.

When AB 32 became law in 2006, California’s unemployment rate was 4.8 percent, and until it’s close to that level again the greenhouse gas regulations shouldn’t be enforced, Anita Mangels, the Sacramento-based committee’s communications director, said in a telephone interview. The group has raised a total of $971,001 so far, according to state records.

“There were assumptions made when AB 32 was adopted about economic growth, job growth and availability of capital that simply no longer are valid,” Mangels said. “You really have to have a similar economic climate in order to make it work.”

Delay Means Defeat?

Waiting for California’s unemployment rate to fall to 5.5 percent before enforcing the global warming law would effectively kill it, Jim Metropulos, a senior advocate for the San Francisco-based environmental group Sierra Club, said in a telephone interview.

“If the initiative passes, it’s good-bye AB 32,” Metropulos said.

The proposed initiative is likely to qualify for the November ballot and environmentalists are bracing for a bigger campaign than the 2006 battle over taxing oil produced in California to fund alternative energy, Metropulos said.

The 2006 ballot initiative, Proposition 87, failed to pass, getting 45 percent of the vote. Its supporters spent $61.3 million and the ballot measure’s opponents spent $92.9 million, according to state records. It was the most expensive ballot initiative campaign in California history, according to the Los Angeles-based Center for Governmental Studies.

More Cash Coming

“We’re preparing for a lot more money to be raised,” said Steven Maviglio, spokesman for Californians for Clean Energy and Jobs, a Sacramento-based group including technology companies such as Google Inc. and Applied Materials Inc., venture capitalists, environmental and public health groups that oppose the initiative.

The global warming ballot initiative in California is being promoted as a group of U.S. senators, led by Massachusetts Democrat John Kerry, try to revamp stalled legislation to create a national program for cutting greenhouse gases so it can pass Congress this year.

“Depending on what happens in Washington, this could be a ground zero for the battle for the future of clean energy,” Maviglio said of the California debate.

Schwarzenegger, who can’t run for re-election this year because of term limits, told reporters April 13 he will fight the “greedy Texas oil companies” that want to delay the state’s greenhouse gas limits.

Tesoro and Valero, both based in San Antonio, have refineries in Los Angeles and near San Francisco.

Tesoro, the largest independent refiner on the West Coast, has more than 2,000 employees in California, said Lynn Westfall, a spokesman for the company. Valero, the largest U.S. independent refiner, has more than 1,600 employees in the state and “a significant interest in ensuring that the California economy remains strong,” said Bill Day, a Valero spokesman.
 

UnScientific American
By William Tucker

Scientific American used to be a great magazine but like any publishing venture headquartered in New York, it has gradually drifted into liberal never-never-land.

Over the years the magazine has run several lead stories encouraging complete nuclear disarmament. At one point it had O.J. Simpson's attorney explaining why DNA technology would never be accurate. Now it's become a shameless, uncritical cheerleader for a world run on renewable energy.

This month's cover story ( http://www.scientificamerican.com/article.cfm?id=a-path-to-sustainable-energy-by-2030 ), "A Plan for a Sustainable Future: How to get all energy from wind, water and solar power by 2030," is a prime example. Authors Mark Z. Jacobsen and Mark A. Delucchi are respectively, a professor of civil and environmental engineering at Stanford and a research scientist at UC Davis -- which makes you wonder what's going on in academia these days. The article is so full of half-truths, absurd omissions and blue-sky fantasy that it is hard to know where to begin.

The authors premise is this: In order to free ourselves from fossil fuels and nuclear power, the authors postulate, all we need to do over the next 20 years is build the following:

• 490,000 tidal turbines of 1 megawatt apiece (<1 percent of which are now in place).

• 5,350 geothermal plants of 100 MW (< 2 percent in place).

• 900 hydroelectric dams of 1300 MW (70 percent in place),

• 3,800,000 windmills of 5 MW (1 percent in place).

• 720,000 wave converters (ocean turbines driven by waves rather than the tide), 0.75 MW (< 1 percent in place).

• 1,700,000,000 rooftop solar voltaic systems, 0.003 MW (< 1 percent in place).

• 49,000 solar thermal plants (mirror arrays that heat a fluid), 300 MW (< 1 percent in place).

• 40,000 photovoltaic power plants (sunlight directly into electricity), 300 MW (<1 percent in place).​
That would make a nice stimulus package, wouldn't it? Let's hope Congress doesn't take this too seriously. Offhand, I would say that if we undertook one-tenth of these tasks over the next twenty years we would be very ambitious. Even then, the authors have had to do a lot of fudging. For example:

• 900 hydroelectric dams, 1300 MW, 70 percent in place. There are only 94 dams in the whole world that produce more than 1300 MW, eleven of them in the United States. Even Glen Canyon (1296 MW) does not quite qualify. Around the world there are few dam sites left untamed. Even building 70 more dams of this size – let alone 800 -- is unlikely.

• 3,800,000 windmills, 5 MW, <1 percent in place. The largest windmills now designed generate 3 MW. These are "the length of a football field," as President Obama recently mentioned. A windmill generating 5 MW would probably be the length two football fields and stand 80 stories high. Imagine the landscape covered with 3 million these

• 1.7 billion solar rooftop systems. With only 6 billion people in the world, there may not be enough rooftops to house all these. We'll have to put up some more buildings just to accommodate them.

• 89,000 solar thermal and voltaic plants, 300 MW apiece. It takes about 15 square miles to generate 1000 MW with either system. There is little room for improvement, since the limits are set by the sun's energy. That amounts 450,000 square miles, about the size of Texas and California combined. Solar mirrors and panels must be washed once a week or they collect too much dust and lose their efficiency. That's a lot of water.

Oh well, this isn't really a serious exercise, is it? The authors are just doing some creative thinking so the U.S. delegation at Copenhagen in December can have something to wave in front of the cameras. The lead editorial praises the authors' "hard-headed pragmatism," saying they show "step by step… that more than enough sustainable energy exists [and] the needed technologies are available now."

What is truly remarkable is that the authors' inventory of knowledge seems to include nothing about nuclear power, the one technology that can truly provide "green energy." To begin with, they barely make any distinction between nuclear and fossil fuels, lumping together as the old way of doing things:

Most recently, a 2009 Stanford University study ranked energy systems according to their impacts on global warming, pollution, water supply, land use, wildlife and other concerns. The very best options were wind, solar, geothermal, tidal and hydroelectric power -- all of which are driven by wind, water or sunlight (referred to as WWS). [This statement is incorrect. Geothermal energy is driven by the radioactive heat of the earth due to the breakdown of uranium and thorium. That's why I called my book "Terrestrial Energy."] Nuclear power, coal with carbon capture, and ethanol were all poorer options, as were oil and natural gas.… Nuclear power results in up to 25 times more carbon emissions than wind energy, when reactor construction and uranium refining and transport are considered. Carbon capture and sequestration technology can reduce carbon dioxide emission from coal-fired power plants but will increase air pollutants and will extend all the other deleterious effects of coal mining, transport and processing, because more coal must be burned to power the capture and storage steps. Similarly, we consider only technologies that do not present significant waste disposal or terrorism risks.​

Where the authors get the notion that nuclear will emit 25 times as much carbon as wind is anybody's guess. A reactor contains about 500,000 cubic yards of concrete and 120 million pounds of steel. Yet a single 45-story windmill stands on a base of 500 cubic yards of concrete and contains as much metal as 120 automobiles. Since you need 2000 of these to equal one nuclear reactor (a very generous estimate), that adds up to twice as much concrete and steel.

Then there's the business of uranium enrichment. Environmentalists love to argue that nuclear is actually more carbon-intensive because uranium enrichment requires such huge amount of electricity. This is true in one respect. The country's only operating uranium enrichment plant in Paducah, Kentucky requires 2,000 MW of electricity -- supplied by two full-fledged coal plants. But the plant employs World War II gas-diffusion technology. The United States Enrichment Corporation's new laser enrichment plant in Ohio would consume only 5 percent as much electricity- except that the Obama Administration has mysteriously rejected its application for a $2 billion loan guarantee and work has been temporarily suspended. In any case, uranium enrichment produces carbon emissions only if the electricity is supplied by coal. If enrichment were powered by nuclear power, carbon emissions would be zero.

Then there's the business of "transporting uranium fuel." It's hard to tell what the authors are talking about here. A nuclear reactor requires a new shipment of fuel rods once every 18 months. They are delivered by about six tractor trailers. There is probably more energy expended in hauling a single giant windmill to a remote farm location than is spent in refueling an entire 1000-MW reactor.

Where the authors lose all contact with reality, however, is in talking about "reliability." Here is what they have to say:

WWS [wind, water, solar] technologies generally suffer less downtime than traditional sources. The average U.S. coal plant is offline 12.5 percent of the year for scheduled and unscheduled maintenance. Modern wind turbines have a down time of less than 2 percent on land and less than 5 percent at sea. Photovoltaic systems are also at less than 2 percent. Moreover, when an individual wind, solar or save device is down, only a small fraction of production is affected; when a coal, nuclear or natural gas plant goes offline, a large chunk of generation is lost.​

Here are the facts. Every form of electrical generation is rated by what is called its "capacity factor," meaning the percentage of time, on average, it is up and running. Plants go on- or off-line for many reasons – maintenance, refueling, high costs, or simple unavailability. Coal plants are generally shut down once every two weeks to perform routine maintenance and "give the boiler a rest." Natural gas is often taken off-line because the fuel is so expensive. Hydroelectric dams shut down because of fish migrations or seasonal variations in reservoir capacity.

The generally accepted capacity factors for the various forms of generation are as follows:

• Nuclear -- >90 percent

• Coal -- ~80 percent

• Geothermal -- 75 percent

• Natural gas -- 50 percent

• Hydroelectricity -- 45 percent

• Wind -- 30 percent

• Solar -- 20 percent

In order to fabricate their argument, the authors have:

1. Considered only maintenance shut-downs and not general availability, and

2. Completely ignored the capacity factor of nuclear.

Windmills may only offline for maintenance 2 percent of the time but the wind only blows about 30 percent of the time. Solar power is available even less. Neither is "dispatchable," as the electrical engineers say, and therefore require constant back-up from other sources. Storage techniques may eventually solve this problem but the storage facilities will take up as much room as the generators themselves.

What Jacobson and Delucchi have managed to leave entirely out of the picture is the concept of energy density. Nuclear power's overwhelming advantage is its tremendous energy yield per pounds of resource employed. A pound of uranium contains 2000 times as much energy as a pound of coal. In real life, this translates into a 110-car coal train arriving every 30 hours versus six tractor trailers arriving once every 18 months.

Yet while nuclear has a tremendous advantage over the fossil fuels, so the fossil fuels have about 20 times the density of wind, water and solar. That is we adopted fossil fuels in the first place. We no longer use the wind to power grist mills or waterwheels to run factories because it takes too much effort to gather too little energy. What renewable enthusiasts are asking us to do is move backwards in history.

Even more significant, the world of Jacobson and Delucchi would be the most colossal human intrusion into the natural world the history of the planet. It would dwarf any previous effort of civilization. We would live in a forest of 80-story windmills interrupted by rolling prairies of solar collectors. Every inch of coastline would be girdled with tidal generators while every square mile of ocean was dotted with wind and wave collectors. There would be no place on the planet not dedicated to gathering energy.

Could we do it? Sure, we probably could, although not on the time scale Jacobsen and Delucchi propose. Would we want to do it? You can answer that question yourself.
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http://online.wsj.com/article/SB100...97990310606472.html?mod=WSJ_hpp_sections_news

The U.S. Treasury Introduces A New $100 Bill

...The bill—the highest denomination of all U.S. notes—circulates widely around the world, with circulation in the past 25 years growing to $890 billion from $180 billion.

About two-thirds of all $100 notes circulate outside the U.S...

...The 6.5 billion or so $100 notes in circulation now will remain legal tender...
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Somebody either needs a proof reader or a remedial mathematics course!

 


THE SUPERINVESTORS OF GRAHAM-AND-DODDSVILLE
by Warren E. Buffett

NOTE:
The original article was an edited transcript of a talk given at Columbia University in 1984 commemorating the fiftieth anniversary of Security Analysis, written by Benjamin Graham and David L. Dodd. This specialized volume first introduced the ideas later popularized in The Intelligent Investor. Buffett's essay offers a fascinating study of how Graham's disciples have used Graham's value investing approach to realize phenomenal success in the stock market.

The tables Buffett mentions are in The Intelligent Investor, but are not reproduced here.​

Is the Graham and Dodd "look for values with a significant margin of safety relative to prices" approach to security analysis out of date? Many of the professors who write textbooks today say yes. They argue that the stock market is efficient; that is, that stock prices reflect everything that is known about a company's prospects and about the state of the economy. There are no undervalued stocks, these theorists argue, because there are smart security analysts who utilize all available information to ensure unfailingly appropriate prices. Investors who seem to beat the market year after year are just lucky. "If prices fully reflect available information, this sort of investment adeptness is ruled out," writes one of today's textbook authors.

Well, maybe. But I want to present to you a group of investors who have, year in and year out, beaten the Standard & Poor's 500 stock index. The hypothesis that they do this by pure chance is at least worth examining. Crucial to this examination is the fact that these winners were all well known to me and pre-identified as superior investors, the most recent identification occurring over fifteen years ago. Absent this condition - that is, if I had just recently searched among thousands of records to select a few names for you this morning -- I would advise you to stop reading right here. I should add that all of these records have been audited. And I should further add that I have known many of those who have invested with these managers, and the checks received by those participants over the years have matched the stated records.

Before we begin this examination, I would like you to imagine a national coin-flipping contest. Let's assume we get 225 million Americans up tomorrow morning and we ask them all to wager a dollar. They go out in the morning at sunrise, and they all call the flip of a coin. If they call correctly, they win a dollar from those who called wrong. Each day the losers drop out, and on the subsequent day the stakes build as all previous winnings are put on the line. After ten flips on ten mornings, there will be approximately 220,000 people in the United States who have correctly called ten flips in a row. They each will have won a little over $1,000.

Now this group will probably start getting a little puffed up about this, human nature being what it is. They may try to be modest, but at cocktail parties they will occasionally admit to attractive members of the opposite sex what their technique is, and what marvelous insights they bring to the field of flipping.

Assuming that the winners are getting the appropriate rewards from the losers, in another ten days we will have 215 people who have successfully called their coin flips 20 times in a row and who, by this exercise, each have turned one dollar into a little over $1 million. $225 million would have been lost, $225 million would have been won.

By then, this group will really lose their heads. They will probably write books on "How I turned a Dollar into a Million in Twenty Days Working Thirty Seconds a Morning." Worse yet, they'll probably start jetting around the country attending seminars on efficient coin-flipping and tackling skeptical professors with, " If it can't be done, why are there 215 of us?"

By then some business school professor will probably be rude enough to bring up the fact that if 225 million orangutans had engaged in a similar exercise, the results would be much the same - 215 egotistical orangutans with 20 straight winning flips.

I would argue, however, that there are some important differences in the examples I am going to present. For one thing, if (a) you had taken 225 million orangutans distributed roughly as the U.S. population is; if (b) 215 winners were left after 20 days; and if (c) you found that 40 came from a particular zoo in Omaha, you would be pretty sure you were on to something. So you would probably go out and ask the zookeeper about what he's feeding them, whether they had special exercises, what books they read, and who knows what else. That is, if you found any really extraordinary concentrations of success, you might want to see if you could identify concentrations of unusual characteristics that might be causal factors.

Scientific inquiry naturally follows such a pattern. If you were trying to analyze possible causes of a rare type of cancer -- with, say, 1,500 cases a year in the United States -- and you found that 400 of them occurred in some little mining town in Montana, you would get very interested in the water there, or the occupation of those afflicted, or other variables. You know it's not random chance that 400 come from a small area. You would not necessarily know the causal factors, but you would know where to search.

I submit to you that there are ways of defining an origin other than geography. In addition to geographical origins, there can be what I call an intellectual origin. I think you will find that a disproportionate number of successful coin-flippers in the investment world came from a very small intellectual village that could be called Graham-and-Doddsville. A concentration of winners that simply cannot be explained by chance can be traced to this particular intellectual village.

Conditions could exist that would make even that concentration unimportant. Perhaps 100 people were simply imitating the coin-flipping call of some terribly persuasive personality. When he called heads, 100 followers automatically called that coin the same way. If the leader was part of the 215 left at the end, the fact that 100 came from the same intellectual origin would mean nothing. You would simply be identifying one case as a hundred cases. Similarly, let's assume that you lived in a strongly patriarchal society and every family in the United States conveniently consisted of ten members. Further assume that the patriarchal culture was so strong that, when the 225 million people went out the first day, every member of the family identified with the father's call. Now, at the end of the 20-day period, you would have 215 winners, and you would find that they came from only 21.5 families. Some naive types might say that this indicates an enormous hereditary factor as an explanation of successful coin-flipping. But, of course, it would have no significance at all because it would simply mean that you didn't have 215 individual winners, but rather 21.5 randomly distributed families who were winners.

In this group of successful investors that I want to consider, there has been a common intellectual patriarch, Ben Graham. But the children who left the house of this intellectual patriarch have called their "flips" in very different ways. They have gone to different places and bought and sold different stocks and companies, yet they have had a combined record that simply cannot be explained by the fact that they are all calling flips identically because a leader is signaling the calls for them to make. The patriarch has merely set forth the intellectual theory for making coin-calling decisions, but each student has decided on his own manner of applying the theory.

The common intellectual theme of the investors from Graham-and-Doddsville is this: they search for discrepancies between the value of a business and the price of small pieces of that business in the market. Essentially, they exploit those discrepancies without the efficient market theorist's concern as to whether the stocks are bought on Monday or Thursday, or whether it is January or July, etc. Incidentally, when businessmen buy businesses, which is just what our Graham & Dodd investors are doing through the purchase of marketable stocks -- I doubt that many are cranking into their purchase decision the day of the week or the month in which the transaction is going to occur. If it doesn't make any difference whether all of a business is being bought on a Monday or a Friday, I am baffled why academicians invest extensive time and effort to see whether it makes a difference when buying small pieces of those same businesses. Our Graham & Dodd investors, needless to say, do not discuss beta, the capital asset pricing model, or covariance in returns among securities. These are not subjects of any interest to them. In fact, most of them would have difficulty defining those terms. The investors simply focus on two variables: price and value.

I always find it extraordinary that so many studies are made of price and volume behavior, the stuff of chartists. Can you imagine buying an entire business simply because the price of the business had been marked up substantially last week and the week before? Of course, the reason a lot of studies are made of these price and volume variables is that now, in the age of computers, there are almost endless data available about them. It isn't necessarily because such studies have any utility; it's simply that the data are there and academicians have [worked] hard to learn the mathematical skills needed to manipulate them. Once these skills are acquired, it seems sinful not to use them, even if the usage has no utility or negative utility. As a friend said, to a man with a hammer, everything looks like a nail.

I think the group that we have identified by a common intellectual home is worthy of study. Incidentally, despite all the academic studies of the influence of such variables as price, volume, seasonality, capitalization size, etc., upon stock performance, no interest has been evidenced in studying the methods of this unusual concentration of value-oriented winners.

I begin this study of results by going back to a group of four of us who worked at Graham-Newman Corporation from 1954 through 1956. There were only four -- I have not selected these names from among thousands. I offered to go to work at Graham-Newman for nothing after I took Ben Graham's class, but he turned me down as overvalued. He took this value stuff very seriously! After much pestering he finally hired me. There were three partners and four of us as the "peasant" level. All four left between 1955 and 1957 when the firm was wound up, and it's possible to trace the record of three.

The first example (see Table 1) is that of Walter Schloss. Walter never went to college, but took a course from Ben Graham at night at the New York Institute of Finance. Walter left Graham-Newman in 1955 and achieved the record shown here over 28 years. Here is what "Adam Smith" -- after I told him about Walter -- wrote about him in Supermoney (1972):

He has no connections or access to useful information. Practically no one in Wall Street knows him and he is not fed any ideas. He looks up the numbers in the manuals and sends for the annual reports, and that's about it.

In introducing me to (Schloss) Warren had also, to my mind, described himself. "He never forgets that he is handling other people's money, and this reinforces his normal strong aversion to loss." He has total integrity and a realistic picture of himself. Money is real to him and stocks are real -- and from this flows an attraction to the "margin of safety" principle.​

Walter has diversified enormously, owning well over 100 stocks currently. He knows how to identify securities that sell at considerably less than their value to a private owner. And that's all he does. He doesn't worry about whether it it's January, he doesn't worry about whether it's Monday, he doesn't worry about whether it's an election year. He simply says, if a business is worth a dollar and I can buy it for 40 cents, something good may happen to me. And he does it over and over and over again. He owns many more stocks than I do -- and is far less interested in the underlying nature of the business; I don't seem to have very much influence on Walter. That's one of his strengths; no one has much influence on him.

The second case is Tom Knapp, who also worked at Graham-Newman with me. Tom was a chemistry major at Princeton before the war; when he came back from the war, he was a beach bum. And then one day he read that Dave Dodd was giving a night course in investments at Columbia. Tom took it on a noncredit basis, and he got so interested in the subject from taking that course that he came up and enrolled at Columbia Business School, where he got the MBA degree. He took Dodd's course again, and took Ben Graham's course. Incidentally, 35 years later I called Tom to ascertain some of the facts involved here and I found him on the beach again. The only difference is that now he owns the beach!

In 1968, Tom Knapp and Ed Anderson, also a Graham disciple, along with one or two other fellows of similar persuasion, formed Tweedy, Browne Partners, and their investment results appear in Table 2. Tweedy, Browne built that record with very wide diversification. They occasionally bought control of businesses, but the record of the passive investments is equal to the record of the control investments.

Table 3 describes the third member of the group who formed Buffett Partnership in 1957. The best thing he did was to quit in 1969. Since then, in a sense, Berkshire Hathaway has been a continuation of the partnership in some respects. There is no single index I can give you that I would feel would be a fair test of investment management at Berkshire. But I think that any way you figure it, it has been satisfactory.

Table 4 shows the record of the Sequoia Fund, which is managed by a man whom I met in 1951 in Ben Graham's class, Bill Ruane. After getting out of Harvard Business School, he went to Wall Street. Then he realized that he needed to get a real business education so he came up to take Ben's course at Columbia, where we met in early 1951. Bill's record from 1951 to 1970, working with relatively small sums, was far better than average. When I wound up Buffett Partnership I asked Bill if he would set up a fund to handle all our partners, so he set up the Sequoia Fund. He set it up at a terrible time, just when I was quitting. He went right into the two-tier market and all the difficulties that made for comparative performance for value-oriented investors. I am happy to say that my partners, to an amazing degree, not only stayed with him but added money, with the happy result shown here.

There's no hindsight involved here. Bill was the only person I recommended to my partners, and I said at the time that if he achieved a four-point-per-annum advantage over the Standard & Poor's, that would be solid performance. Bill has achieved well over that, working with progressively larger sums of money. That makes things much more difficult. Size is the anchor of performance. There is no question about it. It doesn't mean you can't do better than average when you get larger, but the margin shrinks. And if you ever get so you're managing two trillion dollars, and that happens to be the amount of the total equity valuation in the economy, don't think that you'll do better than average!

I should add that in the records we've looked at so far, throughout this whole period there was practically no duplication in these portfolios. These are men who select securities based on discrepancies between price and value, but they make their selections very differently. Walter's largest holdings have been such stalwarts as Hudson Pulp & Paper and Jeddo Highland Coal and New York Trap Rock Company and all those other names that come instantly to mind to even a casual reader of the business pages. Tweedy Browne's selections have sunk even well below that level in terms of name recognition. On the other hand, Bill has worked with big companies. The overlap among these portfolios has been very, very low. These records do not reflect one guy calling the flip and fifty people yelling out the same thing after him.

Table 5 is the record of a friend of mine who is a Harvard Law graduate, who set up a major law firm. I ran into him in about 1960 and told him that law was fine as a hobby but he could do better. He set up a partnership quite the opposite of Walter's. His portfolio was concentrated in very few securities and therefore his record was much more volatile but it was based on the same discount-from-value approach. He was willing to accept greater peaks and valleys of performance, and he happens to be a fellow whose whole psyche goes toward concentration, with the results shown. Incidentally, this record belongs to Charlie Munger, my partner for a long time in the operation of Berkshire Hathaway. When he ran his partnership, however, his portfolio holdings were almost completely different from mine and the other fellows mentioned earlier.

Table 6 is the record of a fellow who was a pal of Charlie Munger's -- another non-business school type -- who was a math major at USC. He went to work for IBM after graduation and was an IBM salesman for a while. After I got to Charlie, Charlie got to him. This happens to be the record of Rick Guerin. Rick, from 1965 to 1983, against a compounded gain of 316 percent for the S&P, came off with 22,200 percent, which probably because he lacks a business school education, he regards as statistically significant.

One sidelight here: it is extraordinary to me that the idea of buying dollar bills for 40 cents takes immediately to people or it doesn't take at all. It's like an inoculation. If it doesn't grab a person right away, I find that you can talk to him for years and show him records, and it doesn't make any difference. They just don't seem able to grasp the concept, simple as it is. A fellow like Rick Guerin, who had no formal education in business, understands immediately the value approach to investing and he's applying it five minutes later. I've never seen anyone who became a gradual convert over a ten-year period to this approach. It doesn't seem to be a matter of IQ or academic training. It's instant recognition, or it is nothing.

Table 7 is the record of Stan Perlmeter. Stan was a liberal arts major at the University of Michigan who was a partner in the advertising agency of Bozell & Jacobs. We happened to be in the same building in Omaha. In 1965 he figured out I had a better business than he did, so he left advertising. Again, it took five minutes for Stan to embrace the value approach.

Perlmeter does not own what Walter Schloss owns. He does not own what Bill Ruane owns. These are records made independently. But every time Perlmeter buys a stock it's because he's getting more for his money than he's paying. That's the only thing he's thinking about. He's not looking at quarterly earnings projections, he's not looking at next year's earnings, he's not thinking about what day of the week it is, he doesn't care what investment research from any place says, he's not interested in price momentum, volume, or anything. He's simply asking: what is the business worth?

Table 8 and Table 9 are the records of two pension funds I've been involved in. They are not selected from dozens of pension funds with which I have had involvement; they are the only two I have influenced. In both cases I have steered them toward value-oriented managers. Very, very few pension funds are managed from a value standpoint. Table 8 is the Washington Post Company's Pension Fund. It was with a large bank some years ago, and I suggested that they would do well to select managers who had a value orientation.

As you can see, overall they have been in the top percentile ever since they made the change. The Post told the managers to keep at least 25 percent of these funds in bonds, which would not have been necessarily the choice of these managers. So I've included the bond performance simply to illustrate that this group has no particular expertise about bonds. They wouldn't have said they did. Even with this drag of 25 percent of their fund in an area that was not their game, they were in the top percentile of fund management. The Washington Post experience does not cover a terribly long period but it does represent many investment decisions by three managers who were not identified retroactively.

Table 9 is the record of the FMC Corporation fund. I don't manage a dime of it myself but I did, in 1974, influence their decision to select value-oriented managers. Prior to that time they had selected managers much the same way as most larger companies. They now rank number one in the Becker survey of pension funds for their size over the period of time subsequent to this "conversion" to the value approach. Last year they had eight equity managers of any duration beyond a year. Seven of them had a cumulative record better than the S&P. The net difference now between a median performance and the actual performance of the FMC fund over this period is $243 million. FMC attributes this to the mindset given to them about the selection of managers. Those managers are not the managers I would necessarily select but they have the common denominators of selecting securities based on value.

So these are nine records of "coin-flippers" from Graham-and-Doddsville. I haven't selected them with hindsight from among thousands. It's not like I am reciting to you the names of a bunch of lottery winners -- people I had never heard of before they won the lottery. I selected these men years ago based upon their framework for investment decision-making. I knew what they had been taught and additionally I had some personal knowledge of their intellect, character, and temperament. It's very important to understand that this group has assumed far less risk than average; note their record in years when the general market was weak. While they differ greatly in style, these investors are, mentally, always buying the business, not buying the stock. A few of them sometimes buy whole businesses. Far more often they simply buy small pieces of businesses. Their attitude, whether buying all or a tiny piece of a business, is the same. Some of them hold portfolios with dozens of stocks; others concentrate on a handful. But all exploit the difference between the market price of a business and its intrinsic value.

I'm convinced that there is much inefficiency in the market. These Graham-and-Doddsville investors have successfully exploited gaps between price and value. When the price of a stock can be influenced by a "herd" on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person, it is hard to argue that the market always prices rationally. In fact, market prices are frequently nonsensical.

I would like to say one important thing about risk and reward. Sometimes risk and reward are correlated in a positive fashion. If someone were to say to me, "I have here a six-shooter and I have slipped one cartridge into it. Why don't you just spin it and pull it once? If you survive, I will give you $1 million." I would decline -- perhaps stating that $1 million is not enough. Then he might offer me $5 million to pull the trigger twice -- now that would be a positive correlation between risk and reward!

The exact opposite is true with value investing. If you buy a dollar bill for 60 cents, it's riskier than if you buy a dollar bill for 40 cents, but the expectation of reward is greater in the latter case. The greater the potential for reward in the value portfolio, the less risk there is.

One quick example: The Washington Post Company in 1973 was selling for $80 million in the market. At the time, that day, you could have sold the assets to any one of ten buyers for not less than $400 million, probably appreciably more. The company owned the Post, Newsweek, plus several television stations in major markets. Those same properties are worth $2 billion now, so the person who would have paid $400 million would not have been crazy.

Now, if the stock had declined even further to a price that made the valuation $40 million instead of $80 million, its beta would have been greater. And to people that think beta measures risk, the cheaper price would have made it look riskier. This is truly Alice in Wonderland. I have never been able to figure out why it's riskier to buy $400 million worth of properties for $40 million than $80 million. And, as a matter of fact, if you buy a group of such securities and you know anything at all about business valuation, there is essentially no risk in buying $400 million for $80 million, particularly if you do it by buying ten $40 million piles of $8 million each. Since you don't have your hands on the $400 million, you want to be sure you are in with honest and reasonably competent people, but that's not a difficult job.

You also have to have the knowledge to enable you to make a very general estimate about the value of the underlying businesses. But you do not cut it close. That is what Ben Graham meant by having a margin of safety. You don't try and buy businesses worth $83 million for $80 million. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000 pound trucks across it. And that same principle works in investing.

In conclusion, some of the more commercially minded among you may wonder why I am writing this article. Adding many converts to the value approach will perforce narrow the spreads between price and value. I can only tell you that the secret has been out for 50 years, ever since Ben Graham and Dave Dodd wrote Security Analysis, yet I have seen no trend toward value investing in the 35 years that I've practiced it. There seems to be some perverse human characteristic that likes to make easy things difficult. The academic world, if anything, has actually backed away from the teaching of value investing over the last 30 years. It's likely to continue that way. Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper.


http://www.tilsonfunds.com/superinvestors.html
 
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http://www.bloomberg.com/apps/news?pid=20601103&sid=aB5wr9MpU5Yw


Carnivores’ Dilemma Widens as Pork Signals Record Meat Prices

By Whitney McFerron

April 26 (Bloomberg) -- U.S. meat prices may rise to records this summer after farmers reduced hog and cattle herds to the smallest sizes in decades, the result of surging feed costs linked to demands for more ethanol.

Wholesale pork jumped as much as 25 percent this month to 90.68 cents a pound last week, the highest since August 2008, U.S. Department of Agriculture data show. Beef climbed 22 percent this year to $1.6896 a pound on April 23, the most expensive since July 2008. Chicken’s gain in March was the most in 20 months.

Demand for pork chops, steaks and chicken breasts is rising as the economy improves, backyard barbecues resume and China and Russia allow more U.S. imports. Domestic supplies may drop to a 13-year low because of culls to stem losses caused by corn prices that doubled after former President George W. Bush set targets to increase ethanol use.

“Ethanol-induced prices in meat are just now getting to the marketplace,” said Steve Meyer, the president of Paragon Economics, a meat industry consultant in Des Moines, Iowa. “Consumers are going to see the highest prices they’ve ever paid in meat and poultry because of the decisions made to make corn into ethanol.”

Hog futures have almost doubled from a low in August to 85.175 cents a pound on the Chicago Mercantile Exchange on April 23. The price may reach $1 by June, said Tom Cawthorne, director of hog marketing at broker R.J. O’Brien & Associates in Chicago. CME cattle jumped 14 percent in the past year.

Meat-Price Outlook

Retail prices may hit records in the next 90 days as U.S. demand peaks during summer grilling season, said John Nalivka, a former USDA economist and the president of meat consultant Sterling Marketing Inc. in Vale, Oregon. The previous records were in 2008 for pork at $3.026 a pound in September, based on monthly averages tracked by the USDA since 1970, and for beef at $4.526 a pound in August. Chicken’s peak was $1.857 a pound in May 2009...



...Ethanol refiners are using more of the U.S. harvest than ever. An estimated 4.3 billion bushels, or 33 percent, of last year’s crop will be used for fuel, compared with 3.049 billion bushels, or 23 percent, in 2008, USDA data show...

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Turning food into hydrocarbons or turning hydrocarbons into food?

"Modern agriculture has been described as a way of turning hydrocarbons into food. Without cheap energy— a single gallon of gasoline is the energy equivalent of 100 hours of old-fashioned labor— the world would certainly have trouble producing half of the current food supply, and that fraction could be substantially less. Hydrocarbons are not only critical to farm equipment and food distribution over very large distances, but also play a dominant role in fertilizer production. With sparse hydrocarbon usage, American agriculture would have to be totally and painfully restructured..."


-Jeremy Grantham
Click to expand...



FoodEnergy
Hydrocarbons
 
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The Goldman Sachs partner who offered me a position in 1978 was Roy Zuckerberg. This was well before many people had ever heard of Goldman Sachs. I declined the offer because I thought they were dishonest; that opinion has never changed.



http://www.bloomberg.com/apps/news?pid=20601087&sid=agq7CoygGLsc&pos=1

Goldman Sachs CDO Labeled ‘Shi**y Deal’ by Montag in E-Mail
By Jody Shenn

April 27 (Bloomberg) -- Thomas Montag, the former head of sales and trading in the Americas at Goldman Sachs Group Inc., called a set of mortgage-linked investments sold by his firm “one shi**y deal,” according to an excerpt from internal e-mails released by Senate lawmakers.

The transaction was Timberwolf Ltd., a $1 billion collateralized debt obligation holding pieces of other CDOs, according to a statement from the Permanent Subcommittee on Investigations. The CDO also included optimistic side-bets on the performance of CDOs, derivatives in which the firm took the opposite pessimistic side in “many” cases, the panel said.

“Boy that timberwo[l]f was one shi**y deal,” Montag, who is now Bank of America Corp.’s president of global banking and markets, said in a June 22, 2007, e-mail to Daniel Sparks, who ran Goldman Sachs’s mortgage business at the time, according to the statement yesterday. Within five months of Timberwolf’s debut, the CDO had lost 80 percent of its value, and it was liquidated in 2008, according to the panel.

The CDO was among securities that Goldman Sachs sold to clients after deciding the New York-based firm needed to reduce its mortgage holdings, Carl Levin, a Michigan Democrat who leads the panel, said in the statement. Chief Executive Officer Lloyd Blankfein and six other current and former executives will testify today in front of the panel about practices in mortgage securities markets before they collapsed.

Truncated Text

The committee, which began to release documents before today’s hearing, didn’t release the full text of the e-mails. A person briefed on the Timberwolf e-mail confirmed that Montag was the author.

Montag, now 53, didn’t respond to a request for comment and Bank of America spokeswoman Jessica Oppenheim had no immediate comment. Blankfein, 55, will tell the panel his firm didn’t wager against clients, according to a prepared text of his remarks.

“We respectfully disagree with Chairman Levin’s statement,” according to an e-mail from Goldman Sachs spokesman Lucas van Praag. “We did not have a big bet against the housing market, as our performance in residential mortgages demonstrates, and we believe we at all times worked appropriately with our clients. We did try to manage our risk, as our shareholders and regulators would expect.”

The Timberwolf CDO was issued in March 2007, following a Goldman Sachs quarter that ended February 2007 in which one department of the bank shifted from $6 billion of bets that mortgage bonds would perform to $10 billion they would default, according to Bloomberg data and information the panel released.

Cioffi Buys

Bear Stearns Asset Management, the manager of two hedge funds overseen by Ralph Cioffi whose collapse in June 2007 roiled global markets, was among the buyers, purchasing about $300 million, according to the committee.

Sparks, who left the bank in 2008, in one e-mail urged “personnel working on a potential Korean sale to ‘[g]et ‘er done,’ and sent a mass e-mail to the sales force promising ’ginormous credits’ for selling” the debt, according to Levin’s statement. “A congratulatory e-mail was sent to an employee who sold a number of the securities: ‘Great job … trading us out of our entire Timberwolf Single-A position,’ ” the panel said, potentially referring to $36 million of A-rated notes.

Montag’s Career

Montag retired from Goldman Sachs in December 2007, and was recruited in April 2008 by then Merrill Lynch & Co. CEO John A. Thain to his firm. Merrill Lynch was bought by Bank of America in a government-assisted deal at the start of 2009.

Montag started his career at Goldman Sachs in 1985 as an associate in the bank’s fixed-income, currencies and commodities department. Blankfein said in a memo when he left that “since that time, Tom has played a leading role in the development of the firm’s derivatives businesses in Europe and Asia.”

CDOs repackage pools of assets such as mortgage bonds, bank capital notes and buyout loans into new securities with varying risks. While Timberwolf was initially intended to be about half invested in mortgage-bond CDOs and half invested in collateralized loan obligations tied to company debt, the bank sold many of its “best-performing” CLOs separately after a rebound in their values, Levin’s statement said.

Levin’s committee also released e-mails with references to Hudson Mezzanine 2006-1, Anderson Mezzanine 2007-1 and Abacus 2007-AC1, the CDO at the heart of a Securities and Exchange Commission suit filed April 16 against Goldman Sachs.

CDO Managers

The U.S. claims Goldman Sachs misled investors by failing to disclose that hedge fund Paulson & Co. -- which was betting against the U.S. mortgage market -- helped the Abacus CDO manager select securities to include in the portfolio. Goldman Sachs has called the SEC’s lawsuit “completely unfounded.” Paulson wasn’t accused of any wrongdoing.

CDO managers select the collateral going into the vehicles, and sometimes reinvest as the underlying positions pay down and trade in and out of holdings.

In Timberwolf’s case, the manager was Purchase, New York- based Greywolf Capital Management LP. The firm’s partners included the late Greg Mount, who joined in 2005 after nine years at Goldman Sachs, where he helped build its CDOs business, according to the prospectus and the firm’s website.

Greywolf, which focuses on corporate debt and says on its Web site it manages $848 million, planned to buy $41 million of the CDO’s junior-most tranches, according to the prospectus. In January 2007, Goldman Sachs underwrote a $502 million CLO managed by Greywolf tied to high-yield company loans, according to Bloomberg data.

Conflicts Disclosed

The conflicts of interest section of Timberwolf’s prospectus said that Greywolf might “take into consideration research and other brokerage services” from investment banks in its decision-making for the CDO and also make separate investments with “interests different from or adverse to” the CDO’s collateral.

“Under the terms of the Collateral Management Agreement,” Greywolf “will be permitted to take whatever action is in the Collateral Manager’s best interest regardless of the impact on the Collateral Assets,” according to the prospectus.

Mount died last April, the company said in a statement at the time. Shawn Pattison, a spokesman for Greywolf, declined to immediately comment. On Goldman Sachs’s role, the prospectus said the firm would act as the sole counterparty for the bullish derivative bets on CDOs that the vehicle was making through so-called credit- default swaps, “which creates concentration risk and may create certain conflicts of interest.”

The Goldman trader responsible for managing Timberwolf’s issuance later characterized the day that the CDO was created as “a day that will live in infamy,” according to part of an e-mail released by the panel.

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http://www.bloomberg.com/apps/news?pid=20601087&sid=aTQF7WdYeieQ

Goldman Sachs Abacus E-mails Show Hunt for ‘Easiest’ Asset Firm
By David Scheer and Joshua Gallu

April 27 (Bloomberg) -- Newly disclosed Goldman Sachs Group Inc. internal e-mails cast light on how the investment bank devised collateralized debt obligations called Abacus, including one at the center of a U.S. Securities and Exchange Commission fraud lawsuit.

The e-mails show employees discussed which outside firms would be “easiest” to work with while creating Abacus CDOs to bet against the housing market.

The e-mails were released yesterday by Senator Carl Levin, the Michigan Democrat who leads the Senate’s Permanent Subcommittee on Investigations, as the panel prepares to question Goldman Sachs executives today. In one message, a Goldman Sachs worker asked which outside firm would most likely approve assets that hedge fund Paulson & Co. wanted to include in a CDO and bet against.

“The way I look at it, the easiest manager to work with should be used for our own axes,” the author wrote in December 2006, using industry jargon that can refer the firm’s financial interest in a deal. The writer also expressed concern that two firms being considered weren’t likely to sign off on Paulson’s suggested assets. “They will never agree to the type of names [P]aulson want to use[.]”

The Senate committee’s investigators have pored through about 2 million Goldman Sachs documents as lawmakers prepare to question Chief Executive Officer Lloyd Blankfein, 55, and six other current and former employees. They include Fabrice Tourre, the banker at the center of the SEC’s complaint.

‘Be Sensitive’

In one e-mail, Tourre emphasized the firm should focus on serving Paulson to reap greater profits.

“We need to be sensitive of the profitability of these trades vs. profitability of abacus,” Tourre wrote in one e- mail, according to a copy released by Levin. “We should prioritize the higher profit margin businesses with Paulson.”

The e-mail about picking the easiest manager was part of an exchange with Tourre, according to a list of exhibits released by the lawmaker. The author wasn’t identified. In another December 2006 e-mail, Tourre discussed other business opportunities for Abacus, outlining a strategy in which Goldman Sachs would “‘rent’ our Abacus platform to counterparties” that wanted to short the market. The messages show “Goldman repeatedly put its own interest and profit ahead of the interests of its clients,” Levin said. While his committee isn’t responsible for determining whether there was any criminal activity, it will decide after the hearing whether to refer the matter to the SEC or the Justice Department.

The SEC sued Goldman Sachs on April 16, claiming the New York-based bank misled investors in a CDO about the role Paulson played in assembling the deal and the fund’s intent to bet that its underlying assets would lose value. The hedge fund, run by billionaire investor John Paulson, wasn’t accused of wrongdoing.

Goldman Sachs is fighting the SEC’s claims, which it says are “unfounded in law and fact.” In prepared testimony for today’s hearing, Blankfein said the firm didn’t bet against clients and didn’t “make a massive short” against the housing market.
 
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The Writer's Almanac
http://writersalmanac.publicradio.org/

It was on this day in 1925 that the poet T.S. Eliot (books by this author) accepted the offer of a job at a small publishing house Faber & Gwyer, which soon changed its name to Faber and Faber. One of the first poets Eliot discovered was the young W.H. Auden, and he went on to publish work by Marianne Moore, Siegfried Sassoon, Jean Cocteau, James Joyce, and Ted Hughes. Under his leadership, the firm passed on publishing Animal Farm by George Orwell, but they chose to publish a book that had been rejected by everybody else in Great Britain, called The Lord of the Flies. It would become the best-selling novel in Faber and Faber's history.

Eliot liked the job in part because he was rarely able to write for more than three hours a day, and he liked having something else to do that made him feel useful. He found it dispiriting that the medical publications continued to outsell the poetry collections. Eliot later said, "With most categories of books you are aiming to make as much money as possible, with poetry you are aiming to lose as little as possible."
Click to expand...
 
http://www.bloomberg.com/apps/news?pid=20602099&sid=aUACY6S1_fW0

Gazprom Net Rises as Russian, Europe Demand Recovers
By Anna Shiryaevskaya

April 29 (Bloomberg) -- OAO Gazprom, the world’s biggest gas producer, increased profit eightfold on a gain from an asset swap deal with E.On Ruhrgas AG and after fuel consumption in Russia and Europe started to recover.

Net income in the fourth quarter rose to 309 billion rubles ($10.5 billion) from 37.5 billion rubles a year earlier, the Moscow-based company said today on its Web site. That beat the average estimate of 212 billion rubles in a Bloomberg survey of six analysts. Third-quarter net was 175 billion rubles.

“The fourth-quarter results’ main message is a clear start of a fundamental recovery trend, which is due to accelerate in the first quarter of 2010,” Lev Snykov and Svetlana Grizan, analysts at VTB Capital, said in note to investors.

Exports to Europe, hurt by the economic crisis, picked up in the second half to increase more than 19 percent in the fourth quarter from a year earlier, Gazprom said in January. Russian demand has also risen with economic growth and colder weather, Bank of America Merrill Lynch said in February.

Recovery is likely to continue after Gazprom boosted gas sales volumes by 22 percent in the first quarter, compared with the same period last year, Chief Financial Officer Andrei Kruglov said today on a conference call.

Gazprom shares gained 3.94 rubles, or 2.3 percent, to 174.45 rubles in Moscow today.

‘No Reasons to Worry’

“The results reflect the recovery in demand in Russia and Europe,” Maria Radina, a gas analyst with Nomura International Plc, said by phone. “Everything is good, not bad. There are no reasons to worry.”

Earnings before interest, taxes, depreciation and amortization rose to $11.3 billion in the fourth quarter from $10.5 billion a year earlier, Radina said. She said ebitda is a more relevant indication of profitability as it wasn’t affected by the asset swap and foreign exchange changes last year and a 2008 loss in value of a stake in Gazprom Neft, the company’s oil division.

Gazprom recognized a 105 billion-ruble gain from the swap, Kruglov said. Gazprom gave the German utility just more than 25 percent in the Yuzhno-Russkoye gas field and got the 49 percent it didn’t already own in ZAO Gerosgaz, which holds a 2.9 percent stake in the Russian gas producer.

Sales volumes rose “on the back of a record decline” in European gas prices, Radina said.

Price Decline

An average price for Gazprom’s gas in Europe stood at $287.5 per 1,000 cubic meters last year, compared with $407.4 per 1,000 cubic meters in 2008, Gazprom said. Revenue fell 9 percent to 2.99 trillion rubles in 2009.

Sales probably dropped to $580 billion in the fourth quarter, according to Bloomberg calculations. Gazprom reported only annual earnings and restated sales for 2008. Analysts said Gazprom excluded operations by German trading subsidiary, Gazprom Germania, last year.

Gazprom sells gas to Europe under long-term contracts linked to crude and oil product prices with a lag of up to nine months. Urals reached a record-high level of $142.50 in July 2008 before plummeting to as low as $34.32 in December the same year.

The Russian gas export monopoly agreed to adapt contracts earlier this year after a rise in lower-priced spot-market supplies to Europe. Gazprom, which aims to supply 32 percent of Europe’s gas in 2020 from about a quarter now, said it will give weight to spot prices in its contracts.

Contract Adjustments

Gazprom said today it considered temporarily reducing the “take-or-pay” limit during a “significant decrease of demand for gas and excessive supply.” The reduction will be compensated by additional purchases when gas demand recovers.

“The significant change of market conditions makes it justifiable to revise prices under long-term contracts,” Gazprom said.

Gazprom is continuing pricing talks with its customers, Vladimir Shchetinin, an official in the company’s export arm, said on the conference call.

Finance expenses declined 71 percent to 58.2 billion rubles, according to Bloomberg calculations, after the ruble strengthened.

Net debt rose 35 percent to 1.37 trillion rubles in the year ending Dec. 31, the Moscow-based company said.

Gazprom boosted proved gas reserves about 2.2 percent last year through exploration and including estimates for the Kruzenshtern offshore field, the company said. Proved reserves under SPE-PRMS methodology rose to 18.6 trillion cubic meters at the end of last year from 18.2 trillion cubic meters a year earlier.
 
Warren Buffett on What's Next in the Payments Industry

October 20, 2009
Excerpts from an interview with Cathy Baron Tamraz


WARREN BUFFETT: You are my favorite interviewer!

CBT: Thank you very much. That’s on tape, by the way. So, the first question I have for you is about the near-term future of our economy. The last 12 months feels like a really bad dream. This year has been the year that shook the world. It’s been a year since the bankruptcy of Lehman Brothers and it almost sent the economy over a cliff. We had the Bear Stearns fallout, Merrill Lynch sold to Bank of America, the AIG crisis, Fannie and Freddie falling under government control. It’s been a really difficult year. So, what do you think is going to happen now in the fourth quarter of 2009 and also in 2010?

WB: I am not sure about exact quarters or anything of the sort. Who knows about next week or next month? We made enormous progress since a year ago. We had a real panic. And if you didn’t panic, you didn’t understand what was going on. What happened in September and October of 2008 will particularly be remembered for a long, long time. And while the governmental authorities malign things sometimes, they fortunately did some very right things, very important things. They did them properly, and they kept us from going over the cliff. The fallout from that financial panic hit the regular economy in the fourth quarter like a ton of bricks. We are coming back from that. The patient really went into the emergency room and it won’t come out of the hospital entirely for a while.

There are things that have to be cured in the system, but this system works. If you look at this country, we have gone through the Great Depression, we have gone through world wars, we have gone through civil war, and we have progressed like no country in the world. We have the right system. It doesn’t avoid all the problems, but it overcomes all the problems.

CBT: Do you see consumer-spending increasing in the near term?

WB: No, and not for a while. I think people had an experience a year ago that they are not going to get over quickly. But the factories are there, the human potential is there, the system is there. It works over time. Your kids will live better than you and I live, and our grandchildren will live better than they do. This country moves forward.

If you take the 20th century, we had a Great Depression, world wars, a nuclear bomb, a flu epidemic. We had all these things, and at the end of the 20th century, the average American was living seven times better than at the start of the century. It’s amazing. The Dow Jones Average had gone from 66 to 11,400. So the country works, you don’t have to worry about that.

CBT: This latest debacle has also been called a “crisis of confidence.” Five trillion dollars of American wealth has vanished. If confidence is what’s needed to stimulate the economy, how do we put trust back into the financial system? Does the government need to retain a stronger hand?

WB: Well, people became afraid a year ago, and confidence is not going to exist when fear exists. Fear is very contagious. It spreads very quickly, and that’s what happened in the start of the fourth quarter last year. The confidence doesn’t come back as fast as it’s lost, but it does come back. It’s come back a long way already, but it has a ways to go. As people see and really get re‑affirmed about the fact that this system works. We are still tossing out 14 trillion worth of product a year. It will return. It’s already returned with most people in most ways, but it’s not back 100%. It’ll get there.

CBT: Do you have any comment on the unemployment rate?

WB: Well, the unemployment rate will turn around late. It always lags. People who have gone through a period like this are slow to rehire until they really have to. On the other hand, the time will come when they have to. There will be more people working in housing a year or two from now. We have a brick company. We have companies in the carpet business. We have had to let people go in those businesses in the last year, year and a half. We will be adding people at some point, but we won’t do it until we see the demand come back. It’ll be a little slow because we don’t want to go through what we did before. Although, I will guarantee you that three years from now, our brick companies, our carpet company, and our insulation company will all be employing far more people than now.

CBT: That’s good to hear. The next question is about the government. Congress and the administration have been working on reforming financial regulation. Do you think they are on the right track? And will reforms and new rules to protect consumers help restore confidence?

WB: Well, the new rules won out, so the things they have done during the last year fell pretty short of confidence. Not everything is done perfectly, but nobody can do them perfectly. The important thing is that they got things done and people do believe in them, and they’ll believe in them more and more as it goes along. Government has a real role to play and it will not prevent bubbles forever. Human beings do crazy things from time to time, and the real question is how they recover from it. You and I have done things in our life, and the truth is that we came back from them. That’s the important thing.

You can’t rule out human emotions. When people get greedy as a pack, strange things happen. When they get fearful as a pack, strange things happen. That isn’t the way they exist most of the time, but they do give into that. So rules will help us avoid some of the problems. They’ll help us modify some of the problems, but they won’t eliminate all future problems.

CBT: I was watching a little TV this week and I was listening to William Cohen, who is the author of “The House of Cards.” He said that if you don’t change compensation and how Wall Street is incented, the same thing is going happen all over again. And yet, I recently heard that Wall Street is hiring, and they are also guaranteeing big bonuses and compensation packages, which is a little bit alarming if you ask me. What’s your view is on that?

WB: Well, Wall Street is about trying to make a lot of money. It’s the nature of the system. You get a huge capitalist system, and it raises lots of money and it makes lots of big deals and people – some people get paid very well for it. What you have to change in Wall Street is you have to make sure that in addition to carrots, there are sticks. And it can’t be a one‑way street where they are making ungodly amounts of money when things are good and then they move on to someplace else for a while when things are bad. You have to create a downside. I hope there are some practices put into place – and I’ll have a few thoughts on them myself – but Congress undoubtedly will have a few thoughts too. You have to put in something where there is downside to people who really mess up large institutions and we need some new help in that. Too many people have walked away from the troubles they have created for society, not just for their own institution, and they have walked away rich. They may not be as rich as they were before, but they have walked away better than they should have. There have to be incentives – not only to get rich, but to behave well.

CBT: President Obama said this week that the financial firms “owe a debt to the American people.” And I wasn’t exactly sure how, how they could pay that back to the American people.

WB: It’s interesting. Exactly a year ago when I was at this conference, I had a proposal for the so‑called “toxic assets.” I called three people in the financial world who were going to write Secretary Paulson about it. I wrote them on October 6th. I called three people to help out on this, and it would have required a lot of effort on their part and some commitment of money and time and energy. I asked all three of them if this went forward to do it absolutely pro‑bono. I asked them not to make one dime out of it. And they all said yes to me. So, they are good people. Many are motivated by greed. None of us are perfect, you know? I always say that, “Every saint has a past, every sinner has a future.” We have got some sinners back there, but they are not all bad. They went along with a bubble that they helped create – but the whole American public did. You still have to have the right rewards and penalties for behavior. That’s how you get decent behavior. So, I don’t look at Wall Street as “evil.” I look at Wall Street as given to huge excess sometimes. I don’t want to get rid of it. We need something to allocate capital and distribute securities and all of that throughout the system. We have got a big capitalist system and we have to have a big capital market – but there is plenty of room for improvement.

CBT: Looking into your crystal ball, what will the stock market look like a year from now?

WB: Well, I don’t know about a year from now. Five years from now, it’ll be higher, yeah. Ten years from now, it’ll be higher. One year from now, I don’t know.

CBT: Fair enough. Moving a little bit more closely to the payment and card system. On September 3rd, the The Wall Street Journal had an articled titled “Wal‑Mart to Pay via Check Cards.” Wal‑Mart isn’t going to issue paychecks anymore. So it’s all going to be through a card system, which is actually good for the payment industry and the card industry. And it seems to be a growing movement to use cards to dispense payments. I noticed that on some airlines, if you don’t have a card – a credit card of some kind – you can’t eat or drink anything if you are sitting in economy because they don’t take cash anymore. So that, that’s kind of interesting…

WB: Some restaurant just announced that in New York too, that they weren’t going to take cash.

CBT: That brings us to the next question: Do you think cash is ever going to disappear as a form of payment?

WB: It won’t disappear, but in the end – and that’s the genius of the American system – we do give the consumer what they want. If people want to use the convenience of cards, they will do it. Now there will be enough people that want to use cash, so consumers won’t turn their back on it entirely. They haven’t given up landline phones entirely for cell phones. The American consumer – in the end – is king. You can push them around for a week or a month maybe, but you either figure out what’s in your customers’ mind and decide you are going to serve them; or you are not going to be in business. They are right, and you are wrong. It’s what made this country, to some extent, what it is. Our market system where the customer – 300 million Americans – tell people what to make, where to serve them, and how to do business. Compare that to some totalitarian system, where somebody decides what people are going eat for lunch and we win.

CBT: Well, we are certainly not used to that…

WB: Oh yeah. Mm‑hmm.

CBT: The credit card industry is about 50 years old, and it’s pretty safe to say that it’s going to transform in the next 10 or 15 years. Sometimes I think we’ll have chips in our hands to scan and pay for things. All kinds of things will be transacted electronically.

WB: Cathy, I met Ralph Schneider who was the founder of the Diners Club back in the 1950s. He had just designed an IRA, and they are just using it around New York. They used to charge the merchants 10 percent and the card was very low priced then. American Express went into the business originally defensively. They had the Travelers Check and they were worried about what the credit card would do to it. In 1964, when American Express had what they called the great Salad Oil Scandal, we became this little outfit in Omaha and became the largest shareholders of the American Express Company. I went around to restaurants and service stations, and asked people about whether the Card was losing its appeal because of the scandal that was going around. They said the Card wasn’t losing it but that it was growing in appeal. So, I watched the credit card industry almost from the beginning in that respect. We got in early. I could see it was a powerful tool. First Data was in Omaha, and I have watched them all. Carte Blanche, the Hilton Card – some of those have disappeared over the years. Of course, Visa and MasterCard have been successful. There have been all kinds of developments, but the truth is, the American public likes to be able to go into their pocket and pull out a card.

CBT: Well, that was a really great lead into a question I had about American Express. Everyone knows here that Berkshire Hathaway has an investment in American Express, as you just said. So, you obviously know a lot about the payment industry and that company in particular. Can you tell us what attracted you to that company?

WB: Well, what originally attracted me back in 1964 was that Diners Club got the jump. They were way ahead of American Express. American Express came in with a very interesting market and concept. People already were carrying Diners Club, and American Express wanted to enter the field. They charged more than Diners Club did for their product. Diners Club had this card that had a bunch of flashy little symbols and everything on it. American Express brought out that centurion, and originally it was the green card with the guy that looked like Mr. Integrity. If you went into a restaurant, and you were buying dinner for somebody, and you had a choice of pulling out this Diners Club card that looked like you were giving a check from your mother or pulling out this centurion that made it look you were J.P. Morgan or something – you went with Mr. Integrity. They actually took over the field by establishing themselves not as the low‑priced competitor but, but as the class competitor. It was a great marketing arrangement. Then it swept the country. The card I carry in my pocket says, “Member Since 1964.”

CBT: Mine says “Member Since 1983.”

WB: Well, that was the year you were born, I was 40 years old or something when I did this.

CBT: Last question. We would like you to impart a little bit of advice and tell us what is the one lesson that we should take away from this economic Pearl Harbor?

WB: Well, I think that it goes back what I have told my manager to do: Just keep taking care of the customer. We have got a lot of customers in this country. Since 1886, Coca‑Cola has been selling a product that people like, and they just keep taking care of them. It’s what you have done at Business Wire. In the end, nobody that’s ever taken good care of the customer has ever lost; I mean, that, that is the name of the game.


*****​
 
A fair use excerpt from

America's Most Wanted: The Hunt For Al Capone
Jonathan Eig
New York, New York 2010.

...By making booze illegal, the government unwittingly glamorized it. The bubbles in a glass of champagne seemed more scintillating, the foam on a mug of beer more refreshing. Homemade alcohol had a tendency to taste like battery acid, which led to the invention of cocktails; the addition of sweet flavors and herbs made the drinks even more alluring, especially to women. Irving Berlin summed up the state of affairs and put it to a snappy tune when he wrote, "You Can Not Make Your Shimmy Shake on Tea."

Congress passed the Volstead Act to provide for enforcement of the Eighteenth Amendment, and at least in the early years under the new set of laws, alcohol consumption in America dropped dramatically. But the Volstead Act failed to anticipate the massive criminal operations that would go to work creating an underground network for the manufacture and sale of alcohol.

A man didn't have to be a genius to recognize this once-in-a-lifetime opportunity. Overnight, general miscreants such as Capone became bootleggers (the phrase has roots in America's colonial days, probably deriving from "boot-leg," the upper part of a tall boot where bottles could be hidden). Their experience running bars, brothels, and gambling joints suddenly came in handy. They already knew how to move money, how to sell booze, how to subdue competition, and how to service multiple businesses across the city. The trick now was learning to think big. A massive legitimate business had just been declared illicit. If they moved quickly, they could take over operations. Just for starters, bootleggers needed trucks and confederates in other cities to help them with supplies. In New York, there was Meyer Lansky; in Boston— Joe Kennedy; in Philadelphia, Boo Boo Hoff; in Detroit, the Purple Gang; in Cleveland, Moe Dalitz; in Montreal— Samuel Bronfman. They patched together a network that would eventually become a loosely organized national crime syndicate.

As bootleggers, their position in society actually improved. Small-time reprobates no longer had time for safecracking, pickpocketing, and mugging. Those lines of work were too dangerous, too risky, and didn't pay well enough.

Bootlegging also offered a certain kind of dignity. As bootleggers, they provided a useful service and catered to a respectable class of customer. Flush with cash, they dressed with panache and consorted with a higher class of friends. They became romantic figures, celebrated by journalists who liked their style, their slang, and their nicknames—not to mention their booze

*****​
Click to expand...
 
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Spain Pricks Solar Power Bubble as Greek Fate Looms
By Ben Sills

April 30 (Bloomberg) -- Spain is lancing an 18 billion-euro ($24 billion) investment bubble in solar energy that has boosted public liabilities, choking off new projects as it works to cut power prices and insulate itself from Greece’s debt crisis.

Industry Minister Miguel Sebastian is negotiating reductions in subsidies for solar plants that would curb energy costs, a ministry spokesman said this week. Grupo T-Solar Global SA, the world’s biggest photovoltaic plant owner, shelved its Spanish stock offering three days ago. Solar Opportunities SL postponed a 130 million-euro deal due to be signed today.

“They’ve put the fear of god into all these investors,” said Paul Turney, chief executive officer of Madrid-based Solar Opportunities. “By the time they’ve finished dithering around, they’ll have hurt their credibility so badly that no one will want to invest.”

Spain is battling on several fronts to revive its economy and convince government bondholders it can avoid getting dragged into a Greek-style debt spiral after Standard & Poor’s cut its credit rating April 28. Solar-plant owners including General Electric Co. earn about 12 times what’s paid for power from fossil fuels. Most of that is a subsidy charged to customers.

Prime Minister Jose Luis Rodriguez Zapatero’s government last cut solar rates in 2008, hitting plants not built at the time. Now it’s weighing reductions for the thousands of installations already making power from the sun, wind and biomass.

‘Excessive Subsidy’

“This is necessary,” said Leon Benelbas, chairman of Atlas Capital Close Brothers investment bank in Madrid. “It’s an excessive subsidy at a time Spain has to gain competitiveness, and the cost of energy is a determining factor.”

Spain’s fixed-price system for renewable power, which attracted more investment in solar panels in 2008 than the rest of the world put together, boosts the state’s liabilities even though they don’t show up on its balance sheet.

That’s because the Spanish system delays payments by consumers for part of their electric bills for years. The government guarantees repayment to power suppliers such as Endesa SA and Gas Natural SDG SA. The cost of those unpaid bills rose last year by about 4 billion euros to 16 billion euros.

Spain intends to revise the clean-energy rates down “to avoid damaging the competitiveness of industry,” Sebastian told the Spanish parliament yesterday.

6.3 Billion-Euro Premium

Renewable-power generators will receive 6.3 billion euros in subsidies this year compared with 5 billion euros in 2009, and they may get more than 126 billion euros in subsidies over the next 25 years under the existing tariff regime, the Industry Ministry said in a report published by Expansion newspaper on its website today.

The fixed-price system has created a “bubble” in photovoltaic power because the government didn’t initially fix limits to the number of plants that could claim subsidized prices, the report said.

S&P cut its rating on Spanish debt to AA on April 28, saying the nation that was AAA-rated until January 2009 is underestimating its fiscal problems and overestimating its ability to grow.

Government officials, who spurred more than 18 billion euros in solar-power projects since 2008, are meeting with industry representatives to negotiate cuts to subsidized rates.

‘Gold Rush’

“We had a gold rush here,” said Turney who, based on current power rates, planned to invest 240 million euros of equity into Spanish solar plants by next year. “They were building plant like crazy.”

Instead, the Solar Opportunities executive postponed a deal with 30 million euros in equity and 100 million euros of debt that was set to be signed today. He said he may cancel other projects too.

Groups such as the Spanish Photovoltaic Industry Association say they’re willing to accept cuts for future plants. They argue that reducing the price for existing facilities will breach their agreements with the government and damage the country’s reputation with investors.

“No sensible government is going to do this,” Juan Domingo Ortega, co-owner of Renovalia Energy SA, said at an April 23 outlining the company’s plan to raise 153 million euros in a stock offering. Renovalia is set to begin trading May 12.

Shares of solar producer Abengoa SA lost 8.9 percent this week. Solaria Energia y Medio Ambiente SA dropped 8.8 percent.

Forced Haircut

Forcing solar investors to take a haircut increases risks of doing business with Spain’s government, which may damage its ability to sell bonds, said Juan Laso, president of the Photovoltaic Business Association and T-Solar’s chief executive.

“The consequences of this are enormous, not just for the companies and financial institutions that have invested their money, but for the credibility of the country,” Laso said.

Investors began questioning the strength of Spanish assets as the shockwaves from Greece’s financial meltdown spill across Europe. The extra yield investors demand to hold Spanish 10-year government bonds reached 113 basis points this week, the widest spread in more than a year as the scale of the bail-out needed by Greece ballooned.

The legal dispute on Spanish solar rates turns on a reading of the 2007 law that governs renewable-power production. The government says it gives it the right to revise prices for existing plants this year. Executives say their prices are guaranteed for 25 years.

General Electric

“In renewable energy, often government incentive programs are a key factor in our decision,” said Andrew Katell, a spokesman for GE Energy Financial Services. “We would take the same approach in Spain.”

GE Capital’s energy investment unit has 32 percent of Fotowatio Renewable Futures, which owns 90 megawatts of solar generating capacity in Spain.

“Those who thought it was a government guarantee hadn’t done their homework,” said Benelbas of Atlas Capital. He said investors will welcome the price cuts because it curbs the state’s financial exposure. “It’s all connected.”



###########################################

The hypothesis of anthropogenic global warming remains completely unproven. Association is not causation and there is absolutely no proof that CO2 levels are anything but coincidental. Beyond that, there is good reason to question the accuracy of the historic temperature record ( see http://www.surfacestations.org ). Michael Mann's "hockey stick" has been thoroughly discredited by the Wegman report. Human comprehension of the climate system is, at best, primitive and it is both premature and irresponsible to suggest otherwise.
 
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Deepwater Horizon Rig Disaster Threatens Drilling
By Peter Coy and Stanley Reed

May 7 (Bloomberg) -- BP Plc last September tapped into a new oilfield called Tiber, estimated to hold at least 3 billion barrels of crude, or six months’ worth of U.S. consumption.

Discovered through seismic imaging and data crunched on a supercomputer, the field is almost six miles (9.6 kilometers) beneath the Gulf of Mexico’s floor, in a spot where the water is almost one mile deep, reports Bloomberg BusinessWeek in its May 10 issue.

To access it, the British oil company and its drilling contractor, Transocean Ltd., sank the deepest oil well ever. The $365 million rig that accomplished this feat was called the Deepwater Horizon, a floating thicket of machinery the size of two football fields, which held a crew of 130 and cost more than $500,000 a day to rent from Transocean.

The Deepwater Horizon, as a drilling rig, didn’t hang around to pump Tiber’s crude. The self-propelled behemoth motored to the site of its next exploration.

Today, the Deepwater Horizon lies upside down at the bottom of the Gulf under one mile of seawater in a place called Mississippi Canyon Block 252. Eleven of its crew are presumed dead. Oil from the last well it drilled, a much shallower, less complex job than Tiber called Macondo, is spewing out of control from the seafloor, with about 3 million gallons released at last estimate. A swath of the Gulf about the size of Delaware is covered by an iridescent, rusty orange sheen.

Exxon Valdez

Should the heaviest portion of the spill come ashore, it may cause damage rivaling the 1989 wreck of the Exxon Valdez in Alaska’s Prince William Sound, despoiling the breeding grounds of species in the fragile coastal-buffer zone that provides hurricane protection.

Already, the oil is threatening some of the most productive and profitable shrimping and fishing grounds in the world, part of a Gulf industry that provides a quarter of the seafood in the U.S. A sheen of oil was confirmed on the Chandeleur Islands off Louisiana by the Coast Guard.

Should efforts to seal the well go awry, they could cause even larger volumes of oil to spill. In some scenarios, the Gulf of Mexico loop current could even carry the oil around Florida and up the East Coast. The unfolding environmental disaster might yet become the worst in U.S. history.

The Deepwater Horizon exploded on April 20 at a moment when U.S. energy policy was pivoting in favor of offshore drilling. After two years of partisan debate triggered by the $4-a-gallon gasoline prices of 2008, President Barack Obama and other Democratic leaders dropped their opposition to expanded offshore drilling.

Offshore Drilling Expansion

Obama on March 31 proposed opening areas off the East Coast and in the eastern Gulf and Alaskan waters beginning in 2012, part of a bargain that administration officials hoped would propel energy and climate legislation designed to lead the country beyond petroleum, as BP’s slogan declared.

For the oil industry, the Gulf of Mexico had been one of the few bright spots in a picture of flattening global production. After several years of decline, the amount of oil pumped in the Gulf has been rising as rigs move into deeper waters.

The U.S. Energy Department predicted this year that by 2035, offshore oil production from the Lower 48 states would rise more than 80 percent to account for about 38 percent of U.S. output, up from 30 percent now.

Until now, Gulf oil production had been expanding, with serious spills rare. Catastrophic accidents had been relegated to history by such gear as “blowout preventers” designed to shut off wells when pressures get out of control.

Hydraulic Shears

These valves and shears were the last line of defense. The federal Minerals Management Service, which regulates offshore oil and gas production and collects reports on spills as small as a single barrel, was so confident of the system that it exempted BP from filing an environmental-impact statement for the Macondo operation.

The MMS commissioned studies on creative ways to cope with massive well blowouts and never implemented them. It promulgated rules and allowed the oil industry to obey them on a voluntary basis. “It turns out, by the way, that oil rigs today generally don’t cause spills,” Obama said on April 2. “They are technologically very advanced.”

The Deepwater Horizon crisis has shifted the political conversation from seeking opportunity to avoiding risk. The Obama Administration announced a 30-day safety review. Florida Governor Charles Crist, who recently left the Republican Party to run for the U.S. Senate as an independent, backed away from his support for offshore drilling, as did California Governor Arnold Schwarzenegger.

Earth Day Origin

“It could have as big an impact as Santa Barbara,” said Philip Verleger, an oil-industry expert, referring to the 1969 oil spill off the California coast that was the catalyst for the first Earth Day in 1970.

Tony Hayward, BP’s chief executive officer, slid into a booth at Copeland’s, a restaurant on the main drag of Houma, a southern Louisiana town of strip malls and honky tonks. It was May 2, some 12 days since the crisis began. His company had lost $30 billion, or 16 percent, of market value, and Hayward, over dinner with a Bloomberg News reporter, was sweaty and haggard; he picked at his ravioli and only sipped his beer.

Despite his weariness, the 52-year-old retained the determination that won him the top job over a pack of rivals at the London-based oil company. He repeated a phrase he says was coined by Winston Churchill: “When you are going through hell, keep going.”

Future in Doubt

He was succinct about the future of offshore drilling. “It all depends on how successful we are with our response,” he said. “If we deal with the situation in a way that minimizes the environmental impact, it will cause some debate. If the environmental impact is serious, as a consequence there won’t be much, if any, extension of offshore drilling.”

Hayward heard about the blowout at breakfast in London on April 21, about four hours after it began. He said his first reaction was “unprintable.” For the first few days, he kept a low profile. BP judged that Transocean, the owner of the drill rig, should take the lead. Later Hayward deferred to U.S. government agencies such as the Coast Guard.

In early May, BP changed strategies and put Hayward in front of the cameras. The company hired Marine Spill Response to deploy four 210-foot oil-skimming ships and two planes to spray dispersants on the oil. As the crisis mounted, Hayward tried everything at once.

Superheated Fluids

Even at a cost of $7 million a day, none of it stopped the leak. A mile below the surface, things can go to hell in an instant. The pressures and temperatures at work are otherworldly. Imagine an elephant sitting on your chest, and you get a sense of the weight of rock and water pressing down on the reservoir of oil and gas miles below the surface.

To keep the superheated, supercompressed fluids from shooting upward before the well is finished, drillers fill the hole with a heavy, synthetic “mud.” Then, to finish the well, they inject a high-tech cement. Each well requires its own unique formulation of mud and cement.

The cement is supposed to go down the middle of the drill pipe, a seven-inch tube surrounded by a larger pipe called the casing. When it reaches the bottom of the drill pipe, it oozes up into the gap between the pipe and its casing before drying in place, forming an impenetrable seal.

Cement Seal

The Deepwater Horizon accident occurred at the final stage of the job, as the rig crew was preparing to put a temporary seal on the well and move on to another site. The exact circumstances aren’t likely to be known for months, though it’s clear that pressurized natural gas was able to infiltrate upward, meaning the seal was imperfect. A 2007 MMS study found that cementing was a factor in 18 of 39 Gulf of Mexico blowouts over 14 years. The pressure surge from a gas bubble has a nickname: the kick.

Although there are procedures for recementing, those take time and money. Each extra day of leasing the drilling rig costs about $500,000. Halliburton Co. was in charge of cementing, under BP’s direction. Robert MacKenzie, a former cementing engineer who is now a securities analyst for FBR Capital Markets Corp., said he wants to know whether BP ordered a so-called cement bond-log test to evaluate the cementing. Such a test would have determined whether a remedial cement job was necessary. BP declined to comment.

Blowout Preventer

The last line of defense in a subsea well is the blowout preventer, which uses valves to close off the flow of oil and gas when pressures get too high. If the regular valves fail, the doomsday feature of the blowout preventer is a series of shear rams, giant pairs of hydraulically powered scissors that are supposed to close the opening by slicing through all the pipes.

The pressure the shear ram can exert is greater than the pressure on the struts of a landing, fully loaded Boeing 747 as the rear wheels hit the runway, said Satish Nagarajaiah, a Rice University professor of mechanical and civil engineering. The Deepwater Horizon’s blowout preventer had five hydraulic rams. For reasons that are still unknown, they didn’t do the job.

The blowout preventer, made by Houston-based Cameron International Corp., failed to close the flow of oil and gas. The gas came up the pipe to the rig and then, heavier than air, settled in low spots. Survivors later said they heard a thump, then a hissing.

The rig started to shake and explosions began at about 10 p.m. on April 20, sending flames hundreds of feet into the air. To Captain Michael Roberts, a commander of a supply vessel that arrived just a few hours later, “it appeared as if the sun was coming over the horizon,” he told CNN.

Leaks in Controls

Almost two weeks after the accident, rescue crews had not managed to get the blowout preventer working. “We have found that there are some leaks on the hydraulic controls” of the blowout preventer, Bob Fryar, senior vice-president of BP’s exploration and production operations in Angola, in southwestern Africa, told the Houston Chronicle.

Hayward said he was mystified that the blowout preventer failed. The last-ditch shear ram is rarely tested under real conditions because of the destruction it causes. In a 2002 laboratory test for the MMS, researchers found that three of six shear rams failed. Seven other makers declined to be tested.

Within a day of the accident, BP had sent as many as eight underwater robots to the scene. Hayward and other company executives watched from a special room inside the company’s suburban Houston complex as the robots, which look like sleds and are painted yellow to be visible at ocean depths, did their work.

Robots, Joysticks

Tethered to a mother ship by wire, they fed video images to their pilots, who use joysticks to move the vehicles and manipulate their tool arms. BP executives hoped the robots could pull external levers and get the blowout preventer to snap shut. A BP spokesman said the company no longer expects the robots to get the device working.

That doesn’t mean they are being put back in their boxes. Robots are the only eyes and ears that BP and other responders have below the sea. The company uses them constantly to monitor the wellhead and mile-long length of pipe that has fallen to the bottom of the Gulf. BP and its contractors are now deploying the robots in a new attempt to shut down the undersea leaks.

The company is constructing a four-story steel funnel that it will try to lower over the most serious of the three leaks. Once the device is in place, a cap attached to a pipe will be placed on top. The hope is that the captured oil, which is lighter than water, will rise up the pipe to a special surface vessel where it can be separated from water and disposed.

One Leak Stopped

BP estimates that if successful, the funnel could divert 85 percent of the oil flow. On May 5, the company succeeded in stopping the smallest of three leaks, a dribble from an oil- filled section of pipe that had broken off.

As the spill spread, BP assembled at least nine airplanes and hundreds of ships for cleanup. Its logistics base for the Gulf of Mexico, in Houma, has been turned into a command center where uniformed U.S. Coast Guard personnel mingle with specialists from BP and other oil companies such as Exxon Mobil Corp.

“There is no expense spared,” says Jacqueline Michel, president of Research Planning, an oil-spill consulting firm based in Columbia, South Carolina. Because oil is still flowing, a cleanup exercise may be in vain and even damaging to the most fragile areas, because it may have to be repeated.

Amoco, Arco

Before the accident, Hayward seemed to have BP on the right track after succeeding his mentor John Browne, who resigned amid personal scandal in 2007. Browne did the megadeals, a $62 billion merger and acquisition of Amoco in 1998 and a $32 billion deal with Arco in 2000, that propelled BP into the supermajor class.

Yet the company during his tenure was accident-prone in the U.S., its most important operating area. In 2005, a blast at a BP refinery in Texas City, Texas, killed 15 people and injured more than 180. In 2006, oil leaking from a pipeline forced BP to shut part of its key Prudhoe Bay oilfield in Alaska.

Hayward has improved BP’s safety record, accelerated much- delayed projects, and backed away from some of Browne’s investments in alternative energy that Hayward deemed uncommercial. Profit more than doubled to $5.6 billion for the quarter ending March 31.

BP has staked its future on aggressive projects in the deepwater Gulf.

“We don’t do simple things,” said Andy Inglis, the company’s exploration and production chief, in an interview last summer. “We are prepared to work on the frontier and manage the risks.”

Thunder Horse

Using seismic-imaging techniques, BP made big discoveries including Thunder Horse, now the second-largest producer in the U.S. at about 300,000 barrels per day. Last September’s Tiber discovery was one of the world’s most important for the year.

The Macondo prospect, where the accident occurred, was a much simpler job than Tiber. The well was only half as deep. Hayward insisted the accident was the fault of the drilling company, Transocean, not BP.

“It is not our rig, not our equipment, not our systems,” he told the BBC on May 3. “There may be a need to do more oversight of drilling equipment,” he said at dinner on May 2.

Inquests into the Deepwater Horizon disaster may find that complacency played a role. The four-story-tall steel funnel that BP fabricated in Port Fourchon, Louisiana, and plans to lower over the largest of the three leaks, was not expected to be operational until three weeks after the accident. Shouldn’t the industry already have several such chambers on standby in offshore drilling regions?

‘Steel Sombrero’

This isn’t exactly a fresh idea: In 1979, Brown & Root lowered a 40-foot-wide “steel sombrero” over the blowing Ixtoc I well in the Bay of Campeche, Mexico, which spilled 35 million barrels before the sombrero helped stanch the flow.

Over the years, researchers funded by the MMS have proposed a variety of ideas for coping with well blowouts; few have gotten past the drawing board.

In 1985, Brown & Root recommended that an oil tanker be retrofitted to collect huge volumes of oil and seawater funneled from a blown well and to pump the liquid into separating tanks. Estimated cost: $59 million.

Without commenting on the merits of that particular idea, industry consultant Robert Peterson said it’s common for the industry to neglect promising innovations.

Lab to Application

“The transfer of the technology from the lab to a commercial application is where you see the highest mortality rate in terms of good ideas,” said Peterson, a Houston-based oil and gas expert at Charles River Associates. A spokesman for the Minerals Management Service did not respond to questions about past research.

The MMS’s own statisticians have never flagged the possibility of a serious spill. By design, the department’s Oil- Spill Risk Analysis model focuses on the likely frequency of spills rather than how big one might get. Projecting from the history of small spills over the past several decades, the MMS in 2007 predicted five spills of 10,000 barrels or more per 100 billion barrels of oil produced.

Ten thousand barrels is about what the Macondo well is thought to be leaking every two days.

The routine spills that the MMS used to calibrate its prediction model “have no bearing on dealing with major spills, predicting their frequency, or getting ready for them,” said Zvi Ziegler, a mathematician at the Technion-Israel Institute of Technology in Haifa, Israel. The MMS press office did not return calls asking about the agency’s statistical methodology.

MMS Problems

Critics of the MMS have called it a captive of the companies it regulates. Last September, the Interior Department shut down an oil-royalty program run by the agency after audits found that the MMS was undercollecting millions of dollars worth of royalties.

The Interior Department inspector general’s office found that several MMS officials had “frequently consumed alcohol at industry functions, had used cocaine and marijuana, and had sexual relationships with oil and gas company representatives.”

In the latest incident, BP was one of three finalists for the agency’s annual safety award for major offshore producers. The ceremony, scheduled for May 3 at a conference in Houston, has been postponed.

In a letter to regulators last September, BP’s Richard Morrison, the company’s vice-president of Gulf of Mexico production, wrote to oppose new rules meant to reduce the risk of injuries and spills, saying that voluntary programs “have been and continue to be very successful.”

Atlantis Whistleblower

The biggest question now is unanswerable: whether the Macondo blowout was a fluke in an otherwise safe system or an indication of more trouble to come.

Earlier this year, 19 members of Congress wrote to the MMS asking for its response to accusations by an anonymous former contractor that BP did not complete crucial engineering drawings and other paperwork for subsea components of its Atlantis project, which began producing oil in 2007. The ex-contractor supplied what he claimed were internal BP e-mails expressing concern about the incomplete documentation.

In one such e-mail made public by the self-proclaimed whistleblower, a BP executive on the Atlantis team named Barry C. Duff writes that the incomplete documentation “could lead to catastrophic Operator errors.” Food & Water Watch, the organization that publicized the accusations, has refused to release the whistleblower’s name to the news media at the person’s request.

‘Too Risky’

An MMS spokesman declined to comment on the allegations. In a Jan. 15 letter to the House subcommittee on energy and minerals, BP did not dispute the authenticity of Duff’s e-mail but denied that it had mismanaged records or jeopardized the project.

Some of the industry’s most reliable supporters have been taken aback by the Macondo spill. “This is like a nuclear plant going out of line; it is too risky for the environment,” said Nansen Saleri, a former chief of reservoir management at Saudi Aramco. “This should be a lesson to learn and improve; offshore resources are too important to be written off.”

So far, President Obama has not backed off his proposal to expand offshore drilling. Aides say the administration is using the 30-day safety review to devise rules that could make offshore drilling safer and, perhaps, rescue his compromise of more drilling along with more efforts to boost clean energy and combat global warming.

Regardless, the crisis is likely to further splinter Congress. Senator Frank Lautenberg, a Democrat from New Jersey, is leading a drive to increase the industry’s liability for economic damages, which is currently capped at $75 million per incident.

As for BP’s Hayward, he will need both savvy and luck to avoid having this incident define his tenure, just as the Texas City refinery explosion defined his predecessor’s. Noting that he has spent his first three years as CEO restoring BP’s fortunes, Hayward said: “My task for the next three years is to put this event behind us.”
 

Every Silver Lining Has A Cloud
by Willis Eschenbach

I noted on the news that there is a new plan afoot to cool down the planet. This one supposedly has been given big money by none other than Bill Gates.

The plan involves a fleet of ships that supposedly look like this:


Figure 1. Artist’s conception of cloud-making ships. Of course, the first storm would flip this over immediately, but heck, it’s only a fantasy, so who cares? SOURCE: http://inhabitat.com/2010/05/10/bill-gates-announces-funding-for-seawater-spraying-cloud-machines/


The web site claims that:

Bill Gates Announces Funding for Seawater-Spraying Cloud Machines​

The machines, developed by a San Francisco-based research group called Silver Lining, turn seawater into tiny particles that can be shot up over 3,000 feet in the air. The particles increase the density of clouds by increasing the amount of nuclei contained within. Silver Lining’s floating machines can suck up ten tons of water per second.​

What could possibly go wrong with such a brilliant plan?


First, as usual the hype in this seems to have vastly outpaced the reality. According to CBS News Tech Talk ( http://www.cbsnews.com/8301-501465_162-20004723-501465.html ):

The machines, developed by a San Francisco-based research group called Silver Lining, turn seawater into tiny particles that can be shot up over 3,000 feet in the air. The particles increase the density of clouds by increasing the amount of nuclei contained within. Silver Lining’s floating machines can suck up ten tons of water per second. If all goes well, Silver Lining plans to test the process with 10 ships spread throughout 3800 square miles of ocean. Geoengineering, an umbrella phrase to describe techniques that would allow humans to prevent global warming by manipulating the Earth’s climate, has yet to result in any major projects.​

However, this is just a quote from the same web site that showed the ship above. CBS Tech Talk goes on to say:

A PR representative from Edelman later sent me this note from Ken Caldeira of the Carnegie Institution for Science: “Bill Gates made a grant to the University of Calgary to support research in possible unique solutions and responses to climate change. Administrating this research funding, David Keith of the University of Calgary and I made a grant to Armand Neukermanns for lab tests to investigate the technical feasibility of producing the fine seawater sprays required by the Latham cloud whitening proposal, one of many proposals for mitigating some of the adverse effects of climate change. This grant to Neukermanns is for lab tests only, not Silver Lining’s field trials.”​

So Bill Gates isn’t funding the ships, and didn’t even decide to fund this particular fantasy, he just gave money to support research into “possible unique solutions”. Well, I’d say this one qualifies …

Next, after much searching I finally found the Silver Lining Project ( http://silverliningproj.org/index.html ) web site. It says on the home page:

The Silver Lining Project is a not-for-profit international scientific research collaboration to study the effects of particles (aerosols) on clouds, and the influence of these cloud effects on climate systems.​

Well, that sure sounds impressive. Unfortunately, the web site is only four pages, and contains almost no information at all.

Intrigued, I emailed them at the address given on their web site, which is info(a)silverliningproj.org. I quickly got this reply:

Delivery has failed to these recipients or distribution lists:

info@silverliningproj.org

The recipient’s e-mail address was not found in the recipient’s e-mail system. Microsoft Exchange will not try to redeliver this message for you. Please check the e-mail address and try resending this message, or provide the following diagnostic text to your system administrator.​

Hmmmm … not a good sign, four page web site, email address is dead … but onwards, ever onwards. Let’s look at a few numbers here.

First, over the tropical oceans, the rainfall is typically on the order of a couple of metres per year. Per the info above, they are going to test the plan with one ship for every 380 square miles. A square mile is about 2.6 square km, or 2.6 million square metres. Three hundred eighty square miles is about a thousand square km. Two metres of rainfall in that area is about two billion tonnes of water …

They say their ships will suck up “ten tonnes of water per second”. That’s about a third of a billion tonnes per year. So if they run full-time, they will increase the amount of water in the air by about 15% … which of course means 15% more rain. I don’t know how folks in rainy zones will feel about a 15% increase in their rainfall, but I foresee legalarity in the future …

Next, how much fuel will this use? The basic equation for pumps is:

Water flow (in liters per second) = 5.43 x pump power (kilowatts) / pressure (bars)​

So to pump 10,000 litres per second (neglecting efficiency losses) with a pressure of 3 bars (100 psi) will require about 5,500 kilowatts. This means about 50 million kilowatt-hours per year. Figuring around 0.3 litres of fuel per kilowatt-hour (again without inefficiencies), this means that each ship will burn about fifteen million litres of fuel per year, so call it maybe twenty five million litres per year including all of the inefficiencies plus some fuel to actually move the ship around the ocean. All of these numbers are very generous, it will likely take more fuel than that. But we’ll use them.

Next, the money to do this … ho, ho, ho …

You can buy a used fire fighting ship for about fifteen million dollars ( http://www.yachtworld.com/boats/200...Vessel-fire-Fighting-Vessel-2168377/Singapore ), but it will only pump about 0.8 tonnes/second. So a new ship to pump ten tonnes per second might cost on the order of say twenty million US dollars.

You’d need a crew of about twelve guys to run the ship 24/7. That’s three eight-hour shifts of four men per shift. On average they will likely cost about US$80,000 per year including food and benefits and miscellaneous, so that’s about a million per year.

Then we have fuel costs of say US$ 0.75 per litre, so there’s about ten million bucks per year there.

Another web site ( http://www.ottawacitizen.com/techno...heat+geoengineering+debate/3015852/story.html ) says:

A study commissioned by the Copenhagen Consensus Centre, a European think-tank, has estimated that a wind-powered fleet of 1,900 ships to cruise the world’s oceans, spraying sea water from towers to create and brighten clouds, could be built for $9 billion. The idea would be to operate most of the ships far offshore in the Pacific so they would not interfere with weather on land.​

My numbers say $38 billion for the ships … and “wind-powered”? As a long time sailor, I can only say “get real” …

However, that’s just for the ships. Remember that we are talking about $11 million per ship for annual pumping fuel costs plus labour … which is an annual cost of another $20 billion dollars …

Finally, they say that they are going to test this using one ship per 380 square miles … and that they can blanket the world with 1,900 ships. That makes a total of around three quarters of a million square miles covered by the 1,900 ships.

The surface of the world ocean, however, is about 140 million square miles, so they will be covering about half a percent of the world ocean with the 1,900 ships. Half a percent. If that were all in the Pacific Ocean per the citation above, here’s how much it would cover:
Figure 2. Area covered by 1,900 cloud making ships.​

Yeah, brightening that would make a huge difference, especially considering half of the time it wouldn’t even see the sun …

See, my problem is that I’m a practical guy, and I’ve spent a good chunk of my life working with machinery around the ocean. Which is why I don’t have a lot of time for “think-tanks” and “research groups”. Before I start a project, I do a back-of-the-envelope calculation to see if it makes sense.

My calculations show that this will cost forty billion dollars to start, and twenty billion per year to run, not counting things like ship maintenance and redundancy and emergencies and machinery replacement and insurance and a fleet of tankers to refuel the pump ships at sea and, and, and …

And for all of that, we may make a slight difference on half a percent of the ocean surface. Even if I’ve overestimated the costs by 100% (always possible, although things usually cost more than estimated rather than less), that’s a huge amount of money for a change too small to measure on a global scale.

Now Bill Gates is a smart guy. But on this one, I think he may have let his heart rule his head. One of the web sites quoted above closes by saying:

The Bill and Melinda Gates Foundation did not respond to requests for comment on Tuesday, nor did U.S. entrepreneur Kelly Wanser, who is leading the Silver Lining Project.​

Smart move … what we have here is a non-viable non-solution to a non-problem. I wouldn’t want to comment either, especially since this non-solution will burn about 27 billion litres (about 7 billion US gallons) of fuel per year to supposedly “solve” the problem supposedly caused by CO2 from burning fuel …

 

Occidental Leads Onshore Rush Amid Offshore Crackdown
By Joe Carroll

May 19 (Bloomberg) -- Occidental Petroleum Corp., the oil explorer that pumps enough crude to fill a supertanker every four days, is leading a rush to find oil on land as BP Plc’s Gulf of Mexico disaster spurs tougher offshore-drilling rules.

Occidental today doubled its estimate for a discovery near Bakersfield, California, to the equivalent of as much as 500 million barrels of oil, which would have a value of more than $34 billion at current prices. The Los Angeles-based company bucked the oil-industry migration to deep-sea drilling during the past decade and focused on onshore fields from California to Texas to Abu Dhabi.

Rival energy producers may have little choice but to follow Occidental’s example after the U.S. Interior Department halted new offshore drilling permits in the wake of the fatal April 20 explosion at a BP prospect off the Louisiana coast, said Brian Youngberg, an analyst at Edward Jones & Co. in St. Louis.

“There is a lot of new interest in onshore-production potential in the U.S. and Occidental is at the forefront of that,” said Youngberg, who has a buy rating on the shares.

Occidental disclosed the higher estimate for the California discovery in materials prepared for a presentation to investors and analysts today in New York.

The oil explorer has kept the precise location of its discovery in Kern County a secret to prevent competitors from trying to horn in on the prospect by purchasing adjacent tracts of land. Last year, the company estimated the field holds the equivalent of as much as 250 million barrels of crude.

Billion Barrels

Howard Weil Inc., a New Orleans investment bank, said in September the discovery may be four times larger than the company’s estimate, or 1 billion barrels, which would be enough to supply every refinery on the U.S. West Coast for 13 months.

Efforts to determine how wide and deep the Kern County field extends have been frustrated by a lack of equipment to process natural gas that flows from wells along with the crude, Chief Financial Officer Stephen I. Chazen said in a March 22 interview in New Orleans.

The company is building a gas-processing plant in Kern County to accelerate development of the field, Chazen said in the interview. Occidental plans to complete the facility, which will augment two mobile processing units scheduled to go into operation by the middle of this year, in early 2011.

Gas pumped from wells must be passed through processing plants to strip out impurities such as sulfur and saltwater to make the fuel suitable for pipeline shipment to industrial and residential customers.

Processing Capacity Needed

New oil wells needed to figure out where the boundaries of the field lie can’t be brought into operation until Occidental has enough processing capacity to handle the gas component, Chazen said.

Kern County has been a petroleum-producing region since the 1860s, when tar was mined to make kerosene and asphalt, according to the San Joaquin Geological Society.

Occidental Chief Executive Officer Ray R. Irani plans to raise production by 5 percent to 8 percent this year and in 2011. Last year, Occidental added twice as much resources for future production, or reserves, as it pumped from the ground.

Chevron Corp., the largest U.S. energy company after Exxon Mobil Corp., owns a 20 percent stake in Occidental’s California discovery. The prospect lies beneath privately owned lands covered by mineral leases Occidental began amassing half a decade ago.

Deep-Water Curb

Doug Leggate, the analyst at Howard Weil who made the 1- billion-barrel estimate last year, didn’t return a phone message seeking comment. Leggate, a former Chevron engineer, left Howard Weil in late 2009 and now works for Bank of America Corp.’s Merrill Lynch unit.

The federal government’s moratorium on new offshore permits will crimp deep-water exploration in the Gulf of Mexico, said Fred Aminzadeh, a University of Southern California researcher and former Unocal Corp. geophysicist.

The moratorium is scheduled to last at least through the end of this month.

Two deep-water projects began in the week that ended May 17 under the terms of permits issued before the moratorium was imposed, according to a report from the U.S. Minerals Management Service, the Interior Department agency that oversees oil and gas exploration and production in federally controlled seas.

The new projects involve Newfield Exploration Co. and ATP Oil & Gas Corp., the report showed. Those wells brought the number of current deep-water drilling operations in the U.S. section of the Gulf to 39.

Occidental has outperformed rivals with offshore operations. Since the April 20 disaster that killed 11 rig workers and triggered three subsea oil leaks, Occidental has fallen 6.4 percent, even as crude prices declined 16 percent.

During the same period, London-based BP, majority-owner of the damaged well, fell 19 percent. BP’s partners Anadarko Petroleum Corp. and Mitsui & Co. have dropped 22 percent and 14 percent, respectively.

http://www.bloomberg.com/apps/news?pid=20601072&sid=af4rQLCJPh2s

===========================================

Rig Gear Supplier Cameron May Prove Oil-Spill Winner
By David Wethe

May 19 (Bloomberg) -- Cameron International Corp., whose stock plunged after a safety device it supplied became a focus of investigations into the Gulf of Mexico oil spill, may find its fortunes boosted by the disaster.

Cameron and other manufacturers of drilling gear, including National Oilwell Varco Inc., may benefit should the April 20 rig explosion that triggered the Gulf spill lead to stricter regulations, said Brian Uhlmer, an analyst at Pritchard Capital Partners in Houston. Rules to improve safety would lead to a jump in sales of equipment to meet new standards, he said.

“The likes of Cameron could see a 180-degree turn in impact from this event within a short period of time,” said Scott Gruber, an analyst at Sanford C. Bernstein & Co. in New York. “It could happen very quickly.”

Cameron made the so-called blowout preventer on the Deepwater Horizon drilling rig that was designed to contain a surge in pressure like the one that killed 11 workers in an April 20 explosion and fire that set off the oil spill. The blast occurred while BP Plc, which leased the rig from Transocean Ltd., was drilling a well in 5,000 feet (1,524 meters) of water.

Cameron, which has been named as a defendant in lawsuits related to the incident, dropped to a seven-month low of $34.65 on April 29. The shares rose 35 cents to $37.10 at 9:53 a.m. on the New York Stock Exchange. It will climb 41 percent in the next 12 months, according to the average analyst price target.

Presidential Commission

Closer scrutiny of offshore drilling already is underway. The U.S. Interior Department halted drilling permits for new wells pending findings of a government study into the incident.

President Barack Obama plans to create a commission to investigate the drilling accident, following presidential probes in prior decades of the Three Mile Island nuclear accident and the Space Shuttle Challenger disaster, an administration official said on condition of anonymity.

The commission will be established by executive order, possibly this week, and will have no current government officials among its members, the official said.

Blowout preventers, known as BOPs, are among the most important pieces of safety equipment on an offshore drilling rig -- and also one of the most expensive. A system costs about $40 million, or roughly 10 percent of the total cost of the vessel, according to Quest Offshore Resources Inc.

‘Rocket Science’

The top three BOP makers, based on sales, for deep-water rigs are Cameron, National Oilwell Varco and General Electric Co.’s GE Oil & Gas unit, said Paul Hillegeist, president of Quest Offshore. Fewer than 10 companies around the world make the devices for deep-water drillers, he said.

A BOP consists of a series of valves installed at the wellhead that close to prevent the escape of pressurized fluids from the petroleum reservoir below ground.

The devices can be up to six stories tall, according to Houston-based National Oilwell Varco, which ranks ahead of Cameron as the biggest U.S. maker of oilfield equipment. On offshore rigs, the systems typically are installed underwater at the seafloor by remote-operated robots.

“This stuff is rocket science,” National Oilwell Varco Chief Executive Officer Pete Miller said Sept. 10 at the Barclays Capital CEO Conference in New York.

T-3 Energy

Katina Hargett, a spokeswoman for National Oilwell Varco, didn’t respond to telephone messages seeking comment for this story. Rhonda Barnat, a spokeswoman for Houston-based Cameron, declined to comment. Nigel O’Connor, a spokesman for GE Oil & Gas, said he couldn’t immediately comment.

Steve Krablin, CEO at T-3 Energy Services Inc., which also provides services and parts for the safety device, said increased regulations could mean “big opportunities” for his Houston-based company. More companies will buy backups for safety equipment, including BOPs, he said.

“There’s already a redundancy in the industry, but that doesn’t mean there can’t be more redundancy when you become very cautious about the effects of a tragedy like this,” Krablin told investors on an April 30 conference call. “For us, most of the things that you could speculate that could come from this would have the result of increasing our revenue, not decreasing it.”

Most offshore rigs are equipped with two BOPs, one of them a backup unit, said Leslie Cook, senior research analyst at Quest. There are currently 239 floating rigs under contract or available for work around the world, as well as 80 more that are under development, she said.

The biggest equipment makers will probably benefit most as the oil spill passes and drillers move to meet new safety standards, said Uhlmer of Pritchard Capital.

“Anything in the Gulf of Mexico is coming under pressure, but in the long term, their business should actually improve,” he said.

http://www.bloomberg.com/apps/news?pid=20601072&sid=ahH3oICuJKT8
 

College Grads Flood U.S. Labor Market With Diminished Prospects
By Mike Dorning


May 19 (Bloomberg) -- Ten months after graduating from Ohio State University with a civil-engineering degree and three internships, Matt Grant finally has a job -- as a banquet waiter at a Clarion Inn near Akron, Ohio.

“It’s discouraging right now,” said the 24-year-old, who sent out more than 100 applications for engineering positions. “It’s getting closer to the Class of 2010, their graduation date. I’m starting to worry more.”

Schools from Grant’s alma mater to Harvard University will soon begin sending a wave of more than 1.6 million men and women with bachelor’s degrees into a labor market with a 9.9 percent jobless rate, according to the Education and Labor departments. While the economy is improving, unemployment is near a 26-year high, rising last month from 9.7 percent in January-March as more Americans entered the workforce.

The graduates’ plight has been the subject of high-level discussions within President Barack Obama’s administration, which so far has concluded the best response is to focus on reviving overall employment and bolstering assistance for higher education, said Peter Orszag, the White House budget director.

“What’s clear is that there is harm to those who graduate at the wrong time through no fault of their own, which is one reason why it is so important to improve the jobs market,” Orszag said. “That is the bottom line here.”

The scramble for jobs may depress earnings of new and recent college graduates for years to come and handicap their future career opportunities, according to Lisa Kahn, an assistant professor of economics at Yale University’s School of Management in New Haven, Connecticut. It also might hurt Democrats in the November Congressional elections, as the young voters who helped propel the party to power in 2008 grow disenchanted with their economic prospects.

Wage Losses

Students who graduated in the early 1980s -- when two recessions drove unemployment to a peak of 10.8 percent -- suffered wage losses of more than $100,000 in the next 15 years compared with those who came into the job market during the decade’s boom years, according to Kahn’s research.

“They get shifted down into a lower level and lower pay scale,” she said. “They are working for worse firms, they’re not learning as many skills and they’re not moving up the career pyramid as quickly.”

The average salary offered to bachelor’s degree candidates this year is $47,673, 1.7 percent less than 2009, when the economy already was in recession, according to data compiled from campus job-placement offices by the National Association of Colleges and Employers in Bethlehem, Pennsylvania.

Increasing Competition

“More so in the last year to 18 months than at any time, we have seen applicants from prior graduating classes looking for the kind of entry-level jobs we’re recruiting for,” said Dan Black, director of campus recruiting for Ernst & Young LLP, a professional-services firm headquartered in New York. “There are a lot more cohorts competing with each other: ‘09 with ‘10, probably ‘10 with ‘11.”

Unemployment among people under 25 years old was 19.6 percent in April, the highest level since the Labor Department began tracking the data in 1948. Their economic travails may haunt Democrats in the November midterm elections. The youthful voters who helped propel the party to victory in the 2006 Congressional elections and gave the 2008 Obama campaign much of its vibrancy are showing signs of waning enthusiasm.

Democrats held a 62 percent to 30 percent advantage over Republicans in 2008 among “millennials,” born after 1980, according to the Pew Research Center for the People & the Press in Washington D.C. Their 32-point margin shrank to 18 points this year, with 55 percent leaning Democratic and 37 percent Republican, based on polls taken from January through April.

Less Excitement

“It’s definitely tamped down the energy and the excitement and activism that the Obama campaign had sparked among that entry-level age group,” said Democratic strategist Joe Trippi, who advised Howard Dean’s 2004 campaign and is working with candidates in several midterm races.

Even graduates of elite and graduate universities feel the impact. A new listserv of “Hot Opportunities” Harvard’s career-services office began compiling in March garnered 1,000 student subscribers in its first two days.

“This is the first year we have seen such a demand for our services this close to graduation,” said Robin Mount, director of the office in Cambridge, Massachusetts.

Thirty-three percent of Harvard’s graduating seniors had accepted a job as of commencement last year, down from 51 percent the year before. The survey results for this year’s class haven’t been released.

On-campus recruiting at schools of business declined 65 percent during the fall job-interview season, according to the MBA Career Services Council in Tampa, Florida. Peter Giulioni, assistant dean and executive director of MBA Career Services at the University of Southern California’s Marshall School of Business in Los Angeles, said he is encouraging this year’s graduates to be more flexible in the jobs they seek.

“Whereas in the past maybe 10 percent of my students had to go with their Plan B, about 30 percent are now,” he said.


http://www.bloomberg.com/apps/news?pid=20601110&sid=a8f9A4GYLECE
 

On Being The Wrong Size
by Willis Eschenbach

This topic is a particular peeve of mine, so I hope I will be forgiven if I wax wroth.

There is a most marvelous piece of technology called the GRACE satellites, which stands for the Gravity Recovery and Climate Experiment. It is composed of two satellites flying in formation. Measuring the distance between the two satellites to the nearest micron (a hundredth of the width of a hair) allows us to calculate the weight of things on the earth very accurately.

One of the things that the GRACE satellites have allowed us to calculate is the ice loss from the Greenland Ice Cap. There is a new article about the Greenland results called Weighing Greenland. ( http://www.grist.org/article/2010-05-13-weighing-greenland/ )

http://wattsupwiththat.files.wordpress.com/2010/05/grace_satellite.jpg?w=634&h=469
Figure 1. The two GRACE satellites flying in tandem, and constantly measuring the distance between them.​

So, what’s not to like about the article?


Well, the article opens by saying:

Scott Luthcke weighs Greenland — every 10 days. And the island has been losing weight, an average of 183 gigatons (or 200 cubic kilometers) — in ice — annually during the past six years. That’s one third the volume of water in Lake Erie every year. Greenland’s shrinking ice sheet offers some of the most powerful evidence of global warming.​

Now, that sounds pretty scary, it’s losing a third of the volume of Lake Erie every year. Can’t have that.

But what does that volume, a third of Lake Erie, really mean? We could also say that it’s 80 million Olympic swimming pools, or 400 times the volume of Sydney Harbor, or about the same volume as the known world oil reserves. Or we could say the ice loss is 550 times the weight of all humans on the Earth, or the weight of 31,000 Great Pyramids … but we’re getting no closer to understanding what that ice loss means.

To understand what it means, there is only one thing to which we should compare the ice loss, and that is the ice volume of the Greenland Ice Cap itself. So how many cubic kilometres of ice are sitting up there on Greenland?

My favorite reference for these kinds of questions is the Physics Factbook ( http://hypertextbook.com/facts/index-topics.shtml ), because rather than give just one number, they give a variety of answers from different authors. In this case I went to the page on Polar Ice Caps ( http://hypertextbook.com/facts/2000/HannaBerenblit.shtml ). It gives the following answers:

Spaulding & Markowitz, Heath Earth Science. Heath, 1994: 195. says less than 5.1 million cubic kilometres (often written as “km^3″).

“Greenland.” World Book Encyclopedia. Chicago: World Book, 1999: 325 says 2.8 million km^3.

Satellite Image Atlas of Glaciers of the World. US Geological Survey (USGS) says 2.6 million km^3.

Schultz, Gwen. Ice Age Lost. 1974. 232, 75. also says 2.6 million km^3.

Denmark/Greenland. Greenland Tourism. Danish Tourist Board says less than 5.5 million km^3.​

Which of these should we choose? Well, the two larger figures both say “less than”, so they are upper limits. The Physics Factbook says “From my research, I have found different values for the volume of the polar ice caps. … For Greenland, it is approximately 3,000,000 km^3.” Of course, we would have to say that there is an error in that figure, likely on the order of ± 0.4 million km^3 or so.

So now we have something to which we can compare our one-third of Lake Erie or 400 Sidney Harbors or 550 times the weight of the global population. And when we do so, we find that the annual loss is around 200 km^3 lost annually out of some 3,000,000 km^3 total. This means that Greenland is losing about 0.007% of its total mass every year … seven thousandths of one percent lost annually, be still, my beating heart …

And if that terrifying rate of loss continues unabated, of course, it will all be gone in a mere 15,000 years.

That’s my pet peeve, that numbers are being presented in the most frightening way possible. The loss of 200 km^3 of ice per year is not “some of the most powerful evidence of global warming”, that’s hyperbole. It is a trivial change in a huge block of ice.

And what about the errors in the measurements? We know that the error in the Greenland Ice Cap is on the order of 0.4 million km^3. How about the error in the GRACE measurements? This reference ( http://www.csr.utexas.edu/grace/GSTM/2006/b2.html ) indicates that there is about a ± 10% error in the GRACE Greenland estimates. How does that affect our numbers?

Well, if we take the small estimate of ice cap volume, and the large estimate of loss, we get 220 km^3 lost annually / 2,600,000 km^3 total. This is an annual loss of 0.008%, and a time to total loss of 12,000 years.

Going the other way, we get 180 km^3 lost annually / 3,400,000 km^3 total. This is an annual loss of 0.005%, and a time to total loss of 19,000 years.

It is always important to include the errors in the calculation, to see if they make a significant difference in the result. In this case they happen to not make much difference, but each case is different.

That’s what angrifies my blood mightily, meaningless numbers with no errors presented for maximum shock value. Looking at the real measure, we find that Greenland is losing around 0.005% — 0.008% of its ice annually, and if that rate continues, since this is May 23rd, 2010, the Greenland Ice Cap will disappear entirely somewhere between the year 14010 and the year 21010 … on May 23rd …

So the next time you read something ( http://www.sciencedaily.com/releases/2010/03/100323161819.htm ) that breathlessly says …

“If this activity in northwest Greenland continues and really accelerates some of the major glaciers in the area — like the Humboldt Glacier and the Peterman Glacier — Greenland’s total ice loss could easily be increased by an additional 50 to 100 cubic kilometers (12 to 24 cubic miles) within a few years”​

… you can say “Well, if it does increase by the larger estimate of 100 cubic km per year, and that’s a big if since the scientists are just guessing, that would increase the loss from 0.007% per year to around 0.010% per year, meaning that the Greenland Ice Cap would only last until May 23rd, 12010.”

Finally, the original article that got my blood boiling finishes as follows:

The good news for Luthcke is that a separate team using an entirely different method has come up with measurements of Greenland’s melting ice that, he says, are almost identical to his GRACE data. The bad news, of course, is that both sets of measurements make it all the more certain that Greenland’s ice is melting faster than anyone expected.​

Oh, please, spare me. As the article points out, we’ve only been measuring Greenland ice using the GRACE satellites for six years now. How could anyone have “expected” anything? What, were they expecting a loss of 0.003% or something? And how is a Greenland ice loss of seven thousandths of one percent per year “bad news”? Grrrr …

I’ll stop here, as I can feel my blood pressure rising again. And as this is a family blog, I don’t want to revert to being the un-reformed cowboy I was in my youth, because if I did I’d start needlessly but imaginatively and loudly speculating on the ancestry, personal habits, and sexual malpractices of the author of said article … instead, I’m going to go drink a Corona beer and reflect on the strange vagaries of human beings, who always seem to want to read “bad news”.



http://wattsupwiththat.com/2010/05/23/on-being-the-wrong-size/
 

Lord Monckton wins global warming debate at Oxford Union
Oxford Union Debate on Climate Catastrophe


For what is believed to be the first time ever in England, an audience of university undergraduates has decisively rejected the notion that “global warming” is or could become a global crisis. The only previous defeat for climate extremism among an undergraduate audience was at St. Andrew’s University, Scotland, in the spring of 2009, when the climate extremists were defeated by three votes.

Last week, members of the historic Oxford Union Society, the world’s premier debating society, carried the motion “That this House would put economic growth before combating climate change” by 135 votes to 110. The debate was sponsored by the Science and Public Policy Institute, Washington DC.

Serious observers are interpreting this shock result as a sign that students are now impatiently rejecting the relentless extremist propaganda taught under the guise of compulsory environmental-studies classes in British schools, confirming opinion-poll findings that the voters are no longer frightened by “global warming” scare stories, if they ever were.

When the Union’s president, Laura Winwood, announced the result in the Victorian-Gothich Gladstone Room, three peers cheered with the undergraduates, and one peer drowned his sorrows in beer.

Lord Lawson of Blaby, Margaret Thatcher’s former finance minister, opened the case for the proposition by saying that the economic proposals put forward by the UN’s climate panel and its supporters did not add up. It would be better to wait and see whether the scientists had gotten it right. It was not sensible to make expensive spending commitments, particularly at a time of great economic hardship, when the effectiveness of the spending was gravely in doubt and when it might do more harm than good.

At one point, Lord Lawson was interrupted by a US student, who demanded to know what was his connection with the Science and Public Policy Institute, and what were the Institute’s sources of funding. Lord Lawson was cheered when he said he neither knew nor cared who funded the Institute.

Ms. Zara McGlone, Secretary of the Oxford Union, opposed the motion, saying that greenhouse gases had an effect [they do, but it is very small]; that the precautionary principle required immediate action, just in case and regardless of expense [but one must also bear in mind the cost of the precautions themselves, which can and often do easily exceed the cost of inaction]; that Bangladesh was sinking beneath the waves [a recent study by Prof. Niklas Moerner shows that sea level in Bangladesh has actually fallen]; that the majority of scientists believed “global warming” was a problem [she offered no evidence for this]; and that “irreversible natural destruction” would occur if we did nothing [but she did not offer any evidence].

Mr. James Delingpole, a blogger for the leading British conservative national newspaper The Daily Telegraph, seconded the proposition, saying that – politically speaking – the climate extremists had long since lost the argument. The general public simply did not buy the scare stories any more. The endless tales of Biblical disasters peddled by the alarmist faction were an unwelcome and now fortunately failed recrudescence of dull, gray Puritanism. Instead of hand-wringing and bed-wetting, we should celebrate the considerable achievements of the human race and start having fun.

Lord Whitty, a Labor peer from the trades union movement and, until recently, Labor’s Environment Minister in the Upper House, said that the world’s oil supplies were rapidly running out [in fact, record new finds have been made in the past five years]; that we needed to change our definition of economic growth to take into account the value lost when we damaged the environment [it is artificial accounting of this kind that has left Britain as bankrupt as Greece after 13 years of Labor government]; that green jobs created by governments would help to end unemployment [but Milton Friedman won his Nobel Prize for economics by demonstrating that every artificial job created at taxpayers’ expense destroys two real jobs in the wealth-producing private sector]; that humans were the cause of most of the past century’s warming [there is no evidence for that: the case is built on speculation by programmers of computer models]; that temperature today was at its highest in at least 40 million years [in fact, it was higher than today by at least 12.5 F° for most of the past 550 million years]; and that 95% of scientists believed our influence on the climate was catastrophic [no one has asked them].

Lord Monckton repeatedly interrupted Lord Whitty to ask him to give a reference in the scientific literature for his suggestion that 95% of scientists believed our influence on the climate was catastrophic. Lord Whitty was unable to provide the source for his figure, but said that everyone knew it was true. Under further pressure from Lord Monckton, Lord Whitty conceded that the figure should perhaps be 92%. Lord Monckton asked: “And your reference is?” Lord Whitty was unable to reply. Hon. Members began to join in, jeering “Your reference? Your reference?” Lord Whitty sat down looking baffled.

Lord Leach of Fairford, whom Margaret Thatcher appointed a Life Peer for his educational work, spoke third for the proposition. He said that we no longer knew whether or not there had been much “global warming” over the 20th century, because the Climategate emails had exposed the terrestrial temperature records as defective. In any event, he said, throwing good money after bad on various alternative-energy boondoggles was unlikely to prove profitable in the long term and would ultimately do harm.

Mr. Rajesh Makwana, executive director of “Share The World’s Resources”, speaking third for the opposition, said that climate change was manmade [but he did not produce any evidence for that assertion]; that CO2 emissions were growing at 3% a year [but it is concentrations, not emissions, that may in theory affect climate, and concentrations are rising at a harmless 0.5% a year]; that the UN’s climate panel had forecast a 7 F° “global warming” for the 21st century [it’s gotten off to a bad start, with a cooling of 0.2 F° so far]; and that the consequences of “global warming” would be dire [yet, in the audience, sat Mr. Klaus-Martin Schulte, whose landmark paper of 2008 had established that not one of 539 scientific papers on “global climate change” provided any evidence whatsoever that “global warming” would be catastrophic].

Lord Monckton, a former science advisor to Margaret Thatcher during her years as Prime Minister of the UK, concluded the case for the proposition. He drew immediate laughter and cheers when he described himself as “Christopher Walter, Third Viscount Monckton of Brenchley, scholar, philanthropist, wit, man about town, and former chairman of the Wines and Spirits Committee of this honourable Society”. At that point his cummerbund came undone. He held it up to the audience and said, “If I asked this House how long this cummerbund is, you might telephone around all the manufacturers and ask them how many cummerbunds they made, and how long each type of cummerbund was, and put the data into a computer model run by a zitty teenager eating too many doughnuts, and the computer would make an expensive guess. Or you could take a tape-measure and” – glaring at the opposition across the despatch-box – “measure it!” [cheers].

Lord Monckton said that real-world measurements, as opposed to models, showed that the warming effect of CO2 was a tiny fraction of the estimates peddled by the UN’s climate panel. He said that he would take his lead from Lord Lawson, however, in concentrating on the economics rather than the science. He glared at the opposition again and demanded whether, since they had declared themselves to be so worried about “global warming”, they would care to tell him – to two places of decimals and one standard deviation – the UN’s central estimate of the “global warming” that might result from a doubling of atmospheric CO2 concentration. The opposition were unable to reply. Lord Monckton told them the answer was 3.26 plus or minus 0.69 Kelvin or Celsius degrees. An Hon. Member interrupted: “And your reference is?” Lord Monckton replied: “IPCC, 2007, chapter 10, box 10.2.” [cheers]. He concluded that shutting down the entire global economy for a whole year, with all the death, destruction, disaster, disease and distress that that would cause, would forestall just 4.7 ln(390/388) = 0.024 Kelvin or Celsius degrees of “global warming”, so that total economic shutdown for 41 years would prevent just 1 K of warming. Adaptation as and if necessary would be orders of magnitude cheaper and more cost-effective.

Mr. Mike Mason, founder and managing director of “Climate Care”, concluded for the opposition. He said that the proposition were peculiar people, and that Lord Monckton was more peculiar than most, in that he was not a real Lord. Lord Monckton, on a point of order, told Mr. Mason that the proposition had avoided personalities and that if Mr. Mason were unable to argue other than ad hominem he should “get out”. [cheers] Mr. Mason then said that we had to prepare for climate risks [yes, in both directions, towards cooler as well as warmer]; and that there was a “scientific consensus” [but he offered no evidence for the existence of any such consensus, still less for the notion that science is done by consensus].

The President thanked the speakers and expressed the Society’s gratitude to the Science and Public Policy Institute for sponsoring the debate. Hon. Members filed out of the Debating Chamber, built to resemble the interior of the House of Commons, and passed either side of the brass division-pole at the main door – Ayes to the right 135, Noes to the left 110. Motion carried.
 
http://www.bloomberg.com/apps/news?pid=20601109&sid=a28NMApkl.RQ&pos=15

Shale Gas Costing 2/3 Less Than OPEC Oil Incites Water Concern
By John Lippert


May 25 (Bloomberg) -- When Victoria Switzer awoke on a cold night in March, her dog was staring out the window at the flame roaring from a natural-gas-drilling rig 2,000 feet behind her house. She remembers trees silhouetted in a demonic dance as the plume burned off gas that had been building up under her land.

She discovered later that such flaring can occur when Cabot Oil & Gas Corp. and dozens more companies drill for gas trapped in shale rock. The deposits, stretching from Texas to New York, and as far away as Australia and China, represent what may be the biggest energy bonanza in decades -- one that Switzer, 57, recalls thinking the Earth isn’t surrendering without a fight, Bloomberg Markets reports in its July issue.

Switzer, a retired teacher in Pennsylvania, is on the front line of a shale gas rush that’s dividing communities, creating millionaires and shaking up global energy markets.

Companies from India’s Reliance Industries Ltd. to Japan’s Mitsui & Co. are spending billions of dollars to dislodge natural gas from a band of Pennsylvania shale -- sedimentary rock composed of mud, quartz and calcite.

Shale gas proponents, led by 91-year-old oil patch billionaire George Mitchell, who invented the process to extract it, say the U.S. should plumb all forms of natural gas. That would help unhook the nation from coal and foreign petroleum.

Gas is about two-thirds cheaper than oil and greener too. It produces 117 pounds (53 kilograms) of carbon dioxide per million British thermal units (MMBtu) of energy equivalent compared with 156 for gasoline and 205 for coal.

‘De-OPEC-ize’

“This discovery will change the course of world history, not just to de-carbonize the economy but to de-OPEC-ize it,” Chesapeake Energy Corp. Chief Executive Officer Aubrey McClendon said in December in Copenhagen as the United Nations climate conference was under way.

Chesapeake, based in Oklahoma City, has profited by selling drilling rights and gas reserves for $10.7 billion during the past 2 1/2 years, quadruple the $2.7 billion it paid. McClendon -- with $33 billion in assets left to sell -- says he’s open for business.

Shale gas has plenty of detractors. Environmentalists say fracking, a process in which drillers blast water into a well to shatter rock and unleash the gas, threatens pristine watersheds. Dish, a hamlet of 180 residents north of Fort Worth, Texas, has almost as many wells, compressors and pipelines as people.

‘Children, Old People’

Last year, the Texas Commission on Environmental Quality found benzene, which it classifies as a carcinogen, at 10,700 times the safe long-term exposure limit next to a well 6 miles (10 kilometers) west of town on which a valve had been left open.

“We have children, old people, pregnant women,” Mayor Calvin Tillman says. “They’re not supposed to be subjected to toxins.”

Switzer, who moved to Dimock Township, Pennsylvania, to build a $350,000 dream home with her husband, Jimmy, in 2004, had no idea how shale gas would consume her village of 1,400.

She says she found so much methane in her well that her water bubbled like Alka-Seltzer. Neighbor Norma Fiorentino says methane in her well blew an 8-inch-thick (20-centimeter-thick) concrete slab off the top. The $180 bonus Cabot paid to drill on Switzer’s 7.2 acres (2.9 hectares) and the $900 in royalties she gets each month don’t compensate, she says.

‘Beads and Baubles’

“I feel like one of the Indians who sold Manhattan for beads and baubles,” she says.

The economics of shale don’t look great right now for big companies either. Natural gas prices plunged to $2.41 per MMBtu in September 2009 from $13.69 in July 2008 as the recession cut demand while drilling accelerated. On May 24, gas traded at $4.04.

James Barrow, who invests one-ninth of his $50 billion portfolio in energy stocks as president of Dallas-based Barrow Hanley Mewhinney & Strauss, says leases signed as gas peaked in 2008 make drilling necessary -- even in a slump. When this new gas hits the market, the price could again sink into the mid-$2 range, he says.

For companies to profit from new wells, gas has to rise to $7.50, says Ben Dell, a Sanford C. Bernstein & Co. analyst in New York. He predicts it’s only a matter of time before firms trim production, which he says will boost gas to $8.50 by 2011.

Soaring Consumption

If gas stays above $4, a price that lets companies cover costs on existing wells, U.S. output could grow 20 percent to 65 billion cubic feet (1.8 billion cubic meters) a day from 2008 through 2030, says Peter Wells, director of U.K. research firm Neftex Petroleum Consultants Ltd. Shale gas production could quadruple to more than 20 billion cubic feet, he says.

That would help meet rising power demand. Global energy consumption will soar 44 percent by 2030 from 2006, the U.S. Energy Department says. China and India will siphon off 28 percent by then, according to the DOE forecast. Demand is rising because the planet’s population will balloon to 8.2 billion in 2030 from 6.8 billion today.

Hydroelectric, wind and other renewable sources will plug only part of the gap: They’ll contribute 17 percent of U.S. electricity generation by 2035 from 9.1 percent in 2009, the DOE says.

“Taking advantage of the new natural gas finds, the shale finds, would be an important piece of how we begin to break our dependence on foreign oil,” Carol Browner, President Barack Obama’s senior energy adviser, told a Washington audience in April.

Investors Primed

Investors are primed for a boom. Chesapeake’s shares fell 47 percent from the beginning of 2008 to $20.75 on May 24 as gas prices sank. Bernstein’s Dell predicted in mid-May that shares would rise to $34 during the next 12 months while companies curb output, reducing supply as rebounding economies demand more energy.

The stock prices of Chesapeake and fellow gas developers Petrohawk Energy Corp. and Range Resources Corp. don’t reflect the firms’ shale holdings, says David Heikkinen, a Tudor Pickering Holt & Co. analyst in Houston.

Fort Worth-based Range has assets valued at $65 a share, he says, a third more than its May 24 stock price of $42.47.

Range began plumbing the Marcellus shale that underlies New York, Pennsylvania and West Virginia in 2004. The band of rock -- so designated because it pokes through the surface near a city of that name in northern New York -- may contain 262 trillion cubic feet of recoverable gas, the DOE estimates. The U.S. uses 20 TCF annually, mostly for power plants and home heating.

That means the Marcellus shale alone could supply America’s needs for more than a decade.

Getting a Bargain

Range CEO John Pinkerton says he got a bargain when his company paid $1,000 an acre for Marcellus drilling rights near Pittsburgh starting in 2004. India’s Reliance paid 14 times more in April, a price Pinkerton says he wouldn’t consider.

“If I sold today for $14,000 an acre, I’d be selling for a quarter of what it’s worth,” Pinkerton told investors in April.

Range has 200 wells in Washington County south of Pittsburgh and may add another 4,300 in the county over 10 years.

Even oil and coal companies are raising their bets on gas. In December, Exxon Mobil Corp. agreed to pay $41 billion in stock and assumed debt for Fort Worth-based XTO Energy Inc., the biggest U.S. gas producer.

Outside North America, unexplored geology and nonexistent pipelines make it harder to gauge how much shale gas exists.

“Regions including China, India, Australia and Europe are thought to hold large resources,” the International Energy Agency said in November.

Liking the Odds

Firms are taking those odds. European oil giants BP Plc and Royal Dutch Shell Plc are looking in China. Chevron Corp., ConocoPhillips and Exxon purchased drilling licenses in Poland.

“Companies are rushing to get the last available license,” says Henryk Jacek Jezierski, Poland’s chief national geologist.

Consol Energy Inc., the second-largest U.S. coal producer by market value, owns land near Pittsburgh that’s in the heart of Marcellus shale. It also bought shale assets valued at $4.4 billion in April. CEO Brett Harvey says coal will remain the bedrock of the U.S. economy far into the future. He’s not ignoring gas.

Because Consol already owns the Pittsburgh-area property, it can charge as little as $3.71 MMBtu for gas and still earn a 20 percent after-tax return, he says. Firms forced to pay $5,000 an acre for drilling rights and a 20 percent leasing royalty would have to charge $5.18, he says.

“If there’s a flood of gas at $4, guess who’s going to produce it?” Harvey says. “We are.”

Managing a Windfall

Pennsylvania is no stranger to energy euphoria. Edwin Drake drilled the world’s first successful oil well in 1859 in Titusville, 240 miles west of the Switzers’ home in Dimock. Now it’s learning to manage its latest windfall.

In October, companies will be required to disclose the chemical composition of fracking water, says John Hanger, secretary of Pennsylvania’s Department of Environmental Protection. The department is doubling its number of oil and gas enforcers to 193.

Switzer says it’s about time. She says she’s had nothing but trouble since Houston-based Cabot arrived in 2006. It sank 50 wells in 2009 and plans 81 this year. Convoys loaded with drilling rigs, pipes and compressors crisscross the village. Her creek ran red with spilled diesel after a truck slid on ice and hit a tree. Some neighbors are moving. Switzer wants Cabot shut down instead.

“They said we’d never notice the drilling,” she says of Cabot. “Now, we won’t be able to remember when they weren’t here.”

Methane Migration

The Switzers and 31 neighbors are suing Cabot for negligence. The company had until June 1 to respond. Cabot spokesman George Stark declined to comment on the suit.

Separately, and without acknowledging any wrongdoing, Cabot agreed with Pennsylvania officials on April 15 to stop drilling in Dimock for a year, cap three wells with casings that the state deemed defective and pay a $240,000 fine.

Ken Komoroski, a Cabot attorney, says there’s no proof drilling polluted Dimock’s water. He says loose soil collapsed at a well, snapping the drilling pipe and dragging the bit 1,700 feet (520 meters) underground. Methane may have migrated through the cavity into aquifers as Cabot recovered the bit, he says. Cabot now tests for methane and uses latex to ensure well casings are cemented properly.

‘More Like Texas’

“In the big picture, drilling is going very well,” Komoroski says. “Pennsylvania is going to look more like Texas.”

Shale gas pioneer Mitchell can take credit if that happens. His parents, Greek immigrants who ran a dry cleaning store, put him through Texas A&M University, where he majored in geology and petroleum engineering. In 1946, he started consulting for a company he later bought and renamed Mitchell Energy & Development Corp.

Mitchell knew gas had become embedded in shale, the most common sedimentary rock, when ancient seabeds were covered and compressed by erosion. Starting in 1981, he experimented with drilling down and then horizontally. He fracked the wells, pumping fluid to blast out the gas -- testing the method sparking today’s boom.

“We tried propane, diesel, anything you can think of,” says Mitchell, who uses a motorized scooter to zip around in his Houston office, where he greets emissaries from China and Europe who have been bitten by the shale bug. “Water with a small amount of sand worked best.”

Better Bet

By 1993, Mitchell had developed shale gas extraction into a viable business. Rivals didn’t pay attention until prices rose in tandem with oil and passed $4 a decade later. Mitchell sold his company to Oklahoma City-based Devon Energy Corp. for $3.1 billion in 2002. Since then, he has invested $25 million in Alta Resources LLC, which has five wells near Montrose in northeastern Pennsylvania and may drill 500 more.

Mitchell says shale gas is a better bet than oil. A typical gas well near Fort Worth costs $4 million and is virtually assured of success. In the Gulf of Mexico, oil companies spend $300 million drilling through 1,000 feet of water and 35,000 feet of rock and can still come up empty.

“They decided they better start working on shale gas,” he says.

Persistent Risk

The U.S. Congress is investigating offshore drilling for a more tragic reason. On April 20, an explosion at a BP oil rig began spewing at least 5,000 barrels of crude a day. The disaster killed 11 people, wiped $58.3 billion off BP’s value as of May 24 and prompted the governors of Florida and California to withdraw support for ocean drilling.

While Chesapeake’s McClendon, 50, expects offshore drilling to become more difficult, shale gas has its own drawbacks, Neftex’s Wells says.

“With deep-water exploration, there is a very small risk of a catastrophic event,” he says. “With shale gas, there is a persistent risk of long-term contamination of groundwater. This doesn’t have easy-to-see TV imagery, like oiled-up seabirds. It needs scientific explanation for which the public is not trained.”

The Doghouse

BP had started looking for gas before the oil spill. In 2008, it paid Chesapeake $1.75 billion for rights on 90,000 acres near Stuart, Oklahoma, 100 miles south of Tulsa. BP has since tripled initial output from wells on this land to 10 million cubic feet a day.

On a sunny February afternoon, workers prepare new wells using a road grader to scrape flat a 5-acre patch called the drill pad. They’ll cover the area with rubber and surround it with 18-inch-high berms to contain any spilled liquid from fracking or drilling debris. They’ll bore as many as eight wells in the pad.

From a 14-story white rig with a blue platform, workers in a control room called the doghouse use computers to manipulate hydraulic lifts that arrange 30-foot sections of black pipe into rows. Mechanical claws screw one pipe to a volleyball-size drill bit studded with diamonds and the other pipes to each other. An 11-ton rotating clamp called a top drive pushes the pieces into the pad to start the well.

Within 10 Feet

The bit and drilling pipes, which are surrounded by three rings of metal casings cemented in place to protect aquifers, go down 8,000 feet. Workers activate a motor in the pipe, which has a slight bend near the bit, so that 1,000 feet of drilling produces a 90-degree turn.

After probing for 3 miles, the driller, from his perch in the doghouse, can place the bit within 10 feet of his target, says Bryant Chapman, BP’s vice president for North American gas operations.

Next comes fracking. Workers park 40 tractor-trailers loaded with pumps, sand, chemicals and portable containment tanks on the pad and spend three days blasting 5 million gallons (19 million liters) of water into the well.

As much as 40 percent flows back out. In Texas, the water is injected into underground rock. In Pennsylvania, which lacks suitable deep-rock formations, the water gets recycled or goes to treatment plants.

Fracking worries people far from Stuart and Dimock. New York City serves 8 million residents from a watershed so pristine it’s exempt from federal filtration requirements.

Fracking Concern

A consulting firm hired by the city, Hazen & Sawyer PC, said in December that chemicals from fracked wells could have a catastrophic impact. Some, like pesticide 2,2-dibromo-3- nitrilopropionamide, are toxic. Each well needs 82 tons of assorted chemicals for reasons such as killing bacteria and inhibiting corrosion, the report says. New York has banned shale gas drilling statewide until it adopts new rules.

“We firmly believe, based on the best available science and current industry and technological practices, that drilling cannot be permitted in the city’s watershed,” Mayor Michael Bloomberg said in an April press release.

Bloomberg is the founder and majority owner of Bloomberg LP, the parent of Bloomberg News.

Range CEO Pinkerton says New York’s leaders are ignoring facts.

“They’re cuckoo for Cocoa Puffs,” he says, quoting a 1960s breakfast cereal slogan.

Squaring Off

Pinkerton, 56, says all Marcellus wells that will ever be built will use less water than one nuclear plant and that damage from coal mines is much worse than shale drilling.

As the drilling debate intensifies, shale gas supporters and opponents are squaring off along the Delaware River, the waterway U.S. General George Washington crossed on Christmas Day in 1776 to defeat Hessian mercenaries.

In April, Pennsylvania issued a permit for the first of up to nine exploratory shale wells in the river basin for New York- based Hess Corp. and Houston-based Newfield Exploration Co. The first well will be 2.5 miles west of the Delaware and 15 miles north of Honesdale.

Pat Carullo says drilling is a beast that can’t be tamed. Carullo, 56, co-founded Damascus Citizens for Sustainability, which wants case-by-case reviews of new wells.

“The gas industry thought they could spread money around like pimps and drill anywhere in the watershed,” he says. “I’ll be dead before that happens.”

Preserving the Farm

Marian Schweighofer, executive director of the Northern Wayne Property Owners Alliance, is rooting for shale gas. If commercial drilling is banned in the river basin, she’d lose out on income for the 712-acre farm in Tyler Hill that’s been in her family for four generations. Marian and her husband Edward, both 54, have gotten $500,000 from Hess so far.

Jack Ivey is contemplating the riches shale gas can bring. He leased 111 acres in Montrose to Mitchell’s Alta for $310,800. Ivey, 80, hopes for at least $346 a day from the first well if gas prices hold up. Royalties may reach $1,734 a day with five more wells.

“Hopefully, I’ll live five or six years so I can get some of this money,” he says.

Mitchell predicts companies will win public support for drilling in Pennsylvania the way they did in Texas.

“With money,” he says, and pauses, as if no elaboration is needed.

Learning From Dimock

Billions of dollars -- and energy for the 21st century -- are at stake. In Australia, Beach Energy Ltd. wants to explore an area that may hold 200 TCF of shale gas. China may produce a quarter of its gas from shale deposits in the next 20 years, the DOE says.

Before Schweighofer’s group signed on for drilling, members toured Dimock and met Victoria Switzer. They hired a lawyer and insisted on stronger well casings than Pennsylvania requires and that farmers be allowed to keep drilling equipment out of their best fields.

Switzer, now a shale gas veteran, says she hopes the world can learn from her and her neighbors that there are costs as well as benefits from unlocking a treasure the Earth has guarded for hundreds of millions of years.



TxRad said:
Someone else talking out their ass...
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Tx,

Don't make the mistake of assuming that you're addressing anything other than an uninformed lynch mob.


Some of the folk 'round here are possessed of the same kind of superstitious ignorance that produced the Salem witch trials. These people are not interested in facts. They don't understand risk. They're not rational. Mathematics and science scare the bejesus out of them. They have the patience and perspective of two year olds. They're doing their thinking with their limbic cortex instead of their cerebral cortex. They've spent lifetimes being suckled by the great teat in the sky. They'd have hung Galileo.


It's the same unfathomable cluelessness that manifests itself in people who believe that grizzly bears are harmless.







Current U.S. government policies are absolutely adverse to retirees and seniors. Let me explain in rather simple terms. Retirees over 65 live off of income from three sources, Social Security, pensions or other retirement plans, and savings. Social Security is in stress through no fault of the current administration. The ultimate solution, which probably won’t happen until a crisis occurs, will be to means test benefits or delay the age when benefits begin. That in itself won’t hurt most seniors today and the ones who earn enough money that they don’t need Social Security probably won’t suffer greatly if benefits are withheld as a result of means testing. So let’s move on and consider the next component, savings. They are mostly invested in cash, money funds, CDs, short term high grade bonds and blue chip stocks. We all know where interest rates are. They are near zero. And they are there for three reasons. The stated reason is to stimulate low cost borrowing but given the steady drop in money supply and decline in new loans, low rates aren’t the necessary catalyst for lending today. The second reason for low rates is to create a steep yield curve that helps to bail out the banks from the mess they got themselves into during the recession. In other words, seniors and those of us who save are earning less so that banks can earn more. Last, while not a direct cause of low rates, note that the Federal government itself benefits greatly paying a tiny fraction on its debt versus what it would be forced to pay in normal times. Do the math. $12 trillion in debt times just 1% is $120 billion. A normal 3% borrowing rate would cost the Federal government $360 billion. Thus, while the fiscal math doesn’t dictate Fed interest rate policy, certainly it isn’t harmful to the Federal budget that interest rates are near zero.

Low rates aren’t the only cause of pain for seniors. Look at what is happening to investments in blue chip stocks. Current tax rates are 15% on capital gains and dividends. Starting January 1, the maximum rates go to 20% for capital gains and 39.6% for dividends. Move forward 3 years and you can tack on another 2.9% courtesy of the new health insurance reform law. In other words, without any changes, taxes on dividends may almost triple in a few years.

Estate taxes are next. They are now zero. Next year they go to 55% and the deductible falls from $3.5 million to just $1 million.

In fairness, the Obama administration earlier this year advocated much lower rates for both dividend and estate taxes but that was before budget deficits ballooned and before the European sovereign debt crisis blew up. While some still insist that tax reform is on the agenda, there has been virtually no movement to date.

Finally IRA withdrawals are taxable at ordinary income rates. The new Roth IRAs seek to deal with that issue but only if one pays taxes up front upon conversion.

An individual without a pension with $500,000 in cash, CDs and stocks stands to make something over $25,000 from Social Security. In normal times, they might earn 3% or more in interest and dividends from their investment portfolio. That could add another $15,000 or 60%. But in today’s environment, a 1% after-tax return on that $500,000 of savings ( or $5,000 ) might be a more logical expectation. $30,000 [ $25,000 plus 1% of $500,000 ] is only 75% of $40,000 [ $25,000 plus 3% of $500,000 ].
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INQUIRY INTO THE DEEPWATER HORIZON GULF COAST OIL SPILL
WEDNESDAY, MAY 12, 2010
House of Representatives,
Subcommittee on Oversight and Investigations,
Committee on Energy and Commerce

Transcript: http://energycommerce.house.gov/Press_111/20100512/transcript.05.12.2010.oi.pdf
( 185 pages )

Chart of last two hours of drilling parameters:
http://energycommerce.house.gov/documents/20100512/Halliburton-Last.Two.Hours.Chart.pdf

The chart of drilling parameters for the last two hours before the blowout suggests that the riser and upper 3,000 ft of the wellbore were fully displaced with seawater by 20:00 on April 20, and the crew was circulating the drilling fluid. Beginning 10 minutes later, at 20:10, the mud pit volume began to increase probably because of gas influx. The volume increased so much, that the recorder re-zeroed four times. When the crew stopped pumping at 21:08, the mud pit volume decreased and this may have alleviated some concern about gas influx.

At 21:30, they stopped pumping again and circulated, but the pit volume continued to increase(Figure 5). Standpipe pressure increased and decreased twice between 21:30 and 21:42 (standpipe pressure generally reflects bottom hole pressure). This, along with a steady increase in mud pit volume, suggests that surges of gas were entering the drilling fluid from a gas column below the wellhead, and outside of the 7-inch production casing. Gas had probably channeled past the inadequate cement job near the bottom of the well and, by now, had reached the seals and pack-offs separating it from the riser at the sea floor.

At 21:47, the rate of standpipe pressure and mud pit volume went off scale, and water flow was measured at the surface. The blowout had begun.

Between 21:47 and 21:49 the gas behind the 7-inch production casing apparently overcame the wellhead seals and pack-offs that separated the wellbore from the riser. Almost instantaneously, the gas shot the water out of the riser and above the crown of the derrick. Then, the gas ignited and exploded.
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Stella_Omega said:
Should I admire stupid people?

Should I trust the uneducated to make decisions that affect me, when what I am doesn't even ping in the limited world of the conservative dimwits?

By and large, stupid people are attracted to conservatism. It's easy. it does not require thought. You can be proud that you've got exactly what your daddy had. The conservative world is filled with other conservative people, and anyone who can't live in it is the enemy of conservatism, plain and simple. And you know who can't live in a a conservative world? The well-educated. You do have a connection with education. it's a negative one, unfortunately.

By the way-- I have no college degree. None. But I am smarter, and more educated than you are, because it is easy to keep on learning.
Click to expand...


Well, keep it up because you have an enormous amount of learning left to do. You may be the most manipulative and Machiavellian poster in the AH. You have perfected the role of professional victim and you do not hesitate to repeatedly post insults, half-truths and outright fabrications.


Unfortunately, it is also possible that you are the singlemost uninformed poster in the AH ( though I hesitate to pronounce you victor in that dubious category as you face fierce competition from the likes of Huckelberry and Dee ( whose entire comprehension of economics can be boiled down to a simple law: what's yours is mine ). You possess an extraordinary capacity to believe the palpably untrue; this is a useful skill and you do yourself an injustice by failing to pursue a career in sales.


It is nearly impossible for anyone to be more ignorant of economics, history and mathematics than you are.





As for the creator of this thread:
NATIVE AMERICANS: DULLARDS AND DRUNKS
SOUTHERNERS: SLOW-WITTED HILLBILLIES


How do you like those labels and generalizations? It is obvious that you initiated this thread with the intention of provoking reactions. Did you get what you wanted? Are you happy now?


The extent of your hypocrisy is mind-boggling. Anyone with half a brain would understand that. Yet you have the unfathomable chutzpah to express surprise that anyone might object to your generalizations.


It is a measure of the depth of your hypocrisy that you go on to stage a hissy fit when somebody ( quite properly ) responds.


For the past two days, I've suppressed the urge to point out your obvious hypocrisy— but the better angels of my nature restrained me. Now, on reflection, your repeated hollow protestations make it necessary to point out that it was your obvious intent in creating this thread to provoke.




Stella_Omega said:
But you need to calculate the potential for damage that just one large spill can inflict, as well.

And the damage that just one catastrophically large spill can inflict.

And you might want to calculate what the cost will be in human lives and suffering as a result of that statistically small but realistically inevitable spill will cause.

Actually you have shown quite consistently that you don't want to calculate things like that. I'm sure you consider yourself a compassionate human being. You don't seem to know what compassion actually is, though.
Click to expand...


Priceless. Just effin' priceless! Sanctimonious preaching from the apostle of ethical relativism.


Your thought process is so internally inconsistent and undisciplined that it's a wonder you can walk a straight line. It is my fervent hope that I may be relieved from the tedious necessity of responding to your ever-so predictable regurgitation of MoveOn/Huff/Greenpeace/ExxonSecrets/MotherJones pablum. It is a land inhabited by innumerates and illiterates.


Your definition of compassion is glaringly simple: it's a character trait possessed only by those who submit to your latent authoritarianism.


The impetus behind Charles Darwin's research was economics. It was his inspiration for his theory of natural selection. Darwin wrote,
I happened to read... Malthus on Population, and being well prepared to appreciate the struggle for existence which everywhere goes on from long continued observation of... animals and plants, it at once struck me that under these circumstances favorable variations would tend to be preserved and unfavorable ones to be destroyed. The result of this would be the formation of new species.
Click to expand...






The Commissar finally showed his stripes. Next, he'll burst into a full-throated, off-key rendition of The Internationale.


The state oppresses and the law cheats
The tax bleeds the miserable
No duty is imposed on the rich
'Rights of the poor' is a hollow phrase
Enough languishing in custody
Equality wants other laws:
No rights without obligations, it says,
And as well, no obligations without rights
|: This is the final struggle
Let us group together, and tomorrow
The Internationale
Will be the human race :|
Click to expand...
 
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Always listen to Bogle; there are very few "honest" people in the investment field— he's one of them.

He's right about this stuff; these are products that are being manufactured for the simple reason that the creators believe they are saleable. IShares ought to be ashamed of themselves but they don't know the meaning of that word. 99% of ETFs are ripoffs.




Hedge Fund in a Single Security Makes Bogle See ETFs as Insane
By Edward Robinson

May 28 (Bloomberg) -- The skunk works at IShares’ headquarters in San Francisco is buzzing. Researchers in the development lab pore over data flashing across computer screens while colleagues refill their mugs at the coffee bar and huddle in conference rooms illuminated by translucent blue partitions.

These brainiacs, who create the exchange-traded funds that have made the BlackRock Inc. unit the kingpin of the global ETF market, took a radical departure in November from the index trackers IShares has churned out for a decade. They released a hedge fund in a box.

The IShares Diversified Alternatives Trust ETF packs the complex bets favored by hedge fund managers into one security. There’s no rock star money manager calling the shots; a computer program monitors the fund daily. Anyone with about $50 and a brokerage account can buy a share of an ETF that uses derivatives to bet on swings in stocks, government bonds, currencies and commodities around the world, Bloomberg Markets magazine reports in its July issue.

“There’s going to be a whole rash of these things coming out,” says Michael Latham, head of IShares’ U.S. and Canada operations.

A physicist named Nathan Most invented the ETF more than 20 years ago as a simple mutual fund that trades on bourses like a stock. Fund providers are now unleashing a new breed of “extreme ETFs” that use short selling, leverage and derivatives in a bid to capture a larger share of investor assets.

Double and Triple Returns

The creators range from BlackRock to startups founded by Ivy League professors. And the ETFs come in an array of styles. While “hedge fund replicators” mimic the strategies of exclusive investment pools, other ETFs offer investors easy entree to the volatile world of commodity futures trading. Some “leveraged and inverse” securities even promise to double and triple returns on moves in the Standard & Poor’s 500 Index and other benchmarks.

Assets in more than 260 such funds have soared to $40 billion globally from virtually zero in about four years, according to BlackRock.

Fund providers and registered investment advisers say that if used judiciously, extreme ETFs can help investors curb losses. In the first week of May, the Greek debt crisis triggered the most-volatile swings in U.S. stocks in more than a year. The S&P 500 dived more than 7 percent in five trading days. The ProShares Advisors LLC’s UltraShort S&P 500 ETF, which uses futures contracts and swaps to bet against the index, surged 17 percent during the same period.

‘It’s Insanity’

“If you’re not hedged these days, you’re going to get killed,” says Adam Patti, the chief executive officer of IndexIQ Advisors LLC, a firm in Rye Brook, New York, that copies hedge fund-style investing in ETFs.

John Bogle counters that extreme ETFs may be the next financial concoction to blow up in investors’ faces.

Bogle, the creator of the first index mutual fund in 1975, says these complex securities subvert the discipline of buy-and- hold investing and encourage investors to chase market-beating returns by speculating like day traders. The ProShares UltraShort S&P 500 ETF plunged 9 percent on May 10 after the stock market rallied on news that the European Union set up a bailout fund for indebted nations.

“It’s insanity,” says Bogle, 81, the founder of Vanguard Group Inc. “This is a classic case of Wall Street trying to capitalize on the worst instincts of investors.”

Some investment advisers say hedge fund replicators and their ilk may be twisting the innovative ETF into an overly complex and murky security that is dependent on derivatives.

Reining in Excesses

“I couldn’t possibly justify putting clients’ money into those because they’re brand new, not tested, and I don’t know what’s in them,” says Andrew Mathieson, the founder and managing member of Fairview Capital Investment Management LLC in Greenbrae, California. “It looks like just another way for investors to get plucked.”

Investors can examine the holdings for ETFs managed by IShares and other fund providers online.

“We believe innovation means good ideas coupled with good execution, and we focus on bringing products to market that provide greater access to a range of asset classes or investment strategies in efficient ways,” says Noel Archard, IShares’ head of product development.

Regulators are moving to rein in possible excesses. On March 25, the Securities and Exchange Commission announced it was deferring approval of new ETFs that use derivatives as its staff reviews whether fund managers are stuffing too much leverage and complexity into offerings aimed at retail investors.

Too Risky

And in June 2009, the SEC and the Financial Industry Regulatory Authority Inc. (Finra) issued a joint alert warning investors that returns in leveraged and inverse ETFs could deviate widely from their underlying indexes when held longer than a day.

Finra, the Washington-based organization that polices broker-dealers, has several investigations under way to see if investors are being sold ETFs they may not understand or that may be too risky for their needs, says James Shorris, the agency’s acting chief of enforcement. Shorris is concerned about the role ETFs are playing in what he calls the “retailization” of leverage, derivatives and other hedge fund-style investing techniques.

“Hedge funds are restricted to high-net-worth individuals and institutions for a reason; they are very complicated, and you have to take the risk of losing everything,” Shorris says. “It would surprise us if retail brokers could explain the risks satisfactorily to their customers.”

Garnering Momentum

All this action comes as ETFs continue to explode in popularity and draw investors away from traditional mutual funds. Assets in ETFs worldwide have more than doubled to $1.1 trillion since 2005, and with 833 new funds in the pipeline the market will soar another 20 to 30 percent this year, says Deborah Fuhr, BlackRock’s global head of ETF research.

While mutual funds, with $19.5 trillion in assets, still dwarf ETFs, these upstart securities are garnering momentum: In 2009, ETF providers raked in net sales of $118 billion in the U.S., more than two times the $54 billion collected by index mutual funds, according to Loren Fox, a senior analyst at Strategic Insight Mutual Fund Research and Consulting LLC.

On some days more than 4 out of 10 trades on U.S. stock exchanges involve ETFs, says Tom Lydon, the editor of ETFtrends.com, an industry website. Following the “flash crash” of U.S. equities on May 6, more than 70 percent of the trades canceled due to excessive declines involved ETFs, according to the SEC and Commodity Futures Trading Commission.

More Exotic Specimens

Some of the biggest names in asset management are jumping into the arena. Legg Mason Inc., Pacific Investment Management Co. and T. Rowe Price Group Inc. are in various stages of unveiling actively managed ETFs that aim to outperform market benchmarks the same way nonindex mutual funds do. And IShares has cracked the $2.7 trillion market for 401(k) retirement plans in the U.S. by selling its ETFs to small and mid-size companies.

“It’s safe to say ETFs aren’t a fad,” Lydon says.

The creators of ETFs are cranking out ever more exotic specimens to bolster the asset management fees they collect from investors. ETFs are cheap: The average plain vanilla one charges investors about 5 cents for every $10 they invest compared with 9 cents for stock index-based mutual funds, according to Morningstar Inc.

IShares and its competitors fetch far more money for complex funds. IShares’ Diversified Alternatives Trust ETF costs 0.95 percent, and the ProShares UltraShort S&P 500 ETF charges 0.91 percent.

Exorbitant Fees

The exotic securities cater to a broad spectrum of investors.

“You can use the exact same product for the most sophisticated institution and for mom-and-pop investors,” says IShares’ Latham, a burly Californian who grew up surfing the Pacific Ocean just 15 miles (24 kilometers) south of his office. “Goldman Sachs is buying the same product as my mom, and for the same price.”

Fund providers are also peddling fancy ETFs to investors who have soured on paying exorbitant fees to hedge funds. Many of these firms blocked clients from withdrawing cash during the credit crash, and about 2,500 out of 9,050 hedge funds in the U.S. shut down in 2008 and 2009, according to data compiled by Hedge Fund Research Inc.

Lack of Liquidity

The IQ Hedge Multi-Strategy Tracker ETF, with fees of 0.75 percent, is a bargain compared with the typical hedge fund that charges 2 percent on assets under management and 20 percent of gains, says IndexIQ’s Patti. Plus, shareholders can bail out of the ETF anytime they choose. The City of New Haven City Employees Retirement Fund invested $8 million in Patti’s strategy.

“The trustees were turned off by the lack of liquidity and transparency in traditional hedge funds,” says Derek Ciampini, a consultant at a unit of Ameriprise Financial Inc. who advised New Haven’s pension board.

In the late 1980s, Most, then head of product development at the American Stock Exchange, set out to boost volume by making mutual funds tradable securities. Most, a polymath who’d worked as an acoustical engineer and commodities trader, faced a problem: A mutual fund would constantly redeem shares as it traded, generating too many taxable transactions. So he retooled the mutual fund to make redemptions with securities instead of cash, limiting capital-gains taxes. That made ETFs cheaper and opened the door to continuous trading.

The First ETF

“That was the key concept of the ETF from which all other features evolved,” Most wrote in a foreword to Exchange Traded Funds by Jim Wiandt and Will McClatchy (Wiley, 2001). Most died in 2004 at the age of 90.

With Most’s help, State Street Corp. in 1993 brought out the first ETF, the SPDR S&P 500 Trust, which was dubbed the Spider. Investors wary of the newfangled instruments mostly shunned them for years.

Then in 2000, Lee Kranefuss, head of the retail products group at Barclays Global Investors in San Francisco, wagered that better product development and marketing would spur a market for ETFs. So with the support of BGI’s then-CEO Patricia Dunn, Kranefuss created IShares at the asset management division of London-based Barclays Plc. And he recruited Latham, an accountant who’d climbed BGI’s management ranks since joining the firm in 1994, to run IShares’ day-to-day operations.

Next Generation

During the next six years, IShares leapfrogged State Street and brought out scores of ETFs that tracked industries, international equities and, eventually, commodities, currencies and bonds. Today, IShares manages more than $516 billion in assets in 430-plus funds and commands 46 percent of the global market, about twice the combined share held by No. 2 State Street and No. 3 Vanguard, according to IShares and Bloomberg data.

Latham took over as head of IShares’ U.S. and Canadian businesses in January 2006 as pressure mounted from investors for exotic ETFs that would hedge market volatility.

“We’d come out of the baby stage where the industry was just trying to break through,” says Latham, tieless in a white Brooks Brothers shirt and chinos at IShares’ 10-story headquarters. “Now, it was moving into the next generation of ETFs.”

In early 2007, Latham turned to Archard, the product development chief, to mint a new line of ETFs with complex strategies that institutions had long used but had been largely inaccessible to Main Street investors. Archard, 40, a chatty Philadelphian fond of plying his colleagues with Dunkin’ Donuts, and his 20-member team occupy two floors at IShares.

Absolute Return

The open office, with its rows of computer screens and desks stacked with books on investing theory, feels like a cross between a trading floor and a university library. That’s fitting given IShares’ provenance. In the late 1960s, economists Eugene Fama, Myron Scholes and William Sharpe tested their theories about market efficiency and risk-return ratios at the firm that eventually became BGI. In 1971, it pioneered the first index strategy by tracking the performance of every equity on the New York Stock Exchange.

Now Archard, who had developed ETFs at Vanguard, and his team have created the first IShares ETF that doesn’t rely on an underlying index. Diversified Alternatives, which trades under the ticker ALT, isn’t designed to produce robust returns associated with hedge funds, according to its prospectus.

Instead, it’s set up to deliver modest gains regardless of how the global economy or the financial markets behave -- what Wall Street professionals call an absolute return. The fund’s paramount goal is to take half the risk of the average equity portfolio by going long and short in broad groups of securities, says the prospectus.

Three Strategies

The ETF blends three strategies that many hedge funds use to insulate their performance from wild swings in the markets. The “momentum/reversal” approach tries to anticipate which way a group of equity indexes, interest rates and commodities are going to move by looking at price history. If a stock index’s recent surge exceeds past performance, the ETF goes long; a slide below historical levels cues a short position. The other two approaches hunt for baskets of securities that are under- or overpriced and exploit changing spreads between groups of fixed- income securities and commodities contracts.

The fund executes all three strategies with futures contracts and currency forward contracts. On May 10, the ETF was bullish on the CAC 40 index of French stocks and the Australian dollar, and it was shorting the euro, Japanese government 10- year bonds and the S&P/TSX 60 index of Canadian equities.

Future ETFs

A computer program, closely monitored by a team of portfolio managers, oversees the fund’s holdings. The ETF, which has a market value of $55 million, has slipped 0.17 percent from its debut on Nov. 16 through May 27, about the same as the HFRX Global Hedge Fund Index.

Latham says this fund is a prelude to future ETFs. In December, BlackRock acquired BGI for $15.2 billion, making the New York-based company the No. 1 global investment firm, with $3.3 trillion in assets. Latham is now working to package BlackRock’s investment strategies in IShares’ ETFs. One area of research: tailoring funds to address specific liabilities for retirees. If inflation were to send a client’s health-care costs higher, for example, the ETF would automatically adjust its bets to produce extra income for a client’s medical bills.

Entrepreneurs are devising their own experimental ETFs. SummerHaven Investment Management LLC, a 14-month-old firm in Stamford, Connecticut, created an index to tame the unpredictable gyrations of commodity derivatives.

One-Room Office

The company, which plans to manage an ETF pegged to its SummerHaven Dynamic Commodity Index this year, hardly seems a hotbed of financial engineering. Its four partners share a one- room office subleased from Basso Capital Management, a hedge fund, with a view of Interstate 95.

SummerHaven’s founders know their way around the arcane world of raw materials investing: K. Geert Rouwenhorst, 50, is a Yale School of Management finance professor who authored a research paper called “Facts and Fantasies About Commodity Futures” in 2004 with Gary Gorton, then a professor at the Wharton School of the University of Pennsylvania. Gorton, now at Yale, is a senior adviser to SummerHaven.

Partner Kurt Nelson, 40, was head of UBS AG’s commodity index business in Stamford until last year.

Startling Results

Rouwenhorst and Gorton showed that from 1959 to 2004, commodities futures didn’t move in sync with stocks yet delivered about the same level of returns. Moreover, the contracts posed less risk for investors than equities, which was startling given the reputation of commodities for volatility.

In a 2007 follow-up paper, the duo, joined by Professor Fumio Hayashi from the University of Tokyo, demonstrated that futures for commodities with low inventories consistently outperformed those with abundant stockpiles.

“These guys brought academic respectability to commodities and showed it’s a real asset class and not just a place for speculators who go broke in pork bellies,” says Jim Rogers, an investor who called the bull market in raw materials in the late 1990s and is chairman of Rogers Holdings in Singapore.

Rouwenhorst, a data hound who studied the commodities- pricing treatises of economists John Maynard Keynes and Nicholas Kaldor, wanted to convert his thesis into an investing strategy. Beginning in the fall of 2009, he and Nelson, along with SummerHaven partner Adam Dunsby, assembled a basket of futures contracts for 27 commodities ranging from platinum to unleaded gasoline to hogs. Then they formulated algorithms to discover which commodities were fetching higher prices for immediate delivery rather than in the future, a pattern called backwardation that signals supplies are dwindling. And they also factored in short-term price momentum.

Nickel and Cotton

The index selects the 14 top contenders every month. In March, the portfolio rotated in nickel and cotton futures and rotated out aluminum and natural gas. And by giving the 14 contracts equal weight, the index decreases the risk of buying just crude or gold.

“When you think about stocks, you think about earnings,” Rouwenhorst says in the precise accent of his native Holland. “So what do you think about with commodity futures? The answer is inventories.”

The SummerHaven index was up 8 percent in the 12 months ended on May 27 compared with an 2 percent increase by the bellwether Goldman Sachs Commodity Index. In December, United States Commodity Fund LLC, an Alameda, California-based company that manages energy ETFs, announced it would distribute a SummerHaven fund.

Next Big Fiasco

Some money managers say investors should avoid extreme ETFs and get back to basics by acquiring undervalued stocks and holding them for the long term.

“We should be dialing this stuff down, but instead we’re going the opposite way,” says Robert Olstein, the chairman and chief investment officer of Olstein Capital Management LP, a mutual fund provider in Purchase, New York. “When all these funds come unglued, this is going to be the next big fiasco on the Street.”

Many investment professionals are telling their clients it may be riskier not to use these new ETFs. The S&P 500 fell 2.7 percent annually in the decade ended on Dec. 31, 2009. Investors, especially baby boomers on the cusp of retirement, have to consider the prospect of depending on income from their portfolios in a bear market.

“Most people want simple solutions, but buy-and-hold investing only works in a bull market,” says Louis Stanasolovich, CEO of Legend Financial Advisors Inc. in Pittsburgh. “Investors can be more nimble now; the tools are out there.”

Future of Investing

Investors are warming to this brave new world. In April 2009, Frank Transue, a Chicago-area civil engineer, agreed to let his investment adviser plow hundreds of thousands of dollars from his 401(k) plan into many ETFs, including one for oil futures and another that shorts Treasury bonds.

“It took some convincing because I’m a conservative investor,” Transue, 68, says. “Now, I’m looking at moving a large portion of my portfolio into ETFs.”

The true test for exotic new funds will come when they demonstrate they can reap profits consistently in a volatile, post-crash world. Then, shareholders will see whether these newfangled ETFs are the future of investing or just another financial experiment gone awry.



http://www.bloomberg.com/apps/news?pid=20601103&sid=asHPlHqMjzYU
 
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http://www.bloomberg.com/apps/news?pid=20601110&sid=a6CV4UGxcLAk

Book Review:
Jews Are Blessed, Cursed by Gift for Capitalism
by Jerry Z. Muller
Review by Calev Ben-David

May 31 (Bloomberg) -- In John Galsworthy’s “Loyalties,” a grocer named Gilman confesses that he dislikes ‘Ebrews, as he calls them. His reasons are revealing.

“They work harder,” the man gripes in the 1922 play. “They’re more sober; they’re honest; and they’re everywhere. I’ve nothing against them, but the fact is -- they get on so.”

Jews, in other words, have a knack for business, as historian Jerry Z. Muller writes in his provocative collection of essays, “Capitalism and the Jews.”

“Jews have had a special relationship with capitalism, for they have been particularly good at it,” says Muller, who teaches at the Catholic University of America in Washington and is himself Jewish. “For Jews, Jewish economic success has been a source of both pride and embarrassment, a blessing -- and a curse.”

It’s a subject rarely given its due in respectable circles. Yet an appreciation for market economics does run deep in Judaic tradition and helps explain the prominence of Jewish bankers, from Mayer Amschel Rothschild to Lloyd Blankfein. In concise prose free of academic jargon, Muller ticks off factors that gave Jews what he calls “behavioral traits conducive to success in capitalist society.”

The Talmud, the compendium of Judaic law and lore, is “replete with debates about economic matters, including contracts, torts and prices,” he writes. Talmudic study also fostered a high regard for education. Other forces included the Diaspora of Jews into far-flung communities connected by commerce. Taken together, these elements created a certain “cultural capital,” Muller says.

Ghettos and Prohibitions

Judaism never idealized poverty, as Christianity often did. Nor did it ban lending with interest. Medieval European Jews -- who in many places were forbidden to own land, forced to live in ghettos and excluded by governments and guilds from numerous manual trades -- were actively recruited as lenders by state and papal authorities.

To protect Christian money lenders, French and English monarchs circumvented the church ban on “usury” by creating a legal fiction under which they were officially regarded as Jews, Muller notes. The Jewish association with money lending, reinforced by such depictions as Shylock in Shakespeare’s “The Merchant of Venice,” bred anti-Semitic resentments and stereotypes that reverberate to this day.

‘Dialect of Disaster’

Capitalism has always been a force for societal change. The prominence of Jews at its cutting edges, both real and exaggerated, swelled the reactionary tide of anti-Semitism that built to a tragic crescendo in the late 19th and early 20th centuries. So did Jewish involvement in the “Anti-thesis,” a communist ideology that promised to erase anti-Semitism “by abolishing its roots in capitalism itself.”

The result was what Muller dubs “a dialect of disaster.” Anti-Semitism from the far right drove Jews to the far left, further fueling fears that Jews were agents of violent revolution. Jews wound up persecuted by Nazis and Soviets alike.

The dilemma was encapsulated in a comment a Moscow rabbi reputedly made about Leon Trotsky, an atheist born with a Jewish name, Lev Bronstein: “The Trotskys made the revolution, and the Bronsteins paid the bills.”

The Jewish ambivalence about capitalism was the subject of a famous lecture economist Milton Friedman gave in 1972. Muller devotes considerable space to reviewing that address.

Friedman was right, Muller says, to declare that capitalism has been good for Jews -- a far from fashionable pronouncement among the intelligentsia at the time. He was wrong to generalize that Jews had for at least a century opposed and sought to undermine capitalism, the author says.

Transient Socialists

Jews had only a transient leaning toward socialism, Muller concludes. Their relationship with market economics proved deeper and more enduring, he says in this persuasive primer.

As evidence, Muller notes how Israel has evolved from a state-dominated economy into a “center of entrepreneurial energy.” This development reflects the changing attitude of Zionists toward capitalism, a trajectory illustrated, he says, by the life of Bank of Israel Governor Stanley Fischer.

In his youth, Fischer was a Rhodesian volunteer on a socialist kibbutz in Israel. He went on to become an economist at the Massachusetts Institute of Technology, the World Bank and the International Monetary Fund.

It’s no coincidence that Fischer helped lead Israel out of the global financial crisis faster than his counterparts elsewhere did. In an era when too many Jewish names have become associated with capitalism’s excesses (and worse), Fischer provides a reminder of why a talent for understanding and appreciating free markets that may date back to the Talmud is, ultimately, more a blessing than a curse.
 
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