|
|
Enron Mail |
To: Ken Lay, Jeffrey Skilling and the Enron Advisory Council
From : Gavyn Davies, Goldman Sachs Re - The Global Oil Price Shock Since our meeting in Houston, the spike in world oil prices has gripped the attention of financial markets. I attach a paper which analyses the genesis of the present oil price increase, the likelihood of it proving permanent, and the probable impact on the world economy. The bottom line is the following: 1. The recent increase in the oil price has been due fundamentally to an increase in global demand, and not to the activities of OPEC, operating as an oil cartel. In fact, OPEC does not seem to have enough immediate supply headroom to make much difference to the situation for many months. The danger of shortages will therefore be very acute this winter, even with normal weather conditions. This could lead to temporary spikes in the price to well over $40/barrel. We see a similar situation, or worse, developing in natural gas. 2. However, we do not see this situation as permanent. In terms of deep fundamentals, the equilibrium price for oil in the long term is still only about $18/barrel. Within about 12 months, a large increase in the supply of oil should push prices back down again, possibly quite sharply. Our present forecast for the average oil price in 2001 is $27/barrel, somewhat below today's spot price levels. But we do not expect to see this oil price downturn before next summer. 3. If oil prices do indeed average $27/bl in 2001, this will prove to be an oil shock for the developed economies which is the same in magnitude as the Gulf War shock a decade ago. It will reduce net disposable income for the OECD economies by about 0.7%, and add about 0.9% to headline inflation numbers. All of these effects will already be in the data by about 2000 Q4, so on our main forecast there should be little or no further adverse effects through 2001. 4. On this oil price scenario, GDP growth in the developed economies will slow from about 3.9% in 2000 to about 3.4% in 2001 - not a bad out-turn. 5. What if the oil price sustains $40/bl next year? This would give us another round of effects about the same as those mentioned in para (3) above. Even then, however, these effects should not be enough to push the world into recession. Growth should still be adequate at about 2.5-3.0%. 6. The main risks to this conclusion are that a spike in oil prices, and possible oil shortages, this winter cause a drop in equity prices, and a large dip in business and consumer confidence. This could then lead to a more pronounced downturn in GDP next year, especially if it triggers the kind of correction in the US that Larry and I have been worrying about for a long time. But this should prove just about avoidable, assuming sensible policy responses.. 7. This may therefore all work out a bit like the winter of 1998/99. Going into the winter, events occur which make people worry about recession. Business and consumer confidence, and equity markets, take a dip. But then things improve, and it all turns out to be a buying opportunity. 8. I hope so, anyway! Best wishes, Gavyn ,2000 Goldman, Sachs & Co. All rights reserved. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based upon this material. This material is for the general information of clients of Goldman Sachs. It does not take into account the particular investment objectives, financial situation or needs of individual clients. Before acting on any advice or recommendation in this material, a client should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. Certain transactions, including those involving futures, options, and high yield securities, give rise to substantial risk and are not suitable for all investors. The material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. We and our affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material may, from time to time, have long or short positions in, and buy or sell, the securities, or derivatives (including options) thereof, of companies mentioned herein. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without Goldman, Sachs & Co.'s prior written consent. This material has been issued by Goldman, Sachs & Co. and/or one of its affiliates and has been approved by Goldman Sachs International, which is regulated by The Securities and Futures Authority, in connection with its distribution in the United Kingdom and by Goldman Sachs Canada in connection with its distribution in Canada. This material is distributed in Hong Kong by Goldman Sachs (Asia) L.L.C., in Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch, in Japan by Goldman Sachs (Japan) Ltd., in Australia by Goldman Sachs Australia Pty Limited (ACN 092 589 770), and in Singapore through Goldman Sachs (Singapore) Pte. This material is not for distribution in the United Kingdom to private customers, as that term is defined under the rules of The Securities and Futures Authority; and any investments, including any convertible bonds or derivatives, mentioned in this material will not be made available by us to any such private customer. Goldman Sachs International and its non-U.S. affiliates may, to the extent permitted under applicable law, have acted upon or used this research, to the extent it relates to non-U.S. issuers, prior to or immediately following its publication. Foreign-currency-denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived from, the investment. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies, effectively assume currency risk. Further information on any of the securities mentioned in this material may be obtained upon request, and for this purpose persons in Italy should contact Goldman Sachs S.I.M. S.p.A. in Milan, or at its London branch office at 133 Fleet Street, persons in Hong Kong should contact Goldman Sachs (Asia) L.L.C. at 2 Queen's Road Central, and persons in Australia should contact Goldman Sachs Australia Pty Limited. Unless governing law permits otherwise, you must contact a Goldman Sachs entity in your home jurisdiction if you want to use our services in effecting a transaction in the securities mentioned in this material.
|