Monday, April 30, 2007

It's Still About Oil

By Michael Johns

For all its greatness, long-range thinking is not one of the many attributes one would assign to our nation. Our public companies often run on quarter to quarter corporate plans; our government's focus, frankly, is on the next election. In the United States House of Representatives, that's every two years. That means the campaign never stops, which also means the long-range thinking never starts.

Examples are plentiful: America's health care policy? Not a policy you'd describe as a long-term one, given its minimal focus on disease prevention, no immediate remedy to the mounting burden placed on state governments by long-term care admissions and no apparent solution for the coming demographic tidal wave in federal and state health costs. America's entitlement programs? The only thing certain about them is that they cannot go on as they are currently. Each Congressional Budget Office study confirms the obvious absurdity of our current course, which cannot be sustained without revolutionary changes. But it's not a comfortable political topic, so the absurdity endures.

National security and foreign policy? There are some brilliant long-range thinkers in the Pentagon, the Central Intelligence Agency, and America's think tanks. But these people rarely are making policy. Here too America's policy is defined by a reactive, not proactive, approach to the many global threats to our national interests. Difficult as it may be to imagine today, the Iraq War will one day end. What next of America's role in this world? Perhaps understandably, Iraq seems to preclude such thinking right now, largely precluding the long-range strategic thinking that is required by our government and its policy makers.

And then there's America's energy policy, and it's generous to use the word "policy" in describing it. The transition of our nation from a manufacturing to a service economy may be nearly complete, but it's certainly not reflecting in our continued demand for oil, which is greater than ever.

By necessity (and to its credit), the administration of George W. Bush is now looking at some long-term alternatives to oil dependence, which President Bush rightly labeled an "addiction" in his State of the Union address this past January 31. Since then, it's a credit to this administration that the phrase "alternative energy", used historically to describe ethanol and other non-oil energy resources, is losing its relevance as these energy sources become less of an "alternative" and more a part of our deliberations over America's long-term energy needs. From all of this, a long-term energy policy may yet arise.

Yet, despite the obvious long-term need to adopt these "alternative" approaches to our nation's energy needs, it's troubling that Washington feels the necessity to trump market forces by making their production a federal mandate. If ethanol is all that its advocates represent, such a mandate would prove unnecessary because market resources would naturally flow to its development. This is especially true today, in an economy with abundant liquidity and unprecedented levels of available private capital.

What's troubling amidst all the hype around ethanol, however, is that these market forces have historically viewed ethanol with some degree of trepidation. That may someday change completely; in fact, it appears to be changing at least partly now. But it would be more appropriate to let those market forces flow to our next energy resources, as opposed to mandating one of them--ethanol, as Congress is doing. Federal corn lobbyists: 1, America's energy interests: 0.

The uncomfortable and too seldom discussed reality is that it is oil and natural gas that still drive this economy--and no alternative has yet emerged to supplant it. That's a fact today, and it will likely be a fact for at least several years to come. And oil is not, for two primary reasons, coming cheap.

First, the cost of oil is influenced by some degree of geopolitical risk still factored into its pricing. On Friday, for example, Saudi Arabia arrested 172 suspected al-Qaeda and other militants. At first word of this development, oil futures soared, as the market confronted the uncertainty of the incident. By this morning, as it appeared that Saudi forces had in fact foiled a fairly large Saudi-based terrorist cell, which should prove helpful to regional stability, future prices dropped, ultimately falling lower than they were before their original escalation on Friday on the theory that Saudi Arabia may finally be getting serious about eradicating the al-Qaeda threat. Such price volatility proves only that this is a jittery market looking over it's shoulder, well aware that dangerous geopolitical threats linger.

Second, the escalated price of oil is equally attributable to classic supply and demand forces, with supply negatively impacted by the fact the U.S., even in the midst of enhanced geopolitical uncertainties, has failed to drill sufficiently for oil on its own soil. An estimated 10 billion barrels remain undrilled on a small part of the Arctic National Wildlife Refuge (ANWR). And off of our own coastal waters, European and other nations drill for oil where our own Congress has prohibited such drilling by American oil companies.

Widely unknown to most Americans, Congress also has mandated the production of roughly 30 different types of gasoline to be used in different parts of the nation, which only further increases the cost of its production. Eric Bolling, a strategic advisor to the New York Mercantile Exchange but better known as "The Admiral" on CNBC's excellent daily 8pm ET show Fast Money, predicts that gasoline is headed to $4 a gallon by July. That's the quantifiable cost of a war on terrorism that is not yet won and a Congress that seems clueless as to the extent of this nation's lingering energy crisis. Forget a long-term plan, this Congress doesn't have a short-term one.

Our long-term energy policy, when it does emerge, will not likely be rooted in oil, as President Bush has astutely acknowledged. But the short-term bridge to this long-term policy is very much rooted in oil, and it's a short-term bridge that requires the use of our own oil resources that can be easily extracted now. Such a step would ease the supply cycle that is burdening this nation with unnecessarily escalated oil and gasoline prices and enhancing our dependency on unreliable Persian Gulf, Nigerian and other oil resources.

Ditto the case with nuclear power, which, since Three Mile Island, modern technology has made an impressively efficient and environmentally-friendly mechanism for the delivery of energy. Even in the environmentally conscious European Union nations, this is a fact long ago recognized. But it's been 30 years since bureaucrats at the Nuclear Regulatory Commission have authorized the construction of a nuclear power facility in this nation. The first one since then is now under development in New Mexico, but it's been a long time coming.

A final point: It surely is not a pleasant thought for most Americans, especially given the prolonged nature and excessive loss of life in the Iraq conflict, but the likelihood of a potential conflict with Iran is not insignificant. High school geography taught us that the Strait of Hormuz, which divides Iran and the United Arab Emirates, is roughly 21 miles wide and twenty percent of the world's oil flows through it. In the not so improbable case that Iran ultimately attempts to close this straight (as it has periodically threatened to do), either in provocation, in retaliation, or as part of a larger geopolitical conflict, it will be important that our currently untapped U.S.-based oil reserves are available.

With light sweet crude futures for June currently priced at roughly $65 a barrel, an ambitious short and long-term energy policy that enhances supply becomes important if, for no other reason, than the fact that, at $100 a barrel, the impact on this economy and the American people would be hugely painful. And in such a scenario, which could yet emerge this year or next, ethanol will not be this nation's salvation.

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Saturday, April 28, 2007

Giving Kevin Kolb the Benefit of the Doubt

By Michael Johns

I wouldn't exactly call Jeffrey Lurie, the owner of my beloved Philadelphia Eagles, a good friend, or even a friend at all really. But we share enough in common: the same birthday (September 8th) and a passionate love for the Eagles, which in my case goes back to the age of six or seven, with fond memories of Ron Jaworski and Bill Bergey. Mr. Lurie's history is actually not as deeply rooted in the green and white: he comes from Boston, then headed to Hollywood to run some movie production company, neither of which you would find too commonly among the old 700-level Veterans Stadium fans who have deep emotional investments in this team. But suffice it to say that he's now the CEO of the company I have long admired the most--and, on that basis alone, Mr. Lurie has earned a place in my world.

But there's at least a little more to my history with Mr. Lurie and maybe, today being NFL Draft day, some relevant lesson that can be drawn from it as it relates to today's shocking first round selection by the Eagles. In that selection, the Eagles opted to trade down with the Dallas Cowboys in the first round and then use their first overall selection to draft University of Houston quarterback Kevin Kolb. Kevin Kolb? Yes, Kevin Kolb.

Back in the late 1990s, as a senior associate in one of Philadelphia's politically-wired center city consulting firms, I also counted the Eagles among one of the Philadelphia-based clients that I represented. While the vast majority of my time was spent in our health care practice focused on assisting hospitals, nursing homes and the like, from time to time some of my colleagues at the firm--looking for some lobbying or strategic input but more likely just knowing of my passionate, lifelong love for the Birds--would look for my assistance in one way or another on the Eagles account. The essence of the mission was simple enough: to obtain state funding from Harrisburg for a new football-only stadium to replace Veterans Stadium, the historic South Philly stadium and former home to the Eagles and Phillies. It's a stadium of such fond multi-decade memories (to put it in historical perspective, I once saw Lou Brock steal a base there) that I sort of regret never purchasing one of its stadium seats, which I think they ended up marketing and selling for about $200 a piece before the stadium was ultimately subjected to a somewhat saddening 15-second, "shock and awe" city-orchestrated implosion. And then it was gone. Given that, I always thought a few Veterans Stadium seats would work well in my living room and would reveal all one needs to know about my interior design preferences.

The decimation was understandable. By the late 1990s the Vet's "field" was pretty much green concrete, not keeping up with some of the more plush NFL stadiums arising around the nation and, while many of us hated to see it go, the case for its replacement became glaringly apparent once quality prospective Eagles and Phillies players expressed reluctance about playing in Philly because of the field's quality. Lincoln Financial Field (along with three other large Pennsylvania stadiums) ultimately won the support sought from the state, and the Eagles now have a new and vastly improved home field.

As the campaign to replace the Vet gained momentum in the 1990s, I'd find myself from time to time in our firm's mahogany board room with none other than Mr. Lurie, and it didn't take more than a few meetings before I joined the many Philadelphians who felt compelled to share their "wisdom" on the team's direction. It was March 1999, maybe three weeks or so before the NFL Draft in which the Eagles had the second overall selection (and it was already widely established that Tim Couch would go first). The fall before, I spent quite a few Saturdays watching the poetic running of University of Texas running back Ricky Williams, who Sports Illustrated reasonably labeled the "Texas Tornado" in one cover story. One look at Williams told me everything I needed to know: he was a huge talent, with great stop and go running capabilities and the sort of speed explosion and misdirection running that made him extraordinary. His senior year, as I recall, he rushed for over 200 yards on something like 12 separate occasions. Who was the last to do that? Not surprisingly, Williams was the obvious choice for the 1998 Heisman. Like a lot of Eagles fans, I felt that Ricky Williams would one day belong to the elite group of NFL running backs: Emmitt Smith, Walter Payton, Barry Sanders...Ricky Williams. Obvious enough, right?

I felt compelled, as a passionate Eagles fan with this special access, to share my wisdom with my new friend, Mr. Lurie. Our meeting broke, the small talk commenced, and I soon found myself walking down the firm's hall with the owner of the Philadelphia Eagles. I shared my pearl of wisdom: "Mr. Lurie, I watched a lot of Ricky Williams down at Texas. I sure hope the Eagles can pick this guy up." "You think so?" he replied, with the smirk of a man who had heard utterly too many suggestions from all-knowing Eagles fans and may well already have discounted Williams for reasons unknown to the pedestrian Eagles fan.

NFL Draft day came and many Eagles fans, urged on by Philly sports radio station WIP, famously made the journey to New York City's Madison Square Garden to root for a Ricky Williams selection. The opportunity to seize the next Walter Payton had arrived. "With the second selection in the 1999 NFL Draft," NFL Commissioner Paul Tagliabue said that day, "the Philadelphia Eagles select...Donovan McNabb from Syracuse." Eagles brethren filled the Garden with boos as McNabb grabbed his Eagles jersey and posed with Tagliabue. The boos continued. Then New Orleans Saints coach Mike Ditka saw his unique opportunity, quickly traded up, and Ricky Williams was off to New Orleans and Eagles fans, I suppose, spent a bus ride back to Philly denouncing the selection of this new quarterback from Syracuse.

Fast forward a few years. McNabb has led the Eagles to the playoffs just about every year and to one Super Bowl. Call him the best quarterback in football and some people might pause and mention Peyton Manning, the Super Bowl-proven Tom Brady, or the emerging and explosive Michael Vick, but the thesis of McNabb as "best" would not be too broadly challenged. McNabb is plain good and maybe great. He has played with broken bones. I became a believer when, this past fall, he refused to leave a game in 110-degree Tampa Bay heat, ultimately vomiting on the grass of Raymond James Stadium, then calmly resuming an Eagles drive to a fourth quarter score.

As for Ricky Williams, as I recall, the Saints somewhat outrageously ended up negotiating his contract with Williams' new agent, Master P of hip hop fame, and Williams then went on to test positive for marijuana multiple times, ultimately announcing an early retirement presumably because he was about to face his third positive test for the drug, which he said he used instead of taking anti-depressants to treat his social anxiety disorder (he would conduct media interviews with his helmet on). Time passed, and the 1999 draft faded from memory. Williams disappeared from the game and the memories of most Eagles fans. McNabb soared to legendary status.

Which brings me to Kevin Kolb, the University of Houston quarterback taken this afternoon with the Eagles' first 2007 NFL Draft selection (after the Eagles were apparently convinced they would not obtain the quality safety they originally sought). I did not follow college football quite as closely in the fall of 2006 as I did the 1998 season that I grew to admire the "Texas Tornado." But let me say that I watched enough to know that Kevin Kolb was not a name that rolled off the tongues of many as a likely top 2007 draft selection. Even among quarterbacks, he was considered a more likely third round selection, and he did not appear on any Eagles short list that I remember seeing.

But at least with the Eagles, I've come to learn and remember the lesson of Ricky Williams. Eagles coach Andy Reid and his quality group of coaches and scouts, likely now realizing that a day will come when McNabb (who will turn 31 this season) no longer takes Eagles' snaps, have thought ahead. As I do most years, I'll make the trip to Bethlehem, Pennsylvania this July for Eagles training camp and look forward to seeing Kolb in a red Eagles quarterback jersey. With the Ricky Williams selection now nearly a decade old, are we too proud in our football wisdom to give Kevin Kolb the benefit of the doubt?

Mr. Lurie, of course, had it right in his selection of Donovan McNabb, who (if his injury recuperation continues on pace) may yet lead the Eagles to a Super Bowl victory and may some day enter Canton as a Pro Football Hall of Fame selection. Conversely, after disappearing for a while following his positive drug findings, Ricky Williams resurfaced recently, playing a season with the Toronto Agronauts in the Canadian Football League and is now purportedly attempting an NFL comeback. I, for one, would love to see him in an NFL uniform this season because his raw talent has yet to be fully witnessed in the NFL, and there is no reason to think it still does not exist. But the Ricky Williams lesson is obvious: The selection of Ricky Williams by the Eagles in 1999 would have ranked among the worst draft selections in Eagles history, with the Eagles passing on a quarterback who has become "the franchise."

One cannot really view the Kevin Kolb selection in April 2007 without that perspective. The McNabb era will one day end. His off-season training and recuperation efforts are legendary, but his cumulative injuries are now sufficiently concerning to ask what the future holds for the Eagles at quarterback.

One hopes that question was answered today in Kevin Kolb, of whom I know next to nothing except that he appears to have had reasonably impressive statistics at the University of Houston, whose games were not once broadcast in Philadelphia as far as I recall. The word "durable" was used today to describe him. Good enough for me. Here's to Kevin Kolb--and hoping his NFL career becomes all that Andy Reid and Jeffrey Lurie obviously saw when Tagliabue let out those now infamous words at the Garden: "Donovan McNabb from Syracuse." This time, I am letting the lesson of Ricky Williams prevail and, unlike some Eagles fans, presuming some not so obvious wisdom in the selection.

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Friday, April 27, 2007

Dow 13,000

By Michael Johns

Predictions of the demise of the American economy are, regrettably, routine these days, but don't be fooled. They also are vastly overrated. For the past six months at least, we have been subjected to routine predictions of sluggish growth, diminished productivity among small and mid-size capitalized companies, and euphoric fascination with the growth prospects in the so-called BRIC countries (Brazil, Russia, India and China).

Not to take anything away from the fascinating promise of these four nations, but this week's development: the Dow Jones Industrial Average blowing right through 13,000 sends the message that American leadership is alive and well in the global economy. Analysts underestimated first quarter earnings for a vast number of leading American companies, perhaps convinced that the sub-prime mortgage squeeze and other pressures would curtail our economic growth. They too shorted the promise of this American economy.

What is behind Dow 13,000? Many things. The vibrant optimism of the American consumer, the prospects for a stabilization of the conflict in Iraq (there actually is progress), and a validation of some of the domestic and economic policies of this administration. President George W. Bush is suffering from predictably diminished approval ratings that have confronted nearly every U.S. President fortunate enough to earn a second term, but this economy under his watch deserves greater praise: nearly full employment, continued global leadership in many important industries, and now a record in the most closely watched stock index in the world. It's not a small accomplishment and is certainly a tribute to the continued promise of the American dream and at least partly to the generally free market, pro-growth policies of this grossly under-appreciated Bush administration, which certainly is not the only factor behind Dow 13,000 but, especially in its support for sensible tax relief on dividends (paid by most Dow stocks)--has played a hugely supportive role, attracting capital to Dow equities.

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