Natural Gas & Technology

by Bruce Fenton

A looming natural gas shortage is beginning to look like the 500-pound monster in the forest of economic recovery. When oil prices spiked and gasoline rocketed far beyond $2 per gallon, it seemed that “winning the war” would add stability and lower costs to the energy picture. This may not be the case . . . and it has little to do with Iraqi oil.

Energy prices remain stubbornly high. Natural gas prices in particular remain inflated in comparison to historical standards. With natural gas accounting for nearly one-fourth of the nation’s energy consumption and gas imports on the rise, these higher prices, if sustained, will be an impediment to the much-anticipated economic rebound.

Higher prices for energy act as a tax on consumers and businesses. Unfortunately, it is the lower wage earners who will pay a disproportionately higher price for the energy they use.

President Bush has called for a renewed emphasis on gas exploration, but in a consumer friendly fashion. He stated, “We’re a technologically capable nation. We can explore for natural gas and protect our environment.”

Natural gas is a colorless, odorless fossil fuel that gives off a great deal of energy with few harmful by-products when burned. It is distributed from vast underground storage sites through a nationwide system of pipelines. Unfortunately, like all extractive resources, exploration for natural gas draws the attention and the ire of environmental activists.
But President Bush may have a point. The natural gas industry has made major strides in using technology to advance its exploration efforts. According to their website, www.naturalgas.org, new technology has allowed the industry to increase exploration and production to meet rising demand without materially increasing the stress on the environment.

Among the factoids on their website:

• 22,000 fewer wells are needed on an annual basis to develop the same amount of oil and gas reserves as in 1985.
• Drilling wastes have decreased by as much as 148 million barrels due to increasing well productivity and using fewer wells.
• The drilling footprint of well pads has decreased by as much as 70% due to advanced drilling technology, which is extremely useful for drilling in sensitive areas.
• By using modular drilling rigs and slim-hole drilling, the size and weight of drilling rigs can be reduced by up to 75% over traditional drilling rigs, reducing their surface impact.
• Had technology, and thus drilling footprints, remained at 1985 levels, today's drilling footprints would take up an additional 17,000 acres of land.

The importance of technological advances in this industry cannot be overstated. New technologies and applications are being developed constantly to improve the economics of producing natural gas, allow for the production of deposits formerly considered too unconventional or expensive to develop, and ensure that the supply of natural gas keeps up with steadily increasing demand.

Sufficient domestic natural gas resources exist to help fuel the U.S. for a significant period of time, and technology is playing a huge role in providing low-cost, environmentally sound methods of extracting these resources.

Hopefully, environmental activists and the industry will find some middle ground that will allow us to continue to develop natural gas resources as an alternative to the use of coal, oil and nuclear energy to provide the energy resources our growing nation needs.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Gold

by Bruce Fenton

Gold was the supreme measure of value and the one common currency of commerce in the world’s financial system in the early development of our nation. The Bank of England went on the gold standard in 1821, agreeing to buy or sell unlimited amounts of gold at a set rate in pounds sterling. Since the Bank of England was the dominant bank for world trade, other nations (the U.S. included) had little choice but to adopt the same standards.

A plus for a gold standard was that it made inflation impossible. A government could not add to its money supply unless it had gold to back its currency. While U.S. banks did print bank notes denominated in gold, the notes tended to carry less value the further they were removed from the issuing bank.

In the beginning, the U.S. was not a major gold-producing nation—in 1847, the U.S. produced only 43,000 ounces. That changed dramatically with the discovery of gold in California the following year. By 1853, gold production reached 3,144,000 ounces, worth almost $65 million (Limbaugh and Fuller, Calaveras Gold).

The discovery of gold in California forever changed the face of the nation. It began the tipping of the population and center of commerce from the east to the west. It made millionaires out of some and bankrupted others. It brought railroads to the west and gave rise to towns and cities, forever blending ethnicities from all backgrounds. It basically laid the foundation for today’s economy.

The sudden influx of wealth from California gold was reflected on Wall Street.
Speculation in mining shares, many of dubious value, abounded. New corporations appeared, more stocks were issued and economic optimism grew. But despite the fact that the gold standard worked to minimize inflation, it did not allow the government the option of using monetary policy to help in times of national crisis.

When the stock market crashed in 1929 and the world economies fell into a deep recession, panicking investors eventually sought to redeem their bank notes for the gold of gold standard countries. Faced with decreasing gold reserves, the Bank of England suspended all gold payments. Their stock market rallied (as did the U.S. markets) when, in 1933, the U.S. announced it was suspending the gold standard.

The end of the gold standard came to the U.S. in 1971 when President Nixon stopped all foreign redemption of Federal Reserve Notes for gold. Again, the stock market responded with enthusiasm.

Today, gold remains an inflation hedge as well as a store of wealth in times of uncertainty. However, as a long-term investment, it has produced a negative return for the past two hundred years, when adjusted for inflation (Jeremy Siegel, Stocks for the Long Run).

Gold has also provided us with the endearing description of “bulls and bears.” For entertainment, the miners in California would chain a bull by one leg in a corral with a bear. They then bet on which would survive the encounter. The optimists bet on the bull and the pessimists bet on the bear. Not much has changed in that equation in the past 150 years!

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Adventure Capitalist

by Bruce Fenton

“Who will produce the goods we need and who will buy our assets in the future?” Wharton finance professor and best-selling author Jeremy Siegel, PhD, posed this provocative question to an association of financial planners in Philadelphia.

There are some some possible answers to this question in the book Adventure Capitalist by Jim Rogers. Rogers set a Guinness record for the world’s longest continuous car trip as he spent three years driving through 116 countries on six continents. His book chronicles the trip and provides observations on capitalist potential.

Rogers made a fortune on Wall Street as the co-founder of the Quantum Fund, a global investment partnership. He sold out and retired at 37, but he has elected to remain active with his own investments and a variety of media commentary positions. In 1988, he took his first trip around the world on a motorcycle.

Three countries he visited during that trip stand out as potential investment opportunities. Ireland has a younger, highly educated workforce that is more interested in working than carrying on the wars of their elders. After 150 years of emigration, the Irish are coming back home, and the country is also now playing host to a significant influx of immigrants. Companies from all over the globe are building plants there, and thanks to favorable tax laws, there is a high tech boom going on.

Rogers observed that the best capitalists were the Communist Chinese. They have a long entrepreneurial history, so even though they have only been a communist nation for thirty years, there are still plenty of businesspeople who remember how capitalism works. And the Chinese don’t take siestas—they have an incredible work ethic and are a quick study when it comes to learning from the expatriate class that is returning with capital and expertise.

Rogers did note a potential problem in Asian demographics—a shortage of girls. Boys outnumber girls by 20% in nations like China and Korea where “one child, one family” is now the custom. (From a girl’s perspective, though, this may not be a problem!)

In Africa, Rogers ran into the blight of Non-Governmental Organizations (NGOs). NGOs, in his opinion, accomplish nothing, spending money raised from charities and government sources in a quest to “save the world” and the bureaucracy that supports their opulent lifestyle while keeping them from having to get real jobs. Next time you are tempted to give clothes to some organization dedicated to fighting African famine, read Rogers’ comments about how our charitable efforts are handled.

But in Angola, he found promise. Decades of bitter civil wars have torn apart this country, but Rogers, ever the contrarian, still saw potential. As he noted, when things are at their worse, and despair its deepest, investment potential can be its greatest.

Everywhere Rogers looked, he could see entrepreneurial spirit driven by enormous energy and motivation just waiting to be harvested. All over Africa, he encountered people with talent and the drive to work from dawn to dusk—a work ethic no less powerful than that of the Chinese.

However, in too many parts of the world, he saw government corruption and an economic ineptitude that has destroyed potential for investment. He comments on how our misguided efforts at foreign aid have left countries like Ethiopia with a generation that has forgotten how to farm because we feed them instead. He spares little contempt for our foreign policy efforts in developing nations.

The answer to the question posed at the beginning of this column, I believe, lies in the future of the developing nations chronicled in Rogers’ book. Those nations with entrepreneurial spirit, work ethic and a young population will be the producers of the goods we buy, and they will, someday, have the money to buy the assets we wish to sell.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.