Get Rich - While Exxon Goes Broke

The Daily Reckoning PRESENTS: Last Thursday, the world’s largest oil company reported that it banked $10.5 billion in the third quarter profits – the second-highest quarterly profit ever posted by a publicly-traded company. Why, then, does Outstanding Investments’ Justice Litle, assert that ExxonMobile could be flat broke in twenty years time? Find out below…”


“In 1930, we found 10 billion new barrels of oil in the world, and we used 1.5 billion. We reached a peak in 1964, when we found 48 billion barrels and used approximately 12 billion. In 1988, we found 23 billion barrels and used 23 billion barrels. That was the crossover when we started finding less than we were using. In 2005, we found about 5-6 billion, and we used 30 billion. These numbers are just overwhelming.”

– Charley Maxwell

Less than 20 years from now – not a long time in the big scheme of things – ExxonMobil Corp. could be flat broke.

Imagine that. One of the biggest, most outrageously profitable corporations in the history of markets… an awe-inspiring behemoth that rakes in tens of billions per quarter in pure profit… broke. Busted. Kaput. Tapped out. Like a poker player down to the felt.

This isn’t some whacked-out, nearly impossible prediction. It’s based on the analysis of Charley Maxwell, a veteran analyst with Weeden & Co. in Greenwich, Conn.

In addition to being one of the most respected energy analysts on the Street, Maxwell has had nearly 50 years of experience in the oil and gas industry. He got his start with Mobil Corp. – since merged with Exxon – way back in 1957. (To give some perspective, my father was nine years old at the time.)

After 11 years in the field, Maxwell headed for the canyons of Wall Street in 1968. He quickly established a reputation as the top oil analyst in the business, dominating the rankings for decades. Now he works with institutional traders, meets with top industry execs and OPEC officials twice a year and routinely advises the top dogs in the energy and hedge fund world.

In other words, the guy’s opinion is probably worth listening to.

In a recent interview with Barron’s, Maxwell marveled at the utter folly of Exxon’s decisions. To understand his line of thinking – and to see why Exxon is in major trouble – we first need to consider the energy industry from a big-picture perspective.

By conservative estimate, 75% of the world’s oil supply is produced by national oil companies, or NOCs. This is not good news, as Maxwell explains:

“Most of [the NOCs] were nationalized in the ’70s and early ’80s, and they have real structural problems today. They bring in a lot of money, but most of it goes to support the national treasuries and the various political constituencies that are in favor in the various countries, whether it’s the army or a host of other bureaucratic ministries. In the end, in the political battle for budgetary support, the national oil companies tend to be a constituency with little or no political influence. All in all, the national oil companies have been shortchanged and held on a poverty diet for a long time.”

Imagine the U.S. Postal Service in charge of America’s energy supply. The efficient, well-run oil majors are like FedEx and UPS – they do a good job, but handle a very small portion of the job overall. Now expand this analogy to a global energy scale.

The situation with NOCs is ugly for multiple reasons. On one side of the coin, you have leaders like Hugo Chavez, who turn their countries’ oil and gas operations into political fronts and largesse-distribution programs. On the other side of the coin, you have leaders like Vladimir Putin, who see the strategic value of energy as a weapon.

Those NOCs that are asleep at the wheel are making the energy supply problem worse as their operations fall into decay. Those NOCs that are wide awake see the increasing value of their reserves and are increasingly loath to share them. Witness Russia’s recent belligerence regarding its Sakhalin and Shtokman fields. Russia rejected all Western partnership offers for development of its massive Shtokman gas field, on grounds that the spoils are simply too valuable to share.

Cynics have their own interpretation of the golden rule: He who holds the gold makes the rules. This is doubly true for energy reserves.

As Russia demonstrates, oil majors in future will have two choices: They will have to pay through the nose for access to new reserves, or be left out in the cold. The first option could eventually disappear altogether. And as my colleague Dan Amoss recently pointed out in an excellent Whiskey & Gunpowder series, the inevitable corruption of paper currencies makes energy hoarding all the more likely. When the world clamors for a refuge from paper, even as the developing world bursts at the seams, NOCs will be all the more aggressive about keeping the goods to themselves.

(By the way, did you hear China will start filling its second oil reserve soon? By the end of this year, we’re told.)

Exxon puts on a confident face, but seems to have no plan… other than assuming things will just work out somehow. If Exxon’s management is confident that cheap oil will be readily available anytime soon, they are deluded. The NOCs are going in the other direction. They are moving toward hoarding, not sharing.

If not cheap oil, then what about expensive oil?

For the most part, energy optimists don’t dispute that the cheap oil is gone. They just assume that technology will save the day, by giving us access to the more expensive, harder-to-reach stuff.

Chevron’s deep-water drilling is just such an example of technological triumph. So is Exxon confidently betting on technology, then? Will the great behemoth save itself with skillful application of technology?

Apparently not. Maxwell reports:

“As we understand it, Exxon is not taking on any leases for deep-water drilling after 2008. They haven’t leased anything. If you think deep-water leases are going to be very important, and the recent big discovery in the Gulf of Mexico suggests they will be, you would have contracted for the future use of rigs. But if you think the deep-water leases aren’t going to be important because the oil found will be more expensive than the common garden-variety Texas oil from 6,000 feet down, and that you will have lots of oil coming from sources like that, then you don’t need these high-cost leases down the road. On the other hand, many major oil companies have taken these rigs to 2010 and 2012 and 2014 and are pre-empting Exxon’s ability to get these rigs. Exxon is putting itself at a huge disadvantage if there should be a need for this type of deep oil. I find that remarkable.”

Maxwell goes on to clarify his belief that Exxon is taking a huge gamble, on the assumption that oil will go back to $30 and none of this high-tech foofaraw will be necessary. He thinks Exxon is “dead wrong”… and I completely agree.

Optimism is good when logic and reason support it. Optimism sans logic is foolhardy and dangerous. I agree with the energy optimists that technology will eventually pull us through… the key word being “eventually.” This idea that oil markets will have a Goldilocks soft landing, though, and that the gusher days of yesteryear will roll back around is just plain silly.

This leads to a conundrum: Exxon is an excellent company, with a history of excellent management. How could it make such a boneheaded mistake?

Not to put too fine a point on it, how could it be so… so… dumb?

It makes sense if one considers that Exxon is steeped in a rigid, old-school culture that doesn’t respond well to change. It fits in terms of seeing Exxon as a gigantic, tradition-steeped company with a history of dogmatic authority at the top of the pyramid.

It also makes sense that Exxon would have adopted this “nothing is wrong” view early on, as a defense of its larger-than-life profits, and then got stuck in a rut of consistency bias.

For Exxon management to adopt the Peak Oil view, even as it rakes in tens of billions per quarter, would be a public relations disaster. If the world’s most profitable corporation were to sound the energy alarm, political heat would increase to unbearable levels. Nationalization would be on the table.

Furthermore, the required investment response to Peak Oil – ramping up capital expenditure like crazy, plunging into high-cost, high-risk deep-water projects with both feet – would be anathema to Exxon’s hard-bitten conservative management. So they reject the facts out of hand, and stubbornly dig their own hole.

In sum, Exxon has become entombed by its own success and its own culture. This in itself is not surprising. It has happened plenty of times before, to companies and empires alike.

One last eye-opening word from Mr. Maxwell:

“I estimate Exxon will peak in 2011. BP will peak in 2012. Total in 2012. ConocoPhillips in 2013. Marathon Oil in 2009. Royal Dutch in 2009 and Hess in 2010. But a company like Suncor Energy (SU: NYSE), which operates in the Canadian tar sands, will peak around 2045. It is a completely different world. EnCana (ECA: NYSE), the big Canadian gas and tar sands producer, will peak around 2020.”

As you know, we own Suncor and EnCana. Now, can you imagine – just imagine – the valuation boost these companies will get when it becomes clear to the world what is happening? When the Street wakes up to the fact that Exxon and its ilk are set to peak within the next five years and find themselves on a path to oblivion thereafter?

The Suncors and EnCanas are indeed in a “different world,” as Maxwell suggests… they are deep in the oil sands, investing in the future, doing it right.


Justice Litle
for The Daily Reckoning
November 1, 2006

P.S. The companies we love will be the Exxons of tomorrow, as the Exxons of today slowly go broke. Years from now, Outstanding Investments will be measuring its portfolio profits not in hundreds, but thousands of percent.

Editor’s Note: Justice Litle is an editor of Outstanding Investments, ranked number one by Hulbert’s Financial Digest for total return performance over the past five years. He has worked with soybean farmers, cattle ranchers, energy consultants, currency hedgers, scrap metal dealers and everything in between, including multiple hedge funds. Mr. Litle also acted as head trader for a private equity partnership, and made contributions to Trend Following: How Great Traders Make Millions in Up or Down Markets, a popular trading book by Mike Covel (FT/Prentice Hall).

Justice, along with Bill Bonner and Kevin Kerr, will be speaking at this year’s Investment Conference in New Orleans, taking place November 15 – 19.

So, so you think you can tell Heaven from Hell,
blue skies from pain.
Can you tell a green field from a cold steel rail?
A smile from a veil?
Do you think you can tell?
And did they get you to trade your heroes for ghosts?
Hot ashes for trees?
Hot air for a cool breeze?
Cold comfort for change?

– Pink Floyd

And we have very bad news, dear reader.

We picked up the London Times yesterday and found a stern warning…and a silly rant. Both came from eminent scientists, and both point to an apocalyptic hell on earth – and no heaven to get away to.

Neither Heaven nor Hell is on The Daily Reckoning’s regular beat. Money is our métier. But we know that there is nothing like the threat of Hell, or the hope of heaven to pry-open a man’s wallet.

Heaven doesn’t exist, says Richard Dawkins; it is a ‘delusion,” quoth he in the Times and in his current best seller. Dawkins, of course, knows no more about whether God exists than we do. But he lacks our modesty; perhaps he was short gold from ’80 to ’99. Maybe he went long stocks in 2002. Or maybe he is just naturally an arrogant jackass. But the man seems to think that if God were to exist he would have to reveal himself to modern, skeptical scientists. This is the sum of Dawkins’ argument – that God must exist in a way that Richard Dawkins can understand.

“God is dead,” said Friedrich Nietzsche. “God never existed,” says Dawkins. “God can do whatever he wants,” says The Daily Reckoning.

So, we leave the Times lead story and turn to page six for more on Sir Nicholas Stern’s report on hell. The theory of it is simple enough. It took the earth millions of years to lay in a stock of carbon based energy reserves – oil, gas, coal. In the space of just a few decades, these resources are being used up. Burning these fossil fuels puts ‘greenhouse gases’ into the atmosphere. Before the Industrial Revolution, such gases were found at the rate of 280 parts per million; now there are 430 ppm. By 2025 they’re expected to rise to 550 ppm.

What do these gases do? Well, they seem to make the earth warmer.

You will recall, when we listed the real threats to the U.S. Empire, we noted that it was running out of fuel. A peaceful nation can live well by buying its energy on the open market – just look at Switzerland, Europe generally, and Japan.

But a modern empire needs to control its oil, otherwise it risks having its supplies cut off by its rivals. That was the lesson of the first and second world wars of the last century. America no longer has enough reliable, inexpensive reserves of her own. So, her foreign and military strategies now must be twisted – like those of Germany and Japan in WWII – towards protecting her fuel lines.

The world as we know it – its standard of living as well as its geo-political arrangements – depends on burning up cheap fossil fuels. And now we discover – if you bend under the weight of the prevailing scientific reports – that the effect of all this carbon-based energy dependence is the destruction of the planet we all live on.


“The five months from May to September this year were the hottest since records began,” writes Merryn Somerset Webb in MoneyWeek. “Primroses are blooming on the Channel Islands; yellow slugs in Northamptonshire, confused by the warmth, are reproducing three months early; all over the U.K. irritated gardeners are cutting their lawns weekly long after they have usually put their mowers away.”

From CBS News:

“[James] Hansen is arguably the world’s leading researcher on global warming. He’s the head of NASA’s top institute studying the climate…

“What James Hansen believes is that global warming is accelerating. He points to the melting arctic and to Antarctica, where new data show massive losses of ice to the sea.

“Is it fair to say at this point that humans control the climate? Is that possible?

“‘There’s no doubt about that,’ says Hansen. ‘The natural changes, the speed of the natural changes [are] now dwarfed by the changes that humans are making to the atmosphere and to the surface.'”

And pity the poor people of Kiribati. The Pacific island nation is only six feet above sea level. According to the Times, just two degrees of global warming would put Kiribati underwater.

The ice caps are melting…the seas are rising…millions of people in Africa will die from hunger or malaria…up to four billion people will be short on water…half of the world’s species will face extinction…Florida, New York, London, and Tokyo will all be swamped…and the Pentagon says climate change is likely to lead to more war…

…drought, famine, pestilence, war…the four horsemen of the apocalypse riding hard towards us…

…if only God existed; He could deliver us from this evil. But the paper says he is only a delusion!

Bummer again.

Oh, but wait…

God cannot save us. But thank god for the global bureaucratic elite! Yes, Sir Nicholas, for example, is the former chief economist for the World Bank. He suggests that if the world would just slather some honey on the right pieces of toast, the whole problem might not seem so bad.

Invest 1% of world GDP in various programs, and you’ll save a lot more later on, says Sir Nicholas, seconded by Al Gore, and a whole host of tax and spend politicians and world improvers.

Even the Bush Administration is said to be warming up to the issue. And why not? There’s money in it – money for research grants…money for the nuclear power industry…money for alternative energy; the Bush boys never miss an opportunity to spend money that doesn’t belong to them on things no one really needs.

Certainly, British politicians see global warming as a promised land. Environmental Secretary David Miliband told the House of Commons that “climate change is the greatest long-term threat faced by humanity…it could cause more human and financial suffering than the two world wars and Great Depression put together.”

To make matters worse, the experts are now talking about a ‘tipping point,’ that is coming up soon. Unless we take action right away, they say we’re doomed.

Ooh la la…faced with the imminent threat of an environmental Armageddon, what is a responsible citizen to do? ‘Green taxes’ should be easy to put over on the taxpayers. New bureaucracies, commissions, and agencies can be set up. New regulations will be promulgated. New functionaries empowered.

Washington must be watching closely. If the ‘war on terror’ peters out…at least they’ll have a back up: a war on greenhouse gases.

More news:


Chris Gaffney, reporting from the EverBank world currency trading desk in St. Louis…

“The U.S. dollar lost over 6% of its value versus most of the major currencies during the month of April…the data we have seen over the past few weeks gives me the feeling that another dramatic drop is beginning.”

For the rest of this story, and for more market insights, see today’s issue of The Daily Pfennig


And more thoughts…

*** Another note from our intrepid small-cap guru, James Boric:

“Interestingly, after I reported yesterday that the final phase of the gold rally is poised to begin soon, the price of gold shot up $10. I’m not saying that I single-handedly started the rally… I’ll let you draw your own conclusions…

“A ten-dollar jump in 24 hours is nothing. The third stage of the gold rally is just getting started.

“As Jim Rogers said yesterday at the Next Generation of Commodity Investment conference in London, ‘The U.S., once the largest creditor nation, is now the largest debtor nation. The country is increasing its foreign debts by $1 trillion every 15 months.’

“Eventually this irresponsible lending will wreak havoc on our economy – just like irresponsible lending will ruin households who fund SUVs and extravagant vacations on second mortgages. As Pierre Lassonde, President of Newmont Mining, put it:

“‘When the growing financial imbalances of the U.S. are one day reconciled with the fact that no country can borrow its way to prosperity, we believe gold will shine.’

“Currently, the United States is running a current account deficit of more than 6% of GDP. During the late stages of the 1970s gold rally, the deficit barely exceeded 1% of GDP. Said another way, we are in six times worse shape than during the last metals boom.

“Does that mean this current rally could be six times more fierce in 1979 and 1980? You bet it does. It’s just a matter of time, dear reader.”

*** Here at the Daily Reckoning headquarters in London, we have no opinion on global warming…just as we have no opinion on God. The earth and its gods still have their secrets.

It is man that interests us. Dawkins and the earth scientists are being presumptuous. Whether their ideas are right or wrong, we can’t say. But men – even scientists – are not free of the desire for power, status and money…and it’s a fair bet that many will use any pretext or self-delusion to get it.

As to God, the scientists know no more than anyone else; but as to the future of the planet… Even if the theory of global warming were basically correct, there is still a mile of slippery, treacherous, self-serving hallucinations between the cup of climate theory and the lip of climate control.

While scientists spell out the hazards of climate change, rarely do they mention its likely benefits. The hell they imagine is full of droughts and floods. But in the heaven part, crop yields actually go up in many areas. And while some areas bake in the ‘hotted-up’ sun, other areas are suddenly livable for the first time in thousands of years. And since so much of the proposition is mere guesswork, the truth is it’s impossible to know heaven from hell. Who are the losers? Who are the winners? We won’t really know until it happens.

Imagine you are getting ready to light up a cigarette, dear reader. Do you ask yourself, “Will the world be a better place if I light this cigarette?” No, you ask yourself, “Do I want a smoke?”

Or imagine that you are in your house in the wintertime, and you are chilly. You want to turn up the thermostat. Do you focus on how much it will contribute to global warming – with all its unknown consequences? Or do you just turn up the heat?

World improvers might say that you are being ‘irresponsible’ when you increase the heat. But it seems to us that you are just being sensible. What is the point of having fossil fuel if you can’t use it to keep warm? And in a contest between obvious advantages and vague and unknown disadvantages, the sensible man does the sensible thing – he turns up the heat.

*** Who is the world’s biggest supplier of oil and gas? Russia. The west may have knocked out the old Soviet Empire, but now Russia has emerged in control of the world’s most strategic asset – energy. Saudi Arabia supplies 18% of the planet’s oil and gas exports. Russia puts out 19 percent.

Vladimir Putin is a former KGB agent who knows what he is doing. He put Mikhail Khodorkovsky in jail and grabbed control of Russia’s energy industry. Then, rising prices were a gift. Russia built its foreign currency reserves to $250 billion from virtually nothing in 1998.

Want to rule the world? You might have to make a deal with Russia.