Buffett Says Oil Will Rise

Buffett Says Oil Will Rise, He Made ‘Mistake’ on ConocoPhillips
Bloomberg
Feb. 28

Warren Buffett said crude oil will rise far above its current price and that he made a mistake when he purchased ConocoPhillips stock last year for his Berkshire Hathaway Inc.

“I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price,” Buffett wrote in his yearly letter to shareholders. He also said he made a “major mistake” when he bought a “large amount of ConocoPhillips stock when oil and gas prices were near their peak.”

Buffett’s Berkshire Hathaway today posted a fifth-straight profit drop, the longest streak of quarterly declines in at least 17 years, on losses from derivative bets tied to stock markets. Fourth-quarter net income fell 96 percent to $117 million, or $76 a share, from $2.95 billion, or $1,904 a share, in the same period a year earlier, the Omaha, Nebraska-based firm said in its annual report.

In 2007, Berkshire reported record earnings as Buffett booked a $3.5 billion profit cashing out of a $500 million investment in oil producer PetroChina Co.

Buffett wrote today that “the terrible timing” of his ConocoPhillips purchase cost Berkshire “several billion dollars.” According to figures given in the letter, Berkshire Hathaway purchased the ConocoPhillips stock for $7.01 billion. As of Dec. 31, the stake was valued at $4.4 billion.

Detroit November 2008

Yes, Detroit Can Be Fixed
A CAFE tweak can bust the UAW labor monopoly.

http://online.wsj.com/article/SB122584326266699163.html

For that guy elected yesterday, a puzzle is how Detroit’s auto makers should be reshaped by the hand of government — with a taxpayer bailout or by letting bankruptcy judges take charge? Both fixes have their fans, yet neither would really solve the industry’s essential problem.

Here’s a better idea, one you haven’t heard before, involving a contemporary curse word seldom used in the debate over the auto makers: “deregulation.”

No, Washington wouldn’t have to find the courage to amend the labor laws to end the Detroit Three’s captivity by the UAW. Nor would it have to repeal the CAFE rules that are now a sacred cow. It would simply have to allow auto makers to meet the fuel economy standards with any mix of autos made in domestic or overseas factories.

Under the nonsensical “two fleet” rule that now applies, manufacturers meet the standards separately with their “domestically” and “nondomestically” produced fleets. What does this have to do with making sure U.S. consumers get good mileage? Nothing. It’s a naked handout to the UAW at the expense of the companies and their customers.

How dumb is the two-fleet rule? Nissan, in a petition for its removal, points out foreign brands may actually minimize the domestic content in their U.S. cars so they can continue to count as “nondomestic.”

How dumb is the rule? Chrysler might not be unraveling today if not for the two-fleet rule, the real genesis of the Hail Marys it’s been throwing in all directions to find an electric car or a small-car partner or to merge with GM. Chrysler has a perfectly salvageable business making trucks, minivans, muscle cars and Jeeps — doomed only by the lack of enough small, fuel-efficient cars to roll out of a UAW factory with a Chrysler emblem slapped on.

For 30 years, to make and sell the large vehicles that earn their profits, the Detroit Three have been effectively required to build small cars in high-wage, UAW factories, though it means losing money on every car. (That — not some perverse desire to make bad cars — is why they skimped for decades on styling, engineering and materials in their family sedans.)

Sure, this bullet would be far from silver and would still cause pain. The UAW might declare war to stop production from being shifted offshore. The Big Three might have to pay billions in job buyouts to use their new freedom. Since 2005, they’ve had some leeway under Nafta to shift “domestic” production to Mexico and haven’t done much about it.

But here’s the key: Detroit would finally get what every foreign competitor and just about every other business has — normal leverage over labor costs. Auto jobs wouldn’t automatically flee offshore. The Big Three would rather hire high-quality U.S. workers — but on the same terms that Toyota or Nissan or BMW do.

Let’s not kid ourselves that a taxpayer rescue would be anything but a down payment on a never-ending bailout. The bailout already is never-ending: Chrysler was already rescued once. Forgotten are the Reagan-era import quotas that inflated the price of every car sold in America to help prop up the Big Three. If hooked up to Washington life supports today, Detroit’s first assignment would be to “protect jobs” — job protection guarantees being one of the Big Three’s fatal errors in the first place.

Meanwhile, a bankruptcy judge can only void contracts, not laws. Not only would the UAW’s labor monopoly remain intact, but the union is a major creditor of the Big Three and would likely become a major shareholder in any reorganized auto maker.

With or without a taxpayer rescue or the ministrations of a bankruptcy court, breaking the labor monopoly is the step without which Detroit will remain the problem child of American industrial policy. And, lo, what would be politically unthinkable under any other circumstances is quite doable if styled a tweak to the fuel-economy rules. In last year’s CAFE bill, the Senate actually voted to get rid of two-fleet, though it crept back via a House-Senate conference.

The UAW, of course, has different ideas. The union expects Congress to pass new “card check” legislation to speed union takeovers of nonunion companies. Rather than reducing Detroit’s domestic costs, why not raise Toyota’s and Honda’s? Then what about the cars they produce in their overseas factories? If Reagan could be buffaloed into imposing “voluntary” import quotas to keep GM afloat, why not a president what’s-his-name?

The stakes here are even bigger than they seem. Detroit’s bad news could be America’s worse news if the industry’s year of living extra miserably starts the whole economy down the road to protectionism and taxpayer-financed industrial cronyism.

jubak103108

By Jim Jubak
The financial crisis is looking less, well, crisislike.

Global financial markets aren’t out of the woods by any means, but each day we seem to inch a little further from the brink.

For example, the commercial paper market, the market for short-term debt that global businesses use to finance their day-to-day operations, has started to function again. The amount of commercial paper issued and sold to investors by companies jumped 46% on Oct. 27 from the amount issued Oct. 25. The worry not so long ago was that this market would freeze up completely, leaving companies unable to finance their basic operations.

Take a quick, short breath of relief. And then start worrying about the real economy. Every day the signs — such as the 159,000 jobs lost in September and the Oct. 30 report of a 0.3% drop in U.S. gross domestic product in the third quarter — are clearer that the United States, along with Japan and Europe, is almost certain to slip into a recession by the end of 2008.

And, unfortunately, it’s not going to be your normal recession. It will last longer than usual. It’s likely to be resistant to the traditional medicines of interest-rate cuts and increased government spending. And the recovery, when it comes, is likely to be less than robust. Some might call it anemic.

After the flood
Let me tell you why I think we’re looking at something other than a normal recession and what that means for investors.

Recessions are a normal part of the capitalist business cycle. Recessions wash out excesses in the system by shaking out inefficient companies, thus clearing the way for new competitors, and they work to keep supply and demand in sync over the long term.

In the past 50 years, we’ve had recessions (or recessionlike economic downturns) in 1969-70, 1973-75, 1980-82, 1990-91 and 2001.

Some of these have been relatively mild: The 2001 recession saw three quarters of negative growth, but the economy contracted by just 0.6%, 1.6% and 0.3% in those quarters. Some have been much more painful: In the second and fourth quarters of 1981 and in the first quarter of 1982, the economy contracted by 2.8%, 4.6% and 6.5%, respectively. Some downturns are extremely brief: The recessions of 1990-91 and 2001 lasted for just three quarters each. Some go on and on: The downturn that began in the second quarter of 1980, when the economy contracted by 7.9%, didn’t fully release its grip on the U.S. economy until the fourth quarter of 1982, 10 quarters later.

There’s bad news in those numbers. The evidence says recessions will be longer than average if they follow a financial crisis, especially if that financial crisis was caused by efforts to keep the economy humming by flooding the market with cheap capital.

Unfortunately, that’s a very good description of where the U.S. economy stands right now.

The pin that popped the bubble and set loose the current financial crisis was the collapse of inflated housing prices. Those high prices led people to take out mortgages they couldn’t afford from banks that should have known the money wouldn’t be repaid.

But homebuyers and mortgage lenders were by no means alone in their love of cheap money. We’re now suffering through the reaction to a global three-ring circus of leverage. Hedge funds, private-equity investors and even banks borrowed directly in Japan, the U.S. or wherever money was cheap in order to buy more debt, stocks, real estate and commodities than they could have bought with their own money. Pension funds, insurance companies, company chief financial officers and money market funds borrowed money indirectly by buying derivatives created with that borrowed money.

Why not increase your buying power by borrowing 30 times your actual capital, as Lehman Bros. (LEHMQ, news, msgs) did before its collapse, when you could borrow at an interest rate below the inflation rate, thus ensuring that, in real terms, you paid back less than you borrowed? After all, the bull market, fueled by this borrowing, virtually guaranteed a profit.

When the assets — starting with real estate and gradually expanding to take in stocks, commodities, corporate loans, commercial paper and the derivatives based on them — that were the foundation of this mountain of leverage fell in price, all that borrowing had to be unwound, as creditors demanded more collateral on loans and borrowers rushed to sell before asset prices fell further and creditors demanded even more collateral.

That fear, compounded by uncertainty about what anything that had been purchased with borrowed money was really worth, drove financial institutions such as Bear Stearns, Lehman Bros. and Washington Mutual (WAMUQ, news, msgs) to — and then over — the edge of insolvency. And it created a credit crunch as even the lenders with money decided it was better to sit on the cash rather than make a loan that might not be repaid.

5 steps down
That global circus of leverage and the unwinding of that leverage — what we call the global financial crisis — has had five big impacts on the shape of the recession we now face:

It means this recession started in the corporate sector. Most recessions start with a decline in consumer demand that leads to cutbacks in production — and then in hiring, capital budgets and in day-to-day spending on everything from travel to staples — by companies across the economy.

But the credit crunch caused by the global financial crisis led companies to make spending cuts even before consumer demand fell significantly. Companies began cutting spending on new plants and production, on hiring, on travel, on office supplies, on benefits and more in an effort to save cash because it was difficult or impossible to raise cash in the public debt markets.

It means that when the recession finally did reach the consumer sector, the drop-off in consumer buying was steep. Take a look at the auto industry. U.S. auto sales hit a record 17.4 million units in 2000 and then stayed above 17.1 million units in 2001. What’s extraordinary is how little sales fell over the next five years: In 2005 sales were still at 16.9 million units, and in 2006 they dipped just a bit, to 16.6 million. Even in 2007, when the financial crisis and the mortgage meltdown started to hit, sales just fell to 16.1 million units.

Why did sales stay so close to record levels so long? Cheap money. When consumer demand gave any hint of flagging, car companies borrowed at low interest rates to offer car buyers 0% financing and cash rebates in the thousands of dollars. At the same time, they used cheap money to finance the shift of millions of car buyers from car loans to car leases, which reduced the monthly payments on buying a new car. Stretching out car loans from three years to four and then to five also reduced the monthly payments.

When the financial crisis finally forced the automakers to cut back on these incentives, auto sales dropped off a cliff. Sales in September ran at an annual rate of 12.5 million. That’s a drop of 22% from the 2007 rate.

Going forward, I suspect it will take extra time to get auto sales in the U.S. back up to the 2007 or 2006 levels because some percentage of sales during those years were essentially borrowed from 2008 and beyond. Cheap money in the form of cash rebates, leases and low loan rates moved some percentage of sales forward as people who might have “naturally” bought in 2008 were persuaded to buy in 2007.

I think we can expect the same effect in the housing, computer, cell phone and other industries in which cheap financing kept demand from falling by borrowing from future sales.

It means consumer demand will show a protracted, two-stage decline. I’d call what I described in No. 2 above the first stage of consumer decline. It’s a version of the typical drop in consumer demand we see in a recession, although its arrival was delayed by the global abundance of cheap money. It finally arrived when the deleveraging of the global financial system reduced or, in some cases, eliminated the supply of cheap money that companies could use to keep consumers buying.

But the credit crunch has a direct effect on consumer buying, too. In this stage, the drying up of consumers’ access to credit creates a second drop-off in consumer buying. This consumer credit crunch is about to kick in now that credit card companies are reducing the amount of credit they offer their customers and making that credit more expensive. American Express (AXP, news, msgs), for example, has said it will increase interest rates by 2 or 3 percentage points for some of its cardholders and reduce credit limits on some of its business and personal cards. Another big card issuer, Capital One Financial (COF, news, msgs), has reduced customer credit lines, on average, by 4.5% in the second quarter.

The moves by the card companies aren’t surprising; the companies wrote off $21 billion in bad credit card debt in the first half of 2008. Losses in the first half of the year came to 5.5% of credit card debt outstanding and could climb to as much as 7.9% before this recession is over. And while it’s not surprising that credit card companies are tightening the debt spigot, it’s sure bad news for a U.S. consumer economy that runs on debt.

It will mean we’re likely to see a second drop in corporate spending in response to the delayed decline in consumer spending. That will stretch out the recession. Once consumers slow their spending, companies will launch a second round of cuts of the sort typical in normal recessions.

At this point companies will take the same steps to reduce production that they take in any recession. These cutbacks are just now becoming visible in the economy.

It will mean ending this recession will be tougher than usual. The standard medicine for a recession is more government spending on infrastructure (roads and bridges), an extension of unemployment benefits to prop up demand (and relieve suffering), grants to cities and states so they can keep spending and not add to the recession with their own set of cutbacks, and interest-rate cuts.

Those fiscal moves are exactly the package of fixes that the Democrats in Congress have proposed for a second stimulus package. I think that kind of plan would indeed be good news for infrastructure companies and local governments, and could well reduce how far the economy will fall in this recession.

However, the amount of money Congress is talking about — and the amount in the first stimulus package (remember those checks that some of us got?) — is small compared with the amount that the credit crunch has taken out of consumer buying power. Add to that the flip side of the wealth effect — people spend less when their houses and stock portfolios are worth less — and you can see why this recession is a lot more likely to look like the long recessions of 1973-75 and 1980-82 than the blink-and-they’re-over recessions of 1990-91 and 2001.

As for interest-rate cuts, the Federal Reserve has already cut the federal funds rate to 1%. However, with the financial markets recovering but still ruled by fear, low rates from the Fed are largely irrelevant.

What should investors do about a protracted U.S. recession? I’ve got three suggestions. I’ll mention them briefly here and then spell them out in more length in future columns.

3 steps forward
First, if everybody and his uncle are going to spend on infrastructure to fix this crisis, go long infrastructure.

China is going to spend $300 billion on its railroads as one way to get its economy at full speed again. Even if this kind of infrastructure spending in China, the U.S. and elsewhere isn’t going to work well as a recession fix, it still should benefit the income statements of the infrastructure companies involved.

Second, go overseas. Especially go overseas to emerging markets. Emerging economies were growing faster than the mature economies of the U.S., Europe and Japan before this crisis, and they’ll grow faster than the developed world after this crisis is over.

JPMorgan Chase (JPM, news, msgs) now expects the U.S. economy to shrink 4% and the euro economies to shrink 2% in the fourth quarter of 2008. In 2009, it forecasts 0.4% global economic growth, with developed economies shrinking 0.5% and emerging economies growing 4.2%. It stands to reason that the consumers most optimistic about being out of a recession in 12 months live in China, Vietnam and Russia, according to recent surveys.

Third, if the U.S. recession is going to be a long one, value investors looking for bargains in the U.S. stock market should look for bargains that pay dividends. That way they’ll get paid while they wait for the market to catch up with their valuations on these shares.

Warren Buffett has done exactly that in recent deals to buy shares of General Electric (GE, news, msgs) and Goldman Sachs Group (GS, news, msgs). Those have come with 10% dividends. You can’t do quite as well as Buffett, but there are value stock bargains out there paying 4% or 5%. Not bad when a 5-year U.S. Treasury note was yielding just 2.71% as of Oct. 29.

In my next column, I’m going to take a look at China’s efforts to end its recession — if you can call the possibility of 7% growth in 2009 a recession — before it starts. I’ll get to the other topics, I promise.

Developments on past columns
“Your guide to the next 12 months”: Oneok Partners (OKS, news, msgs) has rallied past my $52-a-share target price. But I’m not going to sell quite yet.

Shares of the high-yield gas pipeline master limited partnership have rallied strongly on the Federal Reserve’s interest-rate cut. When the Fed lowered its benchmark rate by half a percentage point to 1%, everything with a yield above that rate became more valuable. Odds are, this wasn’t the Fed’s last cut, so I think investors are likely to see even more appreciation in these shares.

And the price is likely to get a boost when the partnership reports third-quarter earnings Nov. 5. Look for news of increased revenue from the start of operations in the third quarter of the Overland Pass pipeline. As of Oct. 31, I’m raising my target price for Oneok Partners to $58 a share by June 2009 from the prior target of $52 by December 2009. (Full disclosure: I own shares of Oneok Partners in my personal portfolio.)

“Be ready for the commodity comeback”: Production from the world’s existing oil fields is falling faster than was projected just last year. A new report from the International Energy Agency says outputs from currently producing oil fields is falling 9.1% a year. For example, production from the United Kingdom’s share of the North Sea oil fields will fall to 500,000 barrels a day by 2030 from 1.7 million barrels a day today.

The solution, according to the agency, is increased investment in existing fields to slow the decline and increased investment in unconventional sources of oil such as the heavy sands of Canada or the extra-heavy oil of Venezuela. To keep oil production ahead of demand, the world will have to invest $360 billion a year every year until 2030. Oil service stocks, anyone?

“Cheap stocks? They’re an illusion”: Wall Street analysts are still playing catch-up with a slowing U.S. economy. As of Oct. 29, the day before the U.S. government announced that the nation’s economy had contracted 0.3% in the third quarter of 2008, Wall Street was projecting that earnings on the stocks in the Standard & Poor’s 500 Index ($INX) would fall 6% in 2008 from 2007 and then show a 16.9% increase for 2009. Citigroup (C, news, msgs), which came out with its own forecast that day, is projecting a 12.4% decline in 2008 earnings and a 13.5% drop in 2009.

Keep that in mind when you start thinking stocks are cheap based on trailing earnings for the past 12 months or on projected 2009 earnings per share. Seems like projected earnings have a ways to go to catch up with economic reality.

Photo Links

Bush Abdullah May 2008

http://www.whitehouse.gov/news/releases/2008/05/images/20080516-19_img5510web-515h.html

Try Jan 2008

May 2008

? 2005

HurricaneGustav

http://www.nytimes.com/2008/08/31/us/31orleans.html?_r=1&hp&oref=slogin

August 31, 2008
Mayor Orders the Evacuation of New Orleans
By ADAM NOSSITER and SHAILA DEWAN
NEW ORLEANS — City officials ordered everyone to leave New Orleans beginning Sunday morning — the first mandatory evacuation since Hurricane Katrina flooded the city three years ago — as Hurricane Gustav grew into what the city’s mayor on Saturday called “the storm of the century” and moved toward the Louisiana coast.

The mayor, C. Ray Nagin, said Hurricane Gustav was larger and more dangerous than Hurricane Katrina, and he pleaded with residents to get out or face flooding and life-threatening winds.

“This is the mother of all storms, and I’m not sure we’ve seen anything like it,” Mr. Nagin said at an evening news briefing. “This is the real deal. This is not a test. For everyone thinking they can ride this storm out, I have news for you: that will be one of the biggest mistakes you can make in your life.”

The mayor’s warnings were considerably more dramatic than the forecasts issued by the National Hurricane Center, and he may have been exaggerating in order to shock jaded residents into taking prudent steps. But he said storm surges, particularly on the city’s West Bank, could be twice as high as the neighborhood’s 10-foot levees, and said those people choosing to remain in their homes should have an ax to chop through their roofs when the floodwaters rise.

The hurricane could arrive on American shores just as the Republican National Convention is scheduled to begin in Minnesota; Senator John McCain of Arizona said the party was considering whether to shorten the gathering or delay it by a few days. Mr. McCain and his choice for vice president, Gov. Sarah Palin of Alaska, plan to visit Mississippi on Sunday to see how preparations for the storm are going, a campaign official said.

Bush administration officials took pains not to be caught as flatfooted as they were in Hurricane Katrina, announcing that President Bush had called governors in the region to assure them of assistance and that top federal emergency officials were in the region to guide the response.

Already, hundreds of thousands of residents had begun streaming north from New Orleans and other Gulf Coast areas stretching from the Florida Panhandle to Houston.

Most left by car, which caused miles of backups on some highways, but New Orleans officials also began a far more carefully planned evacuation of the city’s less mobile residents than took place in 2005. Thousands of city residents began boarding buses and trains ferrying them to shelters in the north.

“I don’t want to be stuck like I was in Katrina,” said Janice McElveen, who was waiting for a bus in the Irish Channel section, recalling being stranded on the Interstate 10 bridge for five days in 2005.

In the Central City section, families, elderly people and the visibly infirm — those with wheelchairs and canes — lined the sidewalk along Dryades Street for half a long block, waiting for a bus. “After going through Katrina, that ain’t no joke,” said Jody Anderson, an unemployed former cashier, who spent seven days in the fetid conditions of the Superdome after that storm. “It’s not worth it, trying to stay.”

The storm strengthened on Saturday into a Category 4 hurricane with winds of up to 145 miles per hour as it moved over Cuba and into the Gulf of Mexico.

Forecasters said the hurricane was most likely to strike the Gulf Coast on Monday. New Orleans could get winds of up to 73 m.p.h. and possibly greater.

Forecasters said Hurricane Gustav could become a Category 5 storm, the strongest designation on the scale.

In a mandatory evacuation, residents are not physically forced to leave, but are subject to arrest outside their houses if a curfew is imposed. Mr. Nagin also warned that anyone who chose to stay would not be able to rely on public agencies for emergency assistance.

The political impact of the approaching storm was already being felt. Gov. Bobby Jindal of Louisiana and Gov. Rick Perry of Texas announced they would not attend the Republican National Convention and would remain in their states during the storm.

In Washington, White House officials were considering whether to reschedule Mr. Bush’s trip to the convention, where he is set to speak on Monday.

Mr. McCain, the presumptive Republican presidential nominee, in an interview taped for “Fox News Sunday,” said the convention program might be reduced or suspended for a day or two if the storm turned out to be destructive.

New Orleans officials estimated that 30,000 people might need the bus and train service to evacuate. Amtrak trains carried thousands of people to Memphis, and buses with thousands of passengers had left the city by Saturday afternoon for shelters in Alexandria, Shreveport and other northern Louisiana locations.

Jackie Clarkson, the president of the City Council, said the evacuation was proceeding more smoothly than any she had seen before. “We can save everybody this time,” Ms. Clarkson said.

The state police on Saturday reported moderately heavy traffic on a principal highway north, Interstate 55, though local news reports indicated that jams had already formed on some roads.

Dozens of people waited outside for buses at 17 collection points all over New Orleans to take them to the Union Passenger Terminal, the train station downtown. From there they would be taken by bus and train to cities in north Louisiana and to Memphis. They clutched duffle bags, plastic shopping sacks, small children and overstuffed suitcases, vowing to avoid at all costs the still-vivid nightmare of Hurricane Katrina.

The buses arrived promptly at 8 a.m. — a sharp contrast to the disorganization of three years ago, when the only plan was to jam thousands of people without cars into the Superdome and let others fend for themselves.

“I refuse to go through that again,” said Roxanne Clayton, a photo technician at Walgreens, who was waiting in the Irish Channel neighborhood with her teenage son and 10-year-old daughter. Ms. Clayton recalled being stuck in her attic for two days during Hurricane Katrina. “I’d rather play it safe than sorry,” she said, “because I know what sorry feels like.”

A neighbor from the larger houses up Louisiana Avenue brought doughnuts for those patiently waiting, and many said they were simply grateful for the ride out of town.

Officials made an effort to soothe concerns about looting. Mayor Nagin noted that with 1,500 to 2,000 National Guard troops coming to New Orleans, the city would have twice as much law enforcement protection as it had in the days after Hurricane Katrina. In all, 7,000 members of the Louisiana National Guard were mobilized Friday.

For residents who were driving out, state officials prepared an elaborate contraflow system, reversing all lanes of several highways so they lead out of southern Louisiana beginning Sunday morning. Officials were staging the plans so that those farthest south could exit first.

In St. Bernard Parish, just east of New Orleans, officials ordered a mandatory evacuation beginning at 4 p.m. Saturday, warning residents that curfews would be enforced. The parish was one of the hardest hit in Hurricane Katrina, and many of its residents never returned. Similar orders were given in the parishes of Plaquemines, St. Charles and lower Jefferson, southwest of New Orleans.

Hurricane Gustav, which has already killed 81 people in the Caribbean, lashed the western tip of Cuba on Saturday, and The Associated Press reported that 300,000 people were being evacuated from the area. Forecasts of its track said it could strike the United States mainland from the Florida Panhandle on the east to the Texas coast, though the center of the track remained the Louisiana coast west of New Orleans. Whatever its exact landing point, storm surges could cause damage throughout the region.

Mr. Nagin said the storm was now 900 miles wide, compared with 400 miles for Katrina. Even the capital of Baton Rouge, 80 miles inland from New Orleans, could experience hurricane winds of up to 100 m.p.h., he said.

But Dennis Feltgen, a spokesman for the National Hurricane Center, said he had no idea what the mayor meant by a 900-mile footprint, saying that hurricane force winds do not extend nearly that far.

Mr. Feltgen emphasized the uncertainty of forecasted landfalls. “New Orleans will be impacted, but to what degree we don’t know,” Mr. Feltgen said. If the center of the storm passes more than 60 miles from the city, he added, “they may not expect hurricane force winds.”

That New Orleans will most likely be east of the center, on “the dirty side of the storm,” means large amounts of rain. In addition, Mr. Feltgen said, there is “potential for a significant storm surge;

we don’t know how much, or where.”

A Louisiana State University scientist who has been tracking the storm said the area at greatest risk, under present forecasts, was not New Orleans but the low-population district between Houma and Lafayette on the state’s south-central coast. “It’s just like Rita; it’s more of a rural storm than an urban storm,” said Robert Twilley, a professor of oceanography and coastal sciences.

Experts say that the New Orleans hurricane defenses have been strengthened significantly since the city was devastated by Hurricane Katrina but that the city is still not yet ready to take the punch from a major hurricane.

“The system itself is stronger than it was before Katrina,” said Maj. Timothy J. Kurgan, the chief of the public affairs office for the Army Corps of Engineers in New Orleans. He acknowledged, however, that the defenses that the corps has been designing and putting into place to withstand what is known as 100-year flooding are under construction and are only 20 percent complete.

While some $2 billion has been spent so far to patch and upgrade the system, the $13 billion construction program that is designed to bring the city full protection against the kind of flooding that has a 1 percent chance of occurring in any given year is not scheduled to be complete until 2011.

“It’s a huge undertaking,” said Major Kurgan, and “we’ve made great strides. But we’re not there by any stretch of the imagination.”

In particular, floodgates have been constructed at the end of city drainage canals leading to Lake Pontchartrain, the principal conduits for the fateful surge during Hurricane Katrina. Still, there is no such arrangement on the Industrial Canal, the surge from which destroyed the still-empty Lower Ninth Ward.

In terms of preparation for Hurricane Gustav, Major Kurgan said, the corps has workers ready to enter its hardened shelters at the floodgates and to respond quickly and in force once the storm has passed. “The Corps of Engineers is ready for this storm,” he said, and will be “able to address whatever this storm brings to us.”

Some institutions — hospitals and nursing homes, where many died during Hurricane Katrina — were taking no chances, already ferrying patients north of the area on Friday.

Michelle Barnes, a French Quarter resident, was nearly in tears, worried that she would not be allowed on the bus with her little dog, Jack, who was resting in a black canvas bag. Evacuees had been instructed to keep their pets in a carrying case, but Ms. Barnes did not have one. “I just hope,” Ms. Barnes said, “because otherwise I won’t leave.”

Test Zulu

1400 Words on The Airline Industry

The Numbers. In 2007, The United States used 20.7 million barrels per day (mbpd) of crude oil and petroleum products. About 2.2 mbpd of this are considered Natural Gas Liquids or Liquified Petroleum Gases. The other 18.5 mbpd of crude oil is refined into three main products – gasoline, diesel fuel, and kerosene-type jet fuel. Roughly speaking, these products are produced and supplied as follows: 9300 thousand barrels per day (kbpd) of gasoline, 4200 kbpd of diesel fuel (a category which includes both the liquid transportion fuel used in most large trucks and the home heating oil), and 1600 kbpd of jet fuel. The remaining 3 or 3.5 mbpd of crude oil is refined into various miscellaneous products. [as we shall see, this 1600 kbpd or 1.6 mbpd of jet fuel is the equivalent of 4500 Boeing 747 transcontinental flights from Boston to LA per day]

A Breakdown of the Refined Product Numbers

Recent Changes. Work I’ve done recently shows jet fuel demand down substantially in the first 5 months of the year. It continues to fall and presently is about 10% below last year’s levels. Jet fuel demand, unlike gasoline has not shown consistent gains over the last decade and flutuactes erratically, although an overall seasonal pattern is discernable. In comparison, gasoline consumption usually increases by a fairly steady 1 or 1.5% per year. It is down 1% so far this year from the same period last year.

The Airlines

“Over all, the number of scheduled flights in the United States dropped 3 percent in May, or 22,900 fewer flights than in May 2007, according to the Official Airline Guide.”
-New York Times

Using these numbers we can quickly see that there are about 9,000,000 commercial flights per year in the United States or about 25,000 per day. This number is much higher than the 4,500 number I have derived – reflecting the more diverse realworld picture of many different sized planes flying different distances. This number probably includes some very small planes, but also omits private flights (of which there are a huge number and chartered flights). The details of the number, distances and types of flights is beyond the scope of this introductory analysis. What is important for now is the overall level of travel and how it is changing with a rapidly increasing oil price. In a second installment, I’ll attempt to delve deeper into the numbers regarding different types of planes and their fuel efficiencies.

The Airlines – Part II Using numbers from The Air Transport Association, it appears that about 840 million people fly every year. The US only has a population of 300 million, so obviously some people are flying more than once. It is unclear whether this number is counting the number of times a passenger boards a commercial flight, the number of complete one-way trips, or round trips. But simply dividing 840 million by the 9 million flights yields about 90 passengers per plane. It is unclear what percent of total capacity this represents or how many seats have remained empty. A heavy reduction in flights nationally probably won’t reduce the availability of long distance distance travel between major hubs, just the convenience of multiple flight times and obviously the pleasure of a near empty plane. As with many things in the American economy, there is a lot of slack and a lot of gains that can be achieved quickly through the elimination of obvious waste. One note of interest is that most of the large commercial jets (Boeing and Airbus) I looked at have seating capacities of 150, 200, or above, so clearly there must be a lot of spare capacity actually flying or a huge amount of flights are done on much smaller planes.

Tickets and Pricing. Looked at differently, these same numbers produce another result. If we use the rough numbers of 1.6 mbpd of jet fuel, 25,000 flights per day, 90 passengers per flight, and $4 per gallon of jet fuel, the average cost per passenger is $120 per flight. If this on average makes up (according to industry sources) 40 percent of the cost of each ticket, then the average ticket price is $300. Assuming that all fuel charges eventually get passed on to the consumer, a doubling of the fuel price from $4 to $8 will result in a 40% increase in the cost of flying (an extra $120 over $300).

Now let’s look at some actual numbers. These are one-way prices based on sample round-trip prices. All flights have been scheduled for the same 2 weeks in September. I’ve provided a high/low range and typical plane types from samples on Orbitz. Boston to L.A.:$208/$288 (757/737), LA to Honolulu $155/$400 (757/737), Chicago to Milan: $400/$550 (A330/A340). As you can see these prices fit in nicely with the “average” base case I’ve used above. I didn’t try to make anything match or fit, I did this completely independently. For the record I did this first almost a week ago for the same cities but some other time-frame (near but not exact). I got prices at the time as much as $100 different in either direction.

Something positive may happen with efficiency. News concerning drastic cuts of flights by the airlines and some carriers going bankrupt and completely out of business may in fact be a good thing in a few ways. For the previous year, prior to the latest explosion of oil and fuel prices, the big news in the airline industry was the horrendous on-time record of all the major carriers, every manner of airport and runway delays, and a very dissastisfied American customer. It is hard to see how a reduced number of planes in the sky could have any effect but to lower jet fuel usage in two ways. First, obviously, there will be less flights. But the reduced amount of traffic in the air should reduce the amount of jets idling on runways, circling in landing queues around congested hubs, and lower the overall gate-to-gate time for the planes that are flying. If recent news about American Airlines is any indicator, the carriers will be retiring and scrapping planes – most likely the older, less efficient models.

The problem of plateauing production and the demand-destruction fallacy. Before I wrap up this introductory piece on the airlines, a word about the history of efficiency and the reality about American oil usage. It is often pointed out that oil usage increased throughout the days of stagflation in the 1970s and coincident with and following the second oil spike of 1979-1981, oil consumption fell by 15%, from which point it took 15 years for it to return to its highs. Conservation, massive gains in efficiency, and a transition in the energy mix are all correctly cited for this “slowing” of consumption growth. But let’s take a closer look at an important statistic. Oil use per capita.

In 2007, The United States used a little over 25 barrels of oil per person. In 1969, the figure was 25.6. It bloated to about 31 barrels in 1978 before dropping to a low of 23.8 in 1983. 25 barrels per year is the equivalent of 2.9 gallons of gasoline per person per day, or every single person driving alone 87 miles each day in a car that gets 30 miles to the gallon. This is the highest of any large, industrialized nation on earth. To put this in perspective consider the next highest contestants on the list. Japan: 15, Germany: 12, UK: 11. China, the latest big consumption story, only uses 2 barrels per person per year.

So for all the talk about efficiency gains, we still use as much person as we did 40 years ago and we’re still Number One. Good Job.

The following chart shows the likely forced gains assuming highly probable population growth of 0.8% per annum and a 1% yearly reduction in oil use in 2008 and beyond. We should be hoping for more drastic changes like those in 1979-1983 which might actually drive the message home.

What will be interesting to watch is what will happen in an environment of a growing global economy and plateauing or decreasing oil production. Any excess supply created by demand destruction in the United States will be quickly devoured elsewhere. All exports are up for auction. How long can we afford the highest bid?

Part II In the second installment, I’ll be taking a more detailed look at planes, their specifications, and how they are mixed in the international fleet. I’ll be looking more closely at their fuel usage. And finally I’ll be looking at the airlines themselves and their sorry record.

The World’s Largest Airlines

The Jetmakers by Charles D. Bright

[ Note: I made a huge mistake (or omission) is these admittedly rough calculations. I know Idid not figure in military consumption because it is only a small percentage of the number. However, I made the assumption that everything else was basically commercial passenger travel. I completely neglected to figure in commercial cargo/freight flights such as Fedex, UPS, USPS, and probably a thousand other carriers. I will be correcting/addressing this in future updates and pieces.]