Ken Rogoff: Is This As Good As It Gets For This Generation?

Tyler Durden's picture




 

Authored by Ken Rogoff, originally posted at The Guardian,

The promise that each generation will be better off than the last is a fundamental tenet of modern society. By and large, most advanced economies have fulfilled this promise, with living standards rising over recent generations, despite setbacks from wars and financial crises.

In the developing world, too, the majority of people have started to experience sustained improvement in living standards and are rapidly developing similar growth expectations. But will future generations, particularly in advanced economies, realise such expectations? Though the likely answer is yes, the downside risks seem higher than they did a few decades ago.

So far, every prediction in the modern era that mankind's lot will worsen, from Thomas Malthus to Karl Marx, has turned out to be spectacularly wrong. Technological progress has trumped obstacles to economic growth. Periodic political rebalancing, sometimes peaceful, sometimes not, has ensured most people have benefited, albeit some far more than others.

As a result, Malthus's concerns about mass starvation have failed to materialise in any peaceful capitalist economy. And, despite a disconcerting fall in labour's share of income in recent decades, the long-run picture still defies Marx's prediction that capitalism would prove immiserating for workers. Living standards around the world continue to rise.

But past growth performance is no guarantee that a broadly similar trajectory can be maintained throughout this century. Leaving aside potential geopolitical disruptions, there are some formidable challenges to overcome, mostly stemming from political underperformance and dysfunction.

The first set of issues includes slow-burn problems involving externalities, the leading example being environmental degradation. When property rights are ill-defined, as in the case of air and water, government must step in to provide appropriate regulation. I do not envy future generations for having to address the possible ramifications of global warming and fresh-water depletion.

A second set of problems concerns the need to ensure that the economic system is perceived as fundamentally fair, which is the key to its political sustainability. This perception can no longer be taken for granted, as the interaction of technology and globalisation has exacerbated income and wealth inequality within countries, even as cross-country gaps have narrowed.

Until now, our societies have proved remarkably adept at adjusting to disruptive technologies; but the pace of change in recent decades has caused tremendous strains, reflected in huge income disparities within countries, with near-record gaps between the wealthiest and the rest. Inequality can corrupt and paralyse a country's political system – and economic growth along with it.

The third problem is that of aging populations, an issue that would pose tough challenges even for the best-designed political system. How will resources be allocated to care for the elderly, especially in slow-growing economies where existing public pension schemes and old-age health plans are patently unsustainable? Soaring public debts surely exacerbate the problem, because future generations are being asked both to service our debt and to pay for our retirements.

The final challenge concerns a wide array of issues that require regulation of rapidly-evolving technologies by governments that do not necessarily have the competence or resources to do so effectively. We have already seen where poor regulation of rapidly-evolving financial markets can lead. There are parallel shortcomings in many other markets.

A leading example is food supply – an area where technology has continually produced evermore highly-processed and genetically refined food that scientists are only beginning to assess. What is known so far is that childhood obesity has become an epidemic in many countries, with an alarming rise in rates of type 2 diabetes and coronary disease implying a significant negative impact on life expectancy in future generations.

Many leading health researchers, including Kelly Brownell, David Ludwig, and Walter Willett, have documented these problems. Government interventions to date, mainly in the form of enhanced education, have proved largely ineffective. Self-destructive addiction to processed foods, which economists would describe as an "internality," can lower quality of life for those afflicted, and can eventually lead to externalities for society, such as higher healthcare costs. Again, despite a rising chorus of concern from researchers, political markets have seemed frozen.

All of these problems have solutions, at least in the short to medium run. A global carbon tax would mitigate climate risks while alleviating government debt burdens. Addressing inequality requires greater redistribution through national tax systems, together with enhanced programs for adult education, presumably making heavy use of new technologies. The negative effects of falling population growth can be mitigated by easing restrictions on international migration, and by encouraging more women and retirees to enter or stay in the workforce. But how long it will take for governments to act is a wide-open question.

Capitalist economies have been spectacularly efficient at enabling growing consumption of private goods, at least over the long run. When it comes to public goods – such as education, the environment, health care and equal opportunity – the record is not quite as impressive and the political obstacles to improvement have seemed to grow as capitalist economies have matured.

Will each future generation continue to enjoy a better quality of life than its immediate predecessor? In developing countries that have not yet reached the technological frontier, the answer is almost certainly yes. In advanced economies, though, the answer should still be yes, but the challenges are becoming formidable.

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Sat, 03/08/2014 - 18:00 | 4525749 JustObserving
JustObserving's picture

When your debt and unfunded liabilties are $1,250,000 per taxpayer and rising at $70,000 per taxpayer per year, it is difficult to see how the next generation will have a better future.

Kudos to Zero Hedge for bringing Ken Rogoff here as he is the inventor of the concept of Coronary Capitalism:

Obesity affects life expectancy in numerous ways, ranging from cardiovascular disease to some types of cancer. Moreover, obesity – certainly in its morbid manifestations – can affect quality of life. The costs are borne not only by the individual, but also by society – directly, through the health-care system, and indirectly, through lost productivity, for example, and higher transport costs (more jet fuel, larger seats, etc.).

CommentsBut the obesity epidemic hardly looks like a growth killer. Highly processed corn-based food products, with lots of chemical additives, are well known to be a major driver of weight gain, but, from a conventional growth-accounting perspective, they are great stuff. Big agriculture gets paid for growing the corn (often subsidized by the government), and the food processors get paid for adding tons of chemicals to create a habit-forming – and thus irresistible – product. Along the way, scientists get paid for finding just the right mix of salt, sugar, and chemicals to make the latest instant food maximally addictive; advertisers get paid for peddling it; and, in the end, the health-care industry makes a fortune treating the disease that inevitably results.

CommentsCoronary capitalism is fantastic for the stock market, which includes companies in all of these industries. Highly processed food is also good for jobs, including high-end employment in research, advertising, and health care.

http://www.project-syndicate.org/commentary/coronary-capitalism

Sat, 03/08/2014 - 18:06 | 4525762 National Blessing
National Blessing's picture

In all honesty, life has always sucked the big one.  Even for the wealthy.  You're born.  You eat a few good meals.  Maybe you're rich enough to own a boat.  Then you die.  Faith in God is the only thing which brings happiness.  The rest is bullshit.  Bitches.

Sat, 03/08/2014 - 18:11 | 4525779 Oxbo Rene
Oxbo Rene's picture

For those not believing in God = There is only one supreme
matter of signifance in your life = that is your health .....
Everything else is just "stuff" .......

Sat, 03/08/2014 - 18:27 | 4525831 frankthomaswhite59
frankthomaswhite59's picture

see Jobe

peace National Blessing

and to all here at zero hedge

Sat, 03/08/2014 - 18:45 | 4525887 TruthInSunshine
TruthInSunshine's picture

"Debt is the money of slaves, bitches."

SSDD

The fractional fiat reserve central bankers & their accomplices in the form of "sovereign governments" are doing their best to ensure that this maxim remains more true than ever.

Sat, 03/08/2014 - 18:55 | 4525921 Shocker
Shocker's picture

This generation has some major economic problems on top of everything else. Its interesting to say the least

Layoff / Closing List: http://www.dailyjobcuts.com

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Sat, 03/08/2014 - 19:00 | 4525939 Arius
Arius's picture

vlah ...blah ... blah ... this is AMERICA it is special people, like Ms. Wahl who are not afraid to quit on the spot for truth and freedom...

and YES this time is different!!!

Sat, 03/08/2014 - 19:14 | 4525999 jbvtme
jbvtme's picture

when you were a baby they trimmed your joy stick for sanitary reasons, then they jabbed you with vaccines. when your tonsils shit the bed because of the thimerisol in the vaccine, they hauled out them out along with your adenoids. schooling is the device in use to take the rest of what's left.

Sat, 03/08/2014 - 19:48 | 4526122 Arius
Arius's picture

however, this generation are lazy and trained to be leaders ...

well there are plenty of chiefs not many indians ....

Sun, 03/09/2014 - 14:45 | 4528041 Moustache Rides
Moustache Rides's picture

Why the fuck is this comment down-voted AT ALL! 

Sat, 03/08/2014 - 19:36 | 4526085 logicalman
logicalman's picture

You don't own 'stuff'

It owns you - if you let it.

Sat, 03/08/2014 - 18:14 | 4525790 SafelyGraze
SafelyGraze's picture

this looks like the right place for some of the longer comments, so I guess I am going to go ahead and share my essay for the district writing contest about education and so here it is (below). hope you enjoy and maybe it is going to inspire you to reach for your higher selves, I hope.

WHAT STAYING IN SCHOOL IS ABOUT FOR THE NEXT GENERATION IN SCHOOL

 

Stay in school. Not only is staying in school an important part of childhood, it's the law.

And when you're at your home, don't neglect your homework. Especially your math homework. 

Why?

Easy.

You'll need that math in order to get a job. 

And to keep your job.

How come math is so important in today's employment environment?

Glad you asked.

Employers demand strong math skills from today's Knowledge Workers. And these workers are now finding employment across all sectors.

Hospitality. Service. Healthcare. Sales.

For example, suppose you are involved in retail sales. A customer comes in and looks around. You say, "how may I help you?" 

And the customer is like, "well, ok, so if y is x squared minus three x plus two, then for what values of x is y going to be zero?"

And if you haven't been paying attention in your math studies, then you are not going to be able to get very far in helping answer that customer's question. 

Are you.

No. You aren't.

But on the other hand, maybe you kept up with your studies instead of, say, smoking marijuana cigarettes. Remember: good employees don't do drugs. Not when they have homework. And certainly not in the workplace. It's the law.

That goes double for the harder drugs. Drugs like blue willies and tiger tail. You know what I'm talking about. 

But maybe you are thinking that there is an equation called the quadratic equation. And you would be right. And maybe you are thinking about the discriminant and how it is going to look like b squared minus four a c. 

Good. You remembered.

And in this case that is going to work out to be three squared minus four times one times two, isn't it. 

Yes. It is.

And so that is how you are going to go ahead and know that the discriminant is nine minus eight, and that is going to be one. And so that square root of that is just one again. 

So your answer is going to be one half a times negative b plus or minus one.

And that is one half times the negative of negative three, plus or minus one. 

Which has got to be one half of three plus one or three minus one.

So now you have got one half of four or one half of two.

And that means you can tell your customer that the answer is going to have to be two or one.

And that is your final answer.

The customer is going to buy your merchandise because you were able to help with their question.

That means money in your pocket if you work on commission.

And moreover, that means you are bringing revenue to your employer.

Revenue means profits.

And profits mean dividends to the shareholders.

You can expect to keep your job because your employer is able to submit a quarterly report that shows sales are going up.

Thanks to a sales force that has people like you.

Knowledge workers.

People who stayed in school. People who can problem-solve. People who are customer-oriented. People who didn't do drugs at the workplace. It's the law.

By keeping your job, you can continue to receive pay-checks that are deposited electronically into your banking account at a financial services institution.

And income means taxes, so you can contribute to building roads and also the common defense. And jobs mean benefits. And social security. For when you are old.

So these are some of the reasons why you want to go ahead and stay in school and do your best. Even if it means sometimes having to get up early when you don't feel like it. Because you know there are rewards for your hard work.

Rewards like getting a job.

And using the skill-sets you learned about in school. 

This was just one example. There are probably a lot of others.

 

 

Sat, 03/08/2014 - 18:30 | 4525847 Manipuflation
Manipuflation's picture

I had to read that twice but I get it now.  +1 and I hope you win.

Sat, 03/08/2014 - 18:35 | 4525861 New_Meat
New_Meat's picture

Learn Math: like duuude, if u wanna b an enjiner, u gotta' do like fuckin' math upto the wazoo.  But they give u a good job u kin set on ur azz almot all day.  An, even bettr, if u b a like not paleface person, like, they have to take u to get there statz cuz the fedZ will kill the company n they can't fire u, but u won't b let go mostly either , n u can be a fat thang , n there ain't nothin' they kin doo 'bout t

'n the skoolz have to tke u, mostly, unless u b 2 fubar

 

Sat, 03/08/2014 - 18:49 | 4525901 Miffed Microbio...
Miffed Microbiologist's picture

Why learn math when in a few years robots will do everything and all we have to do is cruise around in our hover lounges and drink Big Gulps?

Miffed;-)

Sat, 03/08/2014 - 20:25 | 4526274 yrbmegr
yrbmegr's picture

Just factor it in your head.  Don't need the QE.

Sat, 03/08/2014 - 23:31 | 4526790 SafelyGraze
SafelyGraze's picture

but then the essay wouldn't be as long.

Sat, 03/08/2014 - 18:22 | 4525821 rbg81
rbg81's picture

A few good meals and then you die?   Jeeze.....lighten up Francis.  Or, better yet, try getting laid sometime.

Sat, 03/08/2014 - 18:48 | 4525894 Bonapartist
Bonapartist's picture

It's like Obammy says- "You serfs need to STFU and eat your peas  while Moochelle sucks down lobster tails by the crate."

Sat, 03/08/2014 - 18:50 | 4525905 Manipuflation
Manipuflation's picture

Why would National want to get laid?  He might get some chick pregnant after paying for a good dinner which could result in tremendous ongoing financial expenses.  He is just better off eating a nice meal alone if that is what he finds pleasurable in life.

Sun, 03/09/2014 - 14:25 | 4527989 Raging Debate
Raging Debate's picture

Get a vasectomy, best investment on earth.

Sat, 03/08/2014 - 19:48 | 4526121 logicalman
logicalman's picture

There's a lot more to life than stimulating your knob-end.

Sat, 03/08/2014 - 20:26 | 4526280 yrbmegr
yrbmegr's picture

Truth and wisdom.  Good to see this on ZH.

Sat, 03/08/2014 - 22:14 | 4526628 Offthebeach
Offthebeach's picture

Lenin, Stalin showed you can have massive technical progress and not give a squat about the person. I dont see why a modified capital fascist economy couldn't develop along the same lines.

Forward!

Sun, 03/09/2014 - 11:10 | 4527484 chinoslims
chinoslims's picture

Is there a God and true happiness is only achieved through him/her?  I guess I missed that at my Sunday atheist indoctrination school.

Sat, 03/08/2014 - 18:19 | 4525817 Kreditanstalt
Kreditanstalt's picture

But THIS is not "capitalism": it's a planned economy, or socialism, if you like - for both wealthy corporations and the entilement-dependent masses.

Crony socialism.

Sat, 03/08/2014 - 18:35 | 4525855 NoDebt
NoDebt's picture

The author doesn't know that.  Frankly, the author seems more like part of the problem than part of the solution, though I doubt he could conceive of that being true.  Maybe he should go make a few more math errors before stepping up and telling everyone what they should be doing, in his estimation.

Sat, 03/08/2014 - 18:52 | 4525915 Miffed Microbio...
Miffed Microbiologist's picture

Yeah, when I read ramifications of global warming and an implementation of a carbon tax I fight to take the rest of the content seriously.

Miffed;-)

Sun, 03/09/2014 - 11:11 | 4527490 New_Meat
New_Meat's picture

and easily lose that fight ;-)

Sat, 03/08/2014 - 18:08 | 4525771 TeamDepends
TeamDepends's picture

He's going to step on you again.  http://www.youtube.com/watch?v=t1p-VeJPJKM

Yer twistin' my melon, man!

Sat, 03/08/2014 - 18:12 | 4525775 _ConanTheLibert...
_ConanTheLibertarian_'s picture

Each new generation was better off because it stole from the next future generation as a result of Keynesian folly.

Sat, 03/08/2014 - 18:41 | 4525878 NemoDeNovo
NemoDeNovo's picture

Agreed and there ain't much left to steal we are Maxxed out in that regard.

Sat, 03/08/2014 - 18:15 | 4525796 Manipuflation
Manipuflation's picture

"A global carbon tax would mitigate climate risks while alleviating government debt burdens. Addressing inequality requires greater redistribution through national tax systems, together with enhanced programs for adult education, presumably making heavy use of new technologies."

Really?  What kind of bullshit is this?  I sure hope there was a sarc button there that I missed because this is full retard.

Sat, 03/08/2014 - 18:29 | 4525842 New_Meat
New_Meat's picture

Yep, more taxes will help {someone}

Sat, 03/08/2014 - 20:57 | 4526403 HoleInTheDonut
HoleInTheDonut's picture

Right, the young will have a better future, if only they will pay this new and exciting tax that their parents and grandparents never paid.  

Just because they're young doesn't mean they are completely retarded.  Who would buy into "tax me more! my future depends on it!"?  Guess that's what  "enhanced programs for adult education" means.  Enough enhanced programming will get them straight.

Sat, 03/08/2014 - 18:47 | 4525896 layman_please
layman_please's picture

How come you missed the global warming part? It was enough to skip the rest.

Sat, 03/08/2014 - 18:52 | 4525908 Bonapartist
Bonapartist's picture

climate change is now a matter of "national security"- a bloated govt bureaucracy  to address it will be coming soon.

Sat, 03/08/2014 - 19:52 | 4526004 layman_please
layman_please's picture

can it get any more bloated?

everything is a matter of national security. for example, a breakthrough in battery technology can't happen because of the threat to the petro-dollar. and so on...

Sat, 03/08/2014 - 19:06 | 4525948 layman_please
layman_please's picture

Ok, I get the global breathing tax and other ominous shit but what the hell does he mean with enhanced programs for adult education, presumably making heavy use of new technologies? FEMA camps? Deployed with personal (mind-)tracking drones?

Sat, 03/08/2014 - 19:53 | 4526139 logicalman
logicalman's picture

Education is NOT schooling, just like currency is not money.

My kids are 20 & 19.

I've tried to educate them in spite of the school system.

Go to school, you get schooled.

You have to educate yourself.

Sat, 03/08/2014 - 18:17 | 4525806 Kreditanstalt
Kreditanstalt's picture

At root, this is a resource scarcity and lack-of-productivity problem...not even an economic one, except in as economics ultimately represents resource availability.

Sat, 03/08/2014 - 18:23 | 4525826 New_Meat
New_Meat's picture

"When it comes to public goods – such as education, the environment, health care and equal opportunity..."

OK, let's take a look:

  • Education: doesn't have to be a public thing, except when it becomes a union thing.  Have had public school teachers in the extended family, but they would rap my knuckles with a ruler under today's "performance standards", let alone what Ayres and gang are doing.  NYET.
  • The Environment: let's see, the most centrally planned environments are the most fucked up--cf. Beijing, the former USSR, ... . NYET
  • Health Care: I rest my case ;-)
  • Equal Opportunity: I work with engineers, recently we had a demonstration with 7 people (me the only old white guy) and they spanned the world, all competent and all able to overcome their native language starting point to be effective in their job, at the essence to resolve ambiguity.  So, yes, I and my organization celebrate equal opportunity.  On the other hand, as you might know, I reside in the Commonwealth of Massachusetts, governed by Deval Patrick.  He (well he's the governator, right, so he is responsible for his administration's effectiveness) is responsible through his command structure for the deaths of perhaps several hundred individuals (through mismanagement of a drug compounding lab) and for the release of several hundred criminals who were convicted through bad drug lab evidence.  I can say that they as a class are criminals since there are several who have been released who are now back in the can for their next offense, post-bad-analysis. NYET.

That would be zero for four.

Assface,

Best Personal Regards,

- Ned

Sat, 03/08/2014 - 18:40 | 4525877 Chuck Knoblauch
Chuck Knoblauch's picture

Generation Z'ya Later!

Sat, 03/08/2014 - 18:42 | 4525880 Gaurden
Gaurden's picture

the ride up the hill was pretty dark, the ride down will be pitch black.

Sat, 03/08/2014 - 18:57 | 4525893 CrashisOptimistic
CrashisOptimistic's picture

About that technology advance.  When did man last walk on the moon?

 

What's the departure schedule for the supersonic transport we used to have?

 

Have you looked at pictures of airplane passenger cabins of 50 years ago?

 

http://www.britishairways.com/cms/global/assets/images/history_and_herit...

 

Sat, 03/08/2014 - 18:47 | 4525897 ebworthen
ebworthen's picture

All downhill from here.

Sorry kids, you were sold out by the kleptoligarchy of Washington and Wall Street, as were 99% of Americans.

Sat, 03/08/2014 - 19:02 | 4525950 Notarocketscientist
Notarocketscientist's picture

Big oil counts the cost of tapping new discoveries

 

“One hundred dollars per barrel is becoming the new $20, in our business.” With that pithy analysis, John Watson, chief executive of Chevron, summed up the oil industry’s plight.

 

As companies pursue the ever more challenging oil reserves that they need to increase or merely sustain their production, their costs have risen to the point that the most expensive projects, such as deepwater developments or liquefied natural gas plants, need an oil price of at least $100 a barrel to be commercially viable.

 

Now a growing number of oil executives are saying that has to change. As discussions at the IHS Cera Week conference in Houston made clear, cost-cutting is back at the top of the industry’s agenda.

 

The issue has come to a head after three years in which the price of crude has drifted down, in part because of the extra supply coming on to the market from the US shale oil boom, while costs have continued to rise.

 

The result has been a squeeze on margins, declining returns on capital, and underperforming share prices.

 

Chevron and ExxonMobil’s shares have both risen 11 per cent in the past three years, and Total’s by 8 per cent, while Royal Dutch Shell’s have fallen 2 per cent. In the same period the S&P 500 index rose more than 40 per cent.

 

Futures prices show oil is expected to fall further, with five-year Brent at about $91 a barrel, suggesting that the pressure on oil producers’ profits will intensify.

 

Shares in companies such as Schlumberger and Halliburton, which provide services to the big oil groups, have over the past five years comfortably outperformed their customers. Under mounting pressure from their shareholders, oil companies are being forced to act.

 

In part, the roots of the industry’s cost problem lie in part in the increasing technical difficulty of the new projects being developed, such as large LNG plants or offshore oilfields in deep water. They demand complex equipment such as drilling rigs, specialised materials such as sophisticated steel pipes, and highly-skilled engineers, all of which are in limited supply.

 

As Peter Coleman, chief executive of Woodside Petroleum of Australia, put it when explaining the soaring cost inflation in the country’s LNG projects: “Everybody jumped into the pool at the same time, and we’re all trying to fight for the same floatable toys.”

 

Paolo Scaroni, chief executive of Eni of Italy, argues that his rivals’ rising costs also reflect their failure to discover more easily-developed resources. Companies such as Exxon and Shell have been adding production in the oil sands of Canada and US shale, which generally have higher costs per barrel because of the need for techniques such as hydraulic fracturing to extract the resources from the shale, or processing to separate the oil from the sand.

 

Exploration is more risky, but offers higher returns, Mr Scaroni says. Because with oil sands and shale the resources are known, “you are sure of everything, but the point is profitability is lower than if you make a discovery”.

 

Christophe de Margerie, chief executive of Total, adds another explanation: companies – including his own – have lost sight of the need to control costs. When oil prices are rising, managers are tempted to relax on cost control because their projects will still be profitable.

 

“If you have $110 [per barrel], and the budget is at $100, it’s easier. You can say ‘we’ve made it’. But what about the ten dollars? Where are they? Gone with the wind,” he says. “That’s not the way engineers or commercial people should behave.”

 

All the large western oil companies have reached similar conclusions. Andrew Mackenzie, chief executive of BHP Billiton, the mining and energy group, suggests the oil companies have reached the same point the miners were at a couple of years ago: facing up to the need to improve productivity in an environment of weaker commodity prices.

 

Total, Chevron and Shell have announced cuts in capital spending, and were joined on Wednesday by Exxon. Several companies have been “recycling” projects: delaying them to try to work on improving their economics.

 

BP’s Mad Dog phase 2 development in the Gulf of Mexico, Chevron’s Rosebank oilfield in the Atlantic west of Shetland, and Woodside’s Browse LNG project in Western Australia are among the plans being reassessed.

 

Mr Coleman told the Houston conference that as originally planned Browse had an estimated budget of $80bn, which was “not a commercially acceptable risk”.

 

The prospect of an investment slowdown already appears to be having an impact. David Vaucher, an analyst at IHS, says the firm’s survey of oil and gas production costs shows they levelled off last year, in a sign that the industry is moving into a more sustainable balance.

 

Day rates for drilling rigs have started to fall, even for advanced deepwater rigs. The prospect of further falls has helped send shares in Transocean, one of the largest rig operators, down 20 per cent in the past 12 months.

 

However, Mr Vaucher observes that costs tend to be easier to raise than to cut.

 

At Total, Mr de Margerie still sees a lot of work to be done. He is promising a cost-saving plan throughout the company, a new process for designing projects to build in cost control right from the start, and reshaped relationships with service companies.

 

“You need to create a new culture,” he says. “Yes, safety first, yes environment. But also at the same time, yes cost is important. And to achieve a project with lower cost is good.”

 

http://www.ft.com/intl/cms/s/0/b7861cc8-a51b-11e3-8988-00144feab7de.html#slide0

 

WE ARE FUCKED

 

Sat, 03/08/2014 - 19:05 | 4525957 Notarocketscientist
Notarocketscientist's picture

Exxon performance, spending cuts rattle investors' nerves

 

FORTUNE -- If it wasn't clear before, it certainly is now: Big Oil has got some big problems.

In a year in which oil remained near historic highs at around $100 a barrel, ExxonMobil (XOM), the all-around best-in-class energy company, said on Wednesday at its analyst meeting in New York that its return on capital employed (ROCE) for 2013 was 17%. Let me repeat that -- 17%. This is bad, people.

Admittedly, achieving a 17% ROCE is something many companies would kill for -- even other energy companies. But this is ExxonMobil. No other energy company is as skilled or as adept at maneuvering the political and economic quagmire that comes with drilling for fossil fuels than Grandpappy Exxon. In the 2000s, ExxonMobil's ROCE, which is a measure of profitability and efficiency of how capital is employed, was legendary for its strength and power, with 35% considered the internal benchmark. Achieving a level below 30% was considered failure among Exxon's conservative lot, according to a longtime engineer at the firm.

But the financial crisis put an end to ExxonMobil's profit party. Oil and natural gas prices plummeted, and, as one would expect, so did Exxon's ROCE. It still stayed in the mid-20% range, which, while disappointing, wasn't the end of the world. But investors cut the company some slack. They thought that once the tumult was over Exxon would again reign supreme.

And now we have this -- 17%. Even amid high oil prices, the company couldn't even hit 20%? Even more embarrassing, Chevron (CVX), the other big U.S. energy company, is expected to beat Exxon hands down when it comes to ROCE -- it has done so every year since 2010.

This must be very disturbing for Rex Tillerson, ExxonMobil's chief executive. On Wednesday, Tillerson took action, which he believes will boost Exxon's legendary profitability -- spend less. In a surprise move, Tillerson said that 2014 will see a $4 billion, or about 10%, decrease in ExxonMobil's ridiculously large $40 billion capital expenditures budget. Spending less capital means that the ratio will go up, provided that profits stay level. That's probably a good bet considering that it takes years, even decades, for a project to start paying off.

So is Tillerson making the right move? The markets don't think so -- Exxon's stock price sank 3% after the announcement, dragging the entire Dow Jones Industrial Index (INDU) down with it. Tillerson must be very confused. He is doing exactly what he thought shareholders and analysts wanted -- delivering a higher ROCE.

But while ROCE is an important metric, it isn't the only thing investors care about. People who invest in ExxonMobil tend to be conservative value players, more interested in consistent cash flow with long time-horizons than with hitting some financial target. For example, Warren Buffett, the king of value investing, disclosed last November that he had accumulated a nearly 1% stake in ExxonMobil during the second quarter of 2013, equating to some $3.45 billion.

At the same time he bought Exxon, Buffett slashed his relatively large stake in dimming energy giant ConocoPhillips (COP), which, at the time, was going through a major reorganization. Some investors found his choice strange as ConocoPhillips' stock was up 27% for the year at that point, while Exxon's stock was up only 8%. But it plays to the theme of value investing. Exxon's earnings are stable, with defined long-term earnings potential, while COP's future had been up in the air. Uncertainty isn't ideal for value investors, even if it means giving up some of the upside.

Exxon has made a point to be as consistent as possible with its returns, despite, of course, the volatility in oil prices. When it says it is going to invest $40 billion, investors trust that the company will deliver world-class returns on that money over the next few years.

That's why when Tillerson said on Wednesday that he was cutting the CapEx budget, investors ran for the exits. They had projected that Exxon would continue to plough money into new projects and that those projects would yield strong and consistent 20% to 30% returns over time. Sure, it is nice to have that extra $4 billion returned to shareholders, but that's just this year. Value investors are in it for the long haul and cutting CapEx means that they should expect decreased revenue down the road.

To be sure, no one is saying that Exxon should invest in unprofitable ventures just to keep busy -- too many companies already do that. It was just disappointing for investors to hear that the company doesn't believe it can deliver a strong enough return to justify its carefully planned CapEx budget.

Then there is the big fear -- did Exxon think a 17% ROCE was a strong enough return to justify last year's massive capital expenditure outlay? If so, what exactly does Exxon think its future projects will yield if it can so easily slash so much off of it -- 15%? Maybe 10%? You can see how this might have caused a bit of a panic.

 

http://finance.fortune.cnn.com/2014/03/06/exxon-performance-spending-cut...

 

WE ARE FUCKED

 

Sat, 03/08/2014 - 19:06 | 4525959 Notarocketscientist
Notarocketscientist's picture

WE ARE FUCKED

The Saudis have also made public plans to start injecting carbon dioxide into the world’s largest oil field, Ghawar, no later than 2013. CO2 injection is what you do when an oil field starts yielding progressively less oil. It gooses the output…for a little while 

http://www.forbes.com/sites/greatspeculations/2011/03/04/the-truth-behind-saudi-arabias-spare-capacity/ 

Sat, 03/08/2014 - 19:06 | 4525964 Notarocketscientist
Notarocketscientist's picture

WE ARE FUCKED

 

THE DECLINE OF THE WORLD’S MAJOR OIL FIELDS
Aging giant fields produce more than half of global oil supply and are already declining as group, Cobb writes. Research suggests that their annual production decline rates are likely to accelerate.
http://www.csmonitor.com/Environment/Energy-Voices/2013/0412/The-decline-of-the-world-s-major-oil-fields

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