INDEX - ENERGY ID# 0614-02



POSTED: 28 January 2006 - 9:00am

Ready for $262 per barrel oil?

George Soros, a supporter of, displays anti-Bush t-shirt before 2004 election

George Soros and Bill Browder worry about 2006.
Be afraid. Be very afraid!

by Nelson Schwartz on 27 January 2006 in Fortune Magazine

Davos, Switzerland
That's the message from two of the world's most successful investors on the topic of high oil prices. One of them, Hermitage Capital's Bill Browder, has outlined six scenarios that could take oil up to a downright terrifying $262 a barrel.

The other, billionaire investor George Soros, wouldn't make any specific predictions about prices. But as a legendary commodities player, it's worth paying heed to the words of the man who once took on the Bank of England - and won. "I'm very worried about the supply-demand balance, which is very tight," Soros says.

"U.S. power and influence has declined precipitously because of Iraq and the war on terror and that creates an incentive for anyone who wants to make trouble to go ahead and make it." As an example, Soros pointed to the regime in Iran, which is heading towards a confrontation with the West over its nuclear power program and doesn't show any signs of compromising. "Iran is on a collision course and I have a difficulty seeing how such a collision can be avoided," he says.

Another emboldened troublemaker is Russian president Vladimir Putin, Soros said, citing Putin's recent decision to briefly shut the supply of natural gas to Ukraine. The only bit of optimism Soros could offer was that the next 12 months would be most dangerous in terms of any price shocks, because beginning in 2007 he predicts new oil supplies will come online.

Hermitage's Bill Browder doesn't yet have the stature of George Soros. But his $4 billion Moscow-based Hermitage fund rose 81.5 percent last year and is up a whopping 1780 percent since its inception a decade ago. A veteran of Salomon Bros. and Boston Consulting Group, the 41-year old Browder has been especially successful because of his contrarian take; for example, he continued to invest in Russia when others fled following the Kremlin's assault on Yukos.

Doomsdays 1 through 6
To come up with some likely scenarios in the event of an international crisis, his team performed what's known as a regression analysis, extrapolating the numbers from past oil shocks and then using them to calculate what might happen when the supply from an oil-producing country was cut off in six different situations. The fall of the House of Saud seems the most far-fetched of the six possibilities, and it's the one that generates that $262 a barrel.

More realistic -- and therefore more chilling -- would be the scenario where Iran declares an oil embargo a la OPEC in 1973, which Browder thinks could cause oil to double to $131 a barrel. Other outcomes include an embargo by Venezuelan strongman Hugo Chavez ($111 a barrel), civil war in Nigeria ($98 a barrel), unrest and violence in Algeria ($79 a barrel) and major attacks on infrastructure by the insurgency in Iraq ($88 a barrel).

Regressions analysis may be mathematical but it's an art, not a science. And some of these scenarios are quite dubious, like Venezuela shutting the spigot.

Energy chiefs at the World Economic Forum in Davos downplayed the likelihood of a serious oil shortage. In a statement Friday, Shell's CEO Jeroen Van der Veer declared, "There is no reason for pessimism." OPEC Acting Secretary General Mohammed Barkindo said "OPEC will step in at any time there is a shortage in the market." But then no one in the industry, including Van der Veer, foresaw an extended run of $65 oil -- or even $55 oil -- like we've been having.

It's clear that there is very, very little wiggle room, and that most consumers, including those in the United States, have acceded so far to the new reality of $60 or even $70 oil. And as Soros points out, the White House has its hands full in Iraq and elsewhere.

Although there are long-term answers like ethanol, what's needed is a crash conservation effort in the United States. This doesn't have to be command-and-control style. Moral suasion counts for a lot, and if the president suggested staying home with family every other Sunday or otherwise cutting back on unnecessary drives, he could please the family values crowd while also changing the psychology of the oil market by showing that the U.S. government is serious about easing any potential bottlenecks.

Similarly, he could finally get the government to tighten fuel-efficiency standards and encourage both Detroit and drivers to end decades of steadily increasing gas consumption. These kinds of steps would create a little headroom until new supplies do become available or threats like Iran's current leadership or the Iraqi insurgency fade.

It's been done it before. For all the cracks about Jimmy Carter in a cardigan and his malaise speech, America did reduce its use of oil following the price shocks of the 1970s, and laid the groundwork for low energy prices in the 1980s and 1990s. But it would require spending political capital, and offending traditional White House allies, and that's something this president doesn't seem to want to do.

Davos meeting of minds aims to set world to right
by Matt Moore on 25 January 2006 in The Scotsman

Davos, Switzerland
Fifteen heads of state, hundreds of top business leaders and celebrities including the actress Angelina Jolie will gather in the exclusive Alpine resort of Davos from today to discuss key issues facing the world.

They include Iran's nuclear programme, high oil prices and the shifting balance of power in Asia.The four-day World Economic Forum that began in the 1970s as a place to discuss new management techniques has evolved into an eclectic mix of highbrow futurology, ethical debate and a fair bit of schmoozing.

World leaders attending Davos this year include Angela Merkel, the German chancellor, Pervez Musharraf, Pakistan's president, and Kofi Annan, the United Nations secretary-general.

One of the top themes of the forum will be the emergence of China and India as true global powerhouses economically, politically and - to the concern of many - militarily.

"It's one of the five key pillars of the programme that everyone is talking about," said Mark Adams, the forum's spokesman. "We're going beyond the stage of talking about their potential, but looking at them in geopolitical terms."

Though the forum falls on the Chinese lunar new year, several officials from the country are making the visit to Davos, including Zeng Peiyan, the vice-premier.
The main theme of the event is "The Creative Imperative" - a topic chosen because of its ability to influence business, politics, reform and more, said Klaus Schwab, who founded the forum in 1971.

More than 2,340 participants from 89 countries are attending, including 735 who are either chairmen or chief executives of companies, the highest figure of corporate leaders yet, said Mr Adams. They include Craig Barrett, the chairman of Intel, and Lakshmi Mittal, the chairman of the world's largest steel company, Mittal Steel.

A new theme this year will be the role of sport in promoting economic growth and fostering ties between countries. Among those scheduled to attend to discuss sport are Sepp Blatter, the FIFA president, and Jacques Rogge, the president of the International Olympic Committee.

The meeting will also feature celebrities who have come to tout personal causes,
including U2 singer and debt-relief advocate Bono and Angelina Jolie in her role as a goodwill ambassador for the United Nations.

Security for the meeting is again a concern. Activists staged protests against the forum in cities across Switzerland at the weekend, including a paint-bomb attack on the national bank in Zurich.


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