Wizards of Money Part 20: "Caught Between and Dock and a Sweatshop"

Audio Version

This is the Wizards of Money, your money and financial management series… but with a twist. My name is Smithy and I’m a Wizard Watcher in the Land of Oz. This is the 20^th edition of the Wizards of Money and it is entitled “The Battle of the Dragons - Oil vs Insurance”.

Introduction

In this, the twentieth edition of the Wizards of Money, we're going to look at why it's not easy being green when everybody wants to be in the black! We'll discuss the relationship between black gold, the future of the world's most powerful cartel, the changing climate and the powerful industry that loses big bucks on bad weather.

First we'll discuss that ever important "oil price range" - that target price range per barrel of oil within which both producers and consumers are happy to continue "business as usual". But we can't discuss that without also talking about that thing at the heart of the oil markets so despised in all our free market teachings - the cartel - in this case, the OPEC cartel, of course. Given what's happened in Iraq and continuing US policy towards OPEC countries, we'll see where OPEC might be headed in the future.

We'll look at the indications that the OPEC cartel may face tough times ahead and the outlook for the fossil fuel industry in general. For, while they might be thinking their future looks pretty rosy, they may be just about to meet their match.

You see, what has now become "old Europe" is also the home of another fearsome and ancient creature of the capital markets that is none too pleased about the world's use of fossil fuels. Despite all the denials in the US media, the huge global insurers and reinsurers accept climate change as fact. Furthermore, they accept that climate change is induced by human activity. And, climate change is costing them big bucks! As powerful advocates of the Kyoto Protocol and with Trillions of dollars to vote with in the capital markets, the insurance industry has both the motive and the power to do something about climate change.

For this journey though the oil and insurance markets we'll speak with an executive at the world's largest reinsurer (Munich Re), with several oil markets consultants in the oil state of Texas, and with the head of research at Greenpeace, who just had a party at the Exxon Mobil shareholders meeting in Dallas Texas.

1. The Holy Cartel & the Magical Price Range

A cartel is formed when a dominant group of suppliers or producers of a product conspire to keep prices artificially high. Basically, they conspire to hold back supply so that prices are held above where they would fall if you allowed full competition between these producers.

The most powerful cartel in the world is, of course, OPEC - the Organization of Petroleum Exporting Countries. It consists of 11 countries altogether and these are Saudi Arabia, Iran, Iraq, Qatar, UAE, Kuwait, Nigeria, Algeria, Lybia, Indonesia and Venezuela.

For various reasons, OPEC does not want the price of oil to get too high, either. And so the price of oil ends up being managed within a certain magical price range. I asked Professor Dermot Gately, Professor of Economics at New York University to explain this magical price range:

Insert: Professor Gately Interview Segment 1

But the natural question to ask about OPEC these days is "What will happen to it now that America - the worlds largest oil consumer - is running the place?" Isn't it bizarre that, for the first time ever in the history of big cartels, the biggest customer of the cartel, the United States, actually has a seat at the table of the cartel? The cartel is supposed to be in a conspiracy against its customers! Often, when you have serious questions like this about oil, you find yourself going to Texas for the answers. I posed this question to Professor Michael Economides, Professor of Chemical Engineering and consultant to the oil industry, at the University of Houston:

Insert: Professor Economides Segment 1

I also decided to pose this question to a finance professor - Professor Craig Pirrong- at the University of Houston, to see how the oil state's financial world feels about this tricky situation

Insert: Professor Pirrong Segment 1

2. A Party in Dallas

Well, while I was talking to these Oil State professors about the State of Oil, something especially interesting was taking place in Dallas, Texas at the headquarters of Exxon Mobil. Here were some different opinions about the future state of oil. I decided I better find out what was going on, so I spoke to Kert Davies, the head of research at Greenpeace about the party they were having in Dallas in the last week of May 2003.

Insert: Greenpeace Segment 1

These days, it's not just the environmental movement and some concerned shareholders going into battle against the oil giants. Another set of equally formidable industry giants - the global reinsurance companies - are starting to flex their muscles in this global battle for green fuels over fossil fuels.

3. The Ancient Creature of "Old Europe" vs Fossil Fuel Industry

Reinsurance companies basically provide insurance to the direct insurance companies that we are more familiar with, who insure our houses, cars and businesses. The two biggest of these - the European based Swiss Re and Munich Re - provide insurance to insurance companies all over the world, to limit the losses of those insurance companies, just like we limit out losses by buying insurance on our house. Just like you have to go to Texas to talk oil, you have to go to Switzerland and Germany to talk about important worldly insurance issues. I asked Thomas Loster in the Geo Risks Research division at Munich Re in Germany what they think about climate change.

Insert: Munich Re Segment 1

Apparently, not all insurers are quite so active in this mission to stem climate change, and it seems that some of the US insurance companies are not so serious about slaying the fossil fuel dragon:

Insert: "Young Ones" Hippie Knight

Kert Davies from Greenpeace gives a summary of their experiences in working with the insurance sector.

Insert: Greenpeace Segment 2

4. Energy Outlook

Quite undeterred by the finding of the UN Panel on Climate Change and the 30 years of study at the big reinsurers, some consultants and researchers in the oil industry are determined to believe that fossil fuels do not cause climate change. Here's Professor Economides from University of Houston again.

Insert: Professor Economides Segment 2
Many oil industry analysts see the demand for, and use of, oil continuing to increase for decades to come and can't see how transportation can get away from the fossil fuels. But, then again, so people with wood chip cars and buses early in the twentieth century might have once thought about their dependence on chopping down trees for transport. Like many people my age, I've leant all I know about cars from the radio program "Car Talk" including the following:

Insert: CarTalk CLASSIC "Woodchip Burning Engines"

If people can go from using woodchip cars to gasoline cars, then who knows what could be next?

Professor Economides argues that much of the worlds current energy problems will be solved by Natural Gas and Hydrogen fuels.

Insert: Professor Economides Segment 3
Professor Gately at NYU was a little more hopeful about the so-called "renewables".

Insert: Professor Gately Interview Segment 2

In the next part of this series we'll investigate [well, maybe] where the status of renewable really stands and learn more about how, much to some people's amazement, the environmental community is starting to work more with the investment community in the battle against fossil fire.

That's all for Wizards of Money Part 20. Note that the Wizards of Money has a web site at www.wizardsofmoney.org where you can get the text of all episodes and further references.

Insert: Stevie "The Battle of the Dragon"


REFERENCES FOR WOM 20

The Famous Munich Re Graph (of economic and insured loss trends) See Page 5 of Presentation

UN Environment Program Finance Initiatives Climate Change Working Group

Germanwatch Climate Change & Financial Sector Workshop

OPEC      Munich Re     Swiss Re    GreenpeaceUSA

CarTalk CLASSIC - Wood Chip Burning Engines Full Audio

That's all for the Wizards of Money Part 20. Note that the Wizards of Money has a web site at www.wizardsofmoney.org where you can access the text, audio and references for all WOM episodes.