The Stevenson Moment

Stevenson: “Do you, Ambassador Zorin, deny that the U.S.S.R. has placed and is placing medium and intermediate range missiles and sites in Cuba?” Zorin: “I am not in an American court room, sir, and therefore I do not wish to answer a question that is put to me in the fashion in which a prosecutor does.”

Adlai Stevenson, U.S. ambassador to the U.N. Valerian Zorin, Soviet ambassador to the U.N. United Nations, New York City, October 25, 1962

Moments after he spoke the above words, Adlai Stevenson became a leading daytime drama star, at least for a few moments. Stevenson exposed Soviet lies in front of an international TV audience. He showed the entire world U.S. reconnaissance photos of Russian missiles in Cuba. The world is waiting for another “Stevenson Moment”, but this time, from U.S. Secretary of State Colin Powell. And on February 5th, it just might finally get it.

The Bush Administration will produce its “smoking gun” next Wednesday. But why wait? Today, I’ll unveil my own smoking gun. It doesn’t have anything to do with weapons of mass destruction in Iraq. But it does directly deal with what, deep down in his Texas heart, George W. Bush has in mind for Iraq’s 112 billion barrels of oil.

Most people think this coming war is about oil. And it is. But not in the way you might think.

Iraqi Oil Reserves: 220 Billion Barrels Possible

Iraq sits on the second-largest proven reserves in the world. According to the U.S. Department of Energy, it has another 220 billion barrels of probable and possible resources. It may be much, much larger than even this sizable number…much of Iraq remains unexplored and undeveloped since the Gulf War ended in 1991.

It’s not as if Iraq isn’t producing any oil right now. Currently, it produces slightly less than 2 million barrels a day. And under the terms of U.N. resolution 986, Iraq is allowed to export around 2.2 million bpd to pay for food and critical domestic infrastructure plans.

Yet according to Iraqi Oil Minister Amir Rashid, as of early 2002, only 24 of Iraq’s 73 developed oil fields were actually producing. Part of this is Iraq’s own fault. Iraq destroyed much of the production capacity of its southern oil fields before advancing coalition ground forces could seize them in the Gulf War.

All that’s about to change. In a free Iraq, billions more in reserves are likely to come online, increasing Iraqi oil production to somewhere in the neighborhood of 5 or 6 million bpd. But who gets rich off of this? Is it Iraq? Is it major integrated oil companies? Is it Bush and Cheney and their Texas Oil Mafia cronies? Is it France and Russia? The answer tells us how to profit as investors.

Iraqi Oil Reserves: Falling Oil Prices

First off, contrary to popular belief, an increase in Iraqi oil production doesn’t make big U.S. oil companies richer. Rising oil production in Iraq should lead to falling oil prices. And falling oil prices aren’t generally good for big oil profits, even on increased volume. They will lower prices at the pump for sure. But they will not increase profits for Texaco. In fact, if oil prices don’t fall after the war with Iraq – and I mean fall back down to around $15/barrel, the there really IS a conspiracy.

The only companies who will profit after the war – no matter who owns the fields – are the companies who will help make the fields productive. I’m talking about oil service companies. It doesn’t matter if France, Russia, the U.S. Army or a new Iraqi government owns the fields. Whoever owns them will need the services and the equipment to make the profitable. Enter oil service stocks.

Oil service stocks – the companies who sell the equipment and services to make oil fields productive – were the biggest winners in the days between the beginning of the air war in Gulf War One and the end of the ground war. I’m forecasting a quick gain in this sector immediately after the bullets start to fly.

What’s more, oil service stocks act a lot like traditional resource stocks. That is, their businesses improve when the integrated oils ramp up exploration and expansion of existing production capacity – something that’s a lock to happen in post-Saddam Iraq.

In any case, an increase in Iraqi production seems almost inevitable. The only question is how it will come about. If Saddam chooses to lose gracefully, leaving oil fields intact – or if he simply runs out of time to destroy them – existing capacity will be expanded, and new reserves located and developed without much hassle. Otherwise, the United States and its allies will be faced with the black scenario of repairing the entire destroyed infrastructure of the Iraqi oil industry.

If Iraq does destroy its oil infrastructure preemptively – or even if Iraq becomes a ‘free’ state at all – certain people stand to lose an awful lot. These are the people for whom the war really IS about oil.

Iraqi Oil Reserves: France, Russia and China

Under the terms of U.N. resolution 986, Iraq is allowed to export oil and use the proceeds to pay for food and critical infrastructure, as determined by the U.N. In order to produce its oil, Iraq is allowed to enter into contracts with foreign firms to sell parts and equipment for its oil industry. Those contracts must be approved by the U.N.

You can actually view the contracts on line at the U.N. website. The site reveals that France, Russia, and China have 798, 862, and 227 contracts in various states of approval with Iraq, respectively, although not all the contracts have yet been approved or executed. U.S. firms have a grand total of one contract with the Iraqi oil industry. The U.K has eight, two of which have been nullified and six of which have been approved.

Looking at dollar value, the picture becomes even more interesting. Since April of 1995, over 3.3 billion barrels of Iraqi oil valued at $62 billion have been exported under U.N. supervision. Since 1996, about $3.6 billion of this has gone to purchase spare parts for the Iraqi oil industry, a process in which the U.N. acts as a broker between the Iraqi government and foreign firms looking for business. The U.N. estimates there are $10.8 billion worth of additional oil industry contracts up for grabs or in the pipeline.

According to an article by Thomas W. Murphy at, “Russia has ranked first among nations doing business with Iraq under the oil-for-food program, with sales exceeding $4 billion.” As for France, Mr. Murphy states that France sold $1.5 billion worth of goods to Iraq last year, the most of any nation for the year.

The “sales”, by the way, are done by letters of credit that Iraq issues. These letters of credit draw on funds in an escrow account established by the U.N. – funds originally procured from Iraqi oil sales. In other words, French and Russian business profits in Iraq are coming from Iraqi oil money.

What’s more, the potential for more French and Russian contracts in Iraq – at least under the Hussein regime – is staggering.

A report produced by the U.S. Department of Energy’s Energy Information Administration spells it out. Russia has a lot to lose in a free Iraq. The DOE report states that “Russia, which is owed several billions of dollars by Iraq for past arms deliveries, has a strong interest in Iraqi oil development, including a $3.5-billion, 23-year deal to rehabilitate Iraqi oilfields, particularly the 11-15 billion barrel West Qurna field (located west of Basra near the Rumaila field).”

Iraqi Oil Reserves: Dozens of Countries

And then come the French, who’ve got a lot to lose too. The DOE report states: “The largest of Iraq’s oilfields slated for post-sanctions development is Majnoon, with reserves of 12-20 billion barrels of 28o-35o API oil, and located 30 miles north of Basra on the Iranian border.” French company TotalFinaElf reportedly has signed a deal with Iraq on development rights for Majnoon.

You can throw the Chinese and Germans on the pile, too. Dozens of countries, in fact. The black gold rush has been going on for twelve years, under the tight control of the U.N. A Deutsche Bank study estimates international oil companies have signed $50 billion in deals with Iraq. The deals cover the development of an estimated 50 billion barrels of reserves and an additional 4 million bbl/d of potential production.

There are only two major countries that don’t seem to be getting in on the act…and significantly, these are the ones applying pressure for a regime change.

The truth is, we have no idea what will happen in the coming weeks. But using a little logic, it’s not hard to figure out that in almost any scenario, Iraqi oil production is bound to go up. It could go up sooner, if Hussein goes quietly. Or it could go up later, if he doesn’t.

In either scenario – the restoration of destroyed facilities or the increase in production of existing fields and the development of dormant Iraqi reserves – oil service companies have billions in business ahead of them.


Dan Denning
For the Daily Reckoning
January 31, 2003


Day after day…the market seems to be grinding down share prices…fortunes…and reputations. Wall Street dropped again yesterday and is now below its low-point from last October.

The same thing is happening almost everywhere. The FTSE in London has lost 50% of its value since its peak. The Paris stock market is down almost 60%. And German stocks have been whacked for nearly 70%.

Something’s gotta give, we keep thinking. People cannot keep taking losses on this scale without some important reaction – either panic selling…or maybe panic buying.

In the meantime, we love this market. Call it mean- spirited…call it schadenfreude…call it what you like, but we enjoy watching Mother Nature at work. She always seems to come up with what Emerson called “some leveling circumstance,” which redresses imbalances and corrects undeserved success.

Poor Ted Turner, for example. “Better than sex,” was how Jane Fonda’s husband described corporate deal-making when the going was good. But then he wheeled into his biggest deal ever – a merger with AOL. The financial press loved it. Investors loved it. It was the old Time/Warner getting hip to the new Information Age.

Since then, Turner – AOL/TIME Warner’s biggest single shareholder – has lost almost 80% of his money. And yesterday, a day after his company announced the biggest loss ever – $98.7 billion – he finally walked off the job as vice president, following president Stephen Case by only a few weeks.

Then, there’s Peter Lynch, who built his fortune and his reputation in the stock market when the bull market was still fresh. He retired as a fund manager well before the peak, but encouraged the lumpeninvestoriat to get into stocks, too. By then, the market was already beginning to stink…and the little guys lost a lot of money. And now we see that Lynch…still buying and hoping for a turnaround…is losing money, too.

Eric, what’s the latest news on Wall Street?


Eric Fry, reporting from New York…

– The lumpeninvestoriat took a few more lumps yesterday. The Dow tumbled 166 points to 7,945 and the Nasdaq fell nearly 3% to 1,322. Meanwhile, gold – the once-and-again safe-haven metal – jumped $2.30 to $369.70 an ounce.

– The days of 25% annual gains in the stock market are a distant, and therefore, painful memory for most investors. But for many of America’s CEOs, the good ol’ days never left. That’s because ever-rising CEO compensation is an immutable law of the universe. As reliably as the sun rises every single morning, CEO paychecks rise every single year.

– In the years of plenty, CEOs reap a hefty portion of the bounty. And in the lean years, CEOs reap whatever they reaped the year before, plus about 10% – leaving the remnant for the “little people” to squabble over.

– “Faced with dismal 2002 returns, as well as the foul smell that soaring executive compensation left in the noses of shareholders last year, you would think chief executives would have cleaned up their compensation acts,” writes Bloomberg’s Graef Crystal disdainfully. “A review I did of 2001-2002 pay changes for 31 CEOs filing early proxy statements with the U.S. Securities and Exchange Commission shows otherwise. For the 31 companies with 2002 revenue of $3 billion or more, the median total return [of their company’s stock] was a negative 10.7 percent. But the median CEO among the 31 received…a 9.3 percent increase in total pay.”

– Crystal’s observation is disgusting perhaps, but hardly surprising. (And besides, wouldn’t we all like the chance to cash an obscenely, immorally and unconscionably large paycheck…just one time?)

– “Now we begin to see why CEO pay has gone out of sight,” says Crystal. “Because pay doesn’t go down in the bad years, it begins to lap the field every time there is a good year.” Crystal highlights a few of the folks he calls the “Black Hats”. Those are the CEOs “who combined bad performance with big pay increases”.

– For instance, take Cardinal Health’s Robert Walter, whose take-home pay soared 147% last year…even though his company’s share price fell 10.9%. And let’s not forget about Navistar International CEO John Horne, who received a plump 146% pay hike while his company’s share price slipped 25%.

– But Crystal also highlights the “White Hats.” His favorite: John Chambers, CEO of Cisco Systems. Cisco shares fell more than 30% last year. But Chambers threw his (white) hat into the ring alongside his long-suffering shareholders, by slashing his salary to $1 per year and taking no bonus at all.

– “He also returned one of his 2002 option grants to the company,” says Crystal. “The net result: His total pay dropped by 67.1%. Of all the CEOs in my review, Chambers showed that he really gets it.”

– Yes, we agree, Chambers “gets it” alright. In fact, by our reckoning, he has gotten it already. He amassed a net worth in the hundreds of millions of dollars, while his company’s market capitalization shriveled by hundreds of BILLIONS of dollars…What else it there to get?…We’d give Chambers an “A” for style, but no better than a “C” for substance.

– “Before you start worrying about the impending Chambers family trip to the poor farm,” quipped Scott Moritz of, “consider that he’s still taking a 4 million-share stock option package, adding to the $77 million worth of in-the-money options he already held as of July 27.”

– Nevertheless, we applaud Chambers’ gesture. The lone dollar he’ll receive this year will save Cisco $323,318, roughly the amount he would have been paid had he kept his original salary…and every little bit counts. Also to Chambers’ credit, even with Cisco’s stock falling to a three-year low, he hasn’t been selling shares. In fact, he donated all 126,699 shares he purchased in the past year to charity.

– Net-net, the lumpeninvestoriat might take a few less lumps in the future if more CEOs were to follow Chambers recent example…Then again, Mr. Market might knock them over the head anyway.


Back in Paris…

*** Four times as many companies defaulted on their debt last year as in 2000. The default rate 10 years ago was only 2%, says the Financial Times. Now, it’s 11%.

*** Ah, nature…we love it! Last night’s entertainment took your editor and his wife to an exclusive club in the big park adjoining Paris, the Bois du Boulogne. It is here where Elizabeth takes riding lessons and here where her horse club had decided to hold its annual dinner.

Your editor is bored by animals, except in a good sauce. But he finds humans fascinating. What is nice about a visit to the Bois du Boulogne at night is that you see so much of them. Driving along, a redheaded woman standing on the right-hand curb on the right hand side opened her fur coat. Even the SEC does not demand such full disclosure. Then, a petite Asian woman on the same side of the road showed off her underwear. A little further, another woman leaned into an auto window – apparently negotiating. All we saw was her nearly-naked derriere, reflecting the taxi’s headlights like an oversized peach at a roadside fruit market.

Of course, your editor agreed with his wife that the whole spectacle was sordid and disgusting…