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Sunday, June 13, 2004

1. SECTOR-RELATED NEWS

ENERGY

EXXON MOBIL GIVES ENERGY SECTOR A DOSE OF REALITY


With oil prices hovering in the high $30s, discussion about alternative fuels and ways that the U.S. can lessen dependence on foreign oil has grown louder, particularly on Capitol Hill. The solutions offered, ranging from ambitious to fanciful, have raised hopes that the country can gain some control over its energy needs. But the CEO of EXXON MOBIL (XOM, $44, up 1) recently threw a cold dose of reality on this wishful thinking. In a speech in Washington, Lee Raymond outlined that U.S. dependence on foreign oil, and specifically oil from the Middle East, will remain high for decades to come. This is due to the amount of reserves located in that region, and the fact that oil alternatives remain expensive and unrealistic options.

TODD'S TAKE: Despite the possibility that oil prices could drop dramatically from current levels (remember, anything is possible), the issues outlined by Raymond are precisely why we are bullish on the Energy sector for the long term. Yes, even if the market were to fully price in record annual earnings, we would still be bullish on Energy stocks because the hard truth is that the U.S. and the world are addicted to oil, and no alternative can satisfy that need.

Certainly, there are things you can do to reduce your own spending on oil and gas, like buy a hybrid car or ride your bike to work. But to make this modern world spin, we need oil; we need it to produce electricity, heat, and goods. We need it to transport people and products. In fact, you'll be hard pressed to find a part of your life that isn't somehow affected by oil, and things like solar power and wind power aren't going to change that.

Why is this so? As Raymond pointed out, wind and solar power cost far more than oil and natural gas. As for government hopes to increase the use of ethanol -- which is made from corn -- to replace 10% of all gasoline in the U.S. by 2020, Raymond showed that it makes no economic sense. Making ethanol takes more energy than it produces. Furthermore, to make that amount would require more than 20% of all the land in the U.S. currently used for food crops. These alternatives are just not feasible.

When you realize that it is oil and only oil that we need, then you can evaluate what's going to move the price in the coming years. As we've pointed out many times throughout the year, the major factors include rising global demand, especially as China advances into the modern age and adopts all the Western-style, energy consuming accoutrements that go with it. On the other side, we have a diminishing supply of oil, especially oil that is cheap to extract. Finally, there are issues of oil ownership and security, which are problems now (as they have been for decades) by nature of the fact that 50% of all proven oil and gas reserves are in the Middle East.

Because demand is only going to increase over the coming decades, the only way to limit price and supply risks must focus on diminishing reliance on Mideast oil. The Exxon Mobil CEO pointed to a few ways this can be achieved: Develop energy sources in the U.S., including those in areas currently closed to drilling and exploration; use energy more efficiently; and import more oil from places like Russia, Africa, and the areas around the Caspian Sea.

THE BOTTOM LINE: Promoting alternatives to oil, and using energy more efficiently, are great ideas -- but you can't let them cloud your view of the facts. Economic growth and prosperity depend on oil. Energy companies exist to bring oil and gas to market, to feed our needs. As our needs grow, and the process of bringing oil to markets gets harder, Energy companies are going to realize bigger profits. Investments in the best-run companies in the sector, which include those in our model Energy Portfolio, will serve you well. Check them out here: http://www.BullMarket.com/members/energy.php3

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