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Karen Gibbs and Geoff Colvin Geoff Colvin Karen Gibbs Karen Gibbs Geoff Colvin
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Air date: May 6, 2005
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Energy

GEOFF COLVIN: Have you thought about riding your bike to the mall? Gasoline costs $2.24 a gallon this week on average, and forecasters say it's headed higher. We import most of the oil we use in America, but Asia now uses more than we do, and China and India are cozying up to Iran and Sudan to secure their own supplies. In fact, some geologists say global oil production is now in long-term decline. As the world of energy turns upside down, how will our lives change? How worried should we be?

Fairly worried says Daniel Lashof, director of the Global Warming Project at the Natural Resources Defense Council. Not too worried at all, says Peter Huber, a senior fellow at the Manhattan Institute and co-author of The Bottomless Well: The Twilight of Fuel, the Virtue of Waste, and Why We Will Never Run Out of Energy.

Dan, you believe America's dependence on oil is so severe that it's actually a threat to our national security? How so?

DANIEL LASHOF: It is. Well, one virtue of $50 a barrel oil is, it makes the math easy. We import 2.5 million barrels a day of oil from the Middle East alone. At $50 a barrel, that's $125 million a day going into the Middle East. Some of that money ends up in the hands of people who don'twant to do us good and are really trying to do us harm. So we're in effect financing both sides of the war on terrorism right now. And the future just looks more and more dependent on the Middle East because they hold two-thirds of the world’s oil reserves.

COLVIN: And so you believe that we, the United States, need to become massively more efficient, right?

LASHOF: Absolutely. That's the cheapest, fastest, and cleanest way for us to reduce our oil dependence. We also need to be investing in alternatives to oil, other fuels such as fuels that we can grow at home, biofuels, to make ethanol or other energy sources.

COLVIN: Now, Peter, one of the many counterintuitive points in your book is efficiency solves nothing. Now, that will make no sense at all to most people. What's the argument?

PETER HUBER: Well, historically the efficiency of every technology you look at, the engines inside your car, your refrigerator, you name it, efficiencies rise and rise. They have throughout the industrial revolution. Technologies get better. Those higher efficiencies let us do all sorts of things we didn'tuse to do. We drive an extra 2 percent in miles every year, we buy bigger cars, we get bigger refrigerators, we fly more every year. It's human nature it seems. Efficiency unfortunately over the long term makes us do more.

COLVIN: So because of the way the economics work, as our use of oil becomes more efficient, we will use even more oil, not less.

HUBER: Look, even if we don't, these technologies are global technologies. China today, we burn 7 billion barrels of oil a year, China is only two. These very efficient technologies will get deployed in countries that today are very modest users of oil.

COLVIN: Okay, but here’s another counterintuitive point from your book. You say more energy consumption isn't worse, it's better.

HUBER: Well, yeah, energy is an enormous enabler. I mean people resent paying for it at the pump. We resent paying for everything. But it is absolutely crucial to, you know, you can't name a segment of our economy from the transportation sector, the internet that isn't powered by energy of one form or another. By the way, oil is not our dominant fuel now. Electricity is, and very little of our electricity is generated with oil. But in one form or another, energy is absolutely essential to everything we do.

COLVIN: Okay, Dan, Peter has made a couple of points here. One, efficiency won't solve anything. This seems exactly counter to what you're saying.

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LASHOF: Well, it's just wrong. I mean efficiency, there is what economists would call a small take-back effect. That is, (if) you become more efficient -- say you double your efficiency -- I'm not going to drive twice as many miles. I might drive 10 percent more miles, so we're not going to get the full benefit of the efficiency, but we can make very substantial reductions in our oil consumption by becoming more efficient. Yes, while we've become more efficient over the last 30 years, total oil consumption went up. But if we hadn't been more efficient over that period, our oil use would be several million barrels a day higher than it is now.

COLVIN: Okay, let's hold up right there. Do you agree with that?

HUBER: No, that's the Diet Coke fallacy -- you know, saying, "If I drink enough diet sodas, I'll get thinner." I mean, it just doesn't work that way. Unfortunately there's always a double fudge brownie somewhere else.

But cars are a prime example. What has really grown over the last 10 years, partly, are miles, but people are flying way more, and people just leave these things out of their calculation.

COLVIN: Okay, the other point is it doesn't really matter because oil is a shrinking part of our total economy anyway.

LASHOF: Well, our transportation system is 97 percent dependent on oil, so that is a huge problem and it's something that we need to do something about, both by becoming more efficient and diversifying the sources of energy we use for transportation.

COLVIN: Peter, you have been talking about energy in the large sense, meaning all kinds of energy, but for a moment let's focus on oil. Do you believe, as some people have said, that actual annual oil production has begun to decline, is in long-term decline?

HUBER: Well, if it has, it started today, because actual oil production annually, I mean these are historical facts, have been rising and rising. People keep saying we’ve reached the peak. It didn'tpeak in the last 12 months. It is higher today than it was 12 months ago, and it was higher 12 months ago than it was two years before. I think it is very unlikely that we are anywhere close to the peak of liquid hydrocarbon production. There are many different ways of producing it from tar sands and from corn if you really want to. I don'tthink that's ideal, but no, we’re nowhere close to...

COLVIN: And is production up because the price is up? In other words, if the price went back to $35 a barrel, would production start to decline?

HUBER: Certainly high prices help, but that is not the factor, because these are inelastic markets. Over one year, you only get small changes. Production is up decade after decade because our technology keeps improving faster than the horizon of the fuels recedes. We are incredibly clever at digging deeper and further to get oil out of the ground.

COLVIN: Dan, do you have a view on this? Has oil production peaked or is it about to?

LASHOF: I really don't know on a global basis. For the U.S. it has. Our oil production is going down and has been for quite some time. But I think the real concern is not whether total global production is peaking, but it's the reality that most of the supplies are in the Middle East, and certainly the cheap to produce supplies are in the Middle East. So we become, as long as we're dependent on oil, we inevitably become more and more dependent on that very unstable region of the world, and that creates lots of problems.

COLVIN: Peter?

HUBER: Well, Dan is right. Saudi Arabia can pump oil for well under $5 a barrel. We currently import 15 percent of our oil from the Persian Gulf. Our primary producers, in order, are the United States, Canada, and Mexico, in that order, 60 percent of our oil is from North America. Europe is very dependent on the Persian Gulf. You know, we are not that dependent on Persian Gulf oil. It's 15 percent of our oil.

COLVIN: So does this undercut the national security argument? Or does the fact that our oil comes from outside the United States at all form the basis of your point?

LASHOF: Yeah, it really doesn't matter that much where our particular supplies come from, because, of course, there’s a global market. So when there's a disruption in the Middle East that shoots the price of oil to $50 a barrel, or $100 barrel people are talking about if you took out a sulfur clearing tower in Saudi Arabia, that's going to affect the price of every barrel of oil we buy regardless of its origin.

COLVIN: Well, oil is right now about $50 a barrel? Which way do you think it's headed, Dan?

LASHOF: Well, you know, I don't know. When I started in this business in the '70s, we were projecting oil at $100 a barrel by the year 2000. It's gone up and down in between. I think it's going to be high for a while because of growing demand in Asia and continued growth in the United States because we’ve been so slow to improve our efficiency. But we could also see a crash. The economists this week says it could go to 10, it could go to 100.

COLVIN: Now you have written something, Peter, that I saw recently saying you don't think it's headed up.

HUBER: The oil prices will come down again in the next 10 years. We're going to see $30 oil, possibly in the $20s. Look, we're not at the record highs today. The highest price for oil in current dollars was around 1981, over $80...

COLVIN: Adjusted for inflation.

HUBER: Adjusted for inflation, that's right. There is no reason to suppose, there are many places that can pump oil today at under $50. The problem is Saudi oil is so cheap, Iraqi oil is so cheap that this deters capital investment. If the prices stay up, the capital investment will be made and prices will come down.

COLVIN: So, let's take a step back and look at the big picture. Thinking of energy overall, oil plus all the other sources of energy, what is the outlook for America’s standard of living in the next five years?

LASHOF: Oh, I think our standard of living continues to grow because we innovate, we figure out how to become more efficient in using energy, we develop new energy sources. I think if we stick our heads in the sand and make the bet that GM made that oil is going to be $20 a barrel forever, you end up losing $2 billion in a quarter, which they just did. But we don'tneed to do that. We can have a smarter energy policy that reinvests in American technology.

COLVIN: Dan mentioned what our energy policy should be. What do you think America's energy policy should be?

HUBER: We should promote domestic supply and some North American supply, promote supply from politically stable countries, and we should promote the non-oil fuels wherever we can, the fuels that power, particularly the ones that power our electric grid, which are coal and uranium and natural gas.

COLVIN: Well, and you mentioned fleetingly uranium, but in the most recent report from the Natural Resources Defense Council, there's not even a mention of nuclear power. Why is that?

LASHOF: Because primarily we just don't think it's economic. Nobody actually risking their own money in a competitive market has ever built a nuclear power plant. I really don't see that changing anytime soon, if ever. It still has problems with waste disposal and proliferation risk. So I just don't see it as part of the picture, and it certainly has nothing to do with the oil market, because as Peter mentioned, we don'tproduce electricity from oil.

HUBER: Wrong on both counts. To begin with, our heating sector, 15 percent of our oil is still in the industrial heating sector, about a billion barrels of oil a year in industrial heating, all displaceable by electricity. The main reductions in oil consumption between 1980 and today came from displacing oil with coal and uranium in our electric sector.

Much of the growth in oil demand today in China and India is to generate electricity. They’re burning oil because they don'thave a grid. So across the board, without touching the transportation sector, you can have a major impact on oil consumption. Uranium, you know, NRDC has been saying for 20 years uranium can't do it, we are therefore burning today 400 billion tons of coal more a year than we were in 1980, because coal has always been the path of least political resistance. It's a very bad policy, very bad for the environment and in every other respect as well.

COLVIN: Dan, James Lovelock, a very prominent environmentalist, has written nuclear power is the only green solution. Is he wrong?

LASHOF: I think he's wrong, absolutely. We can meet our energy needs, reduce emissions of carbon dioxide that causes global warming, reduce our dependence on coal without relying on nuclear power. I don't rule out using nuclear power if it can solve these problems. But it wasn't NRDC that sunk the nuclear industry. It was Three Mile Island and Wall Street pulling their money out.

COLVIN: What are the cars we drive five, six, seven years from now going to be like, Peter?

HUBER: We're going hybrid, not because Washington says we must or for green reasons, although it is green or it is more efficient, but the technology is unconditionally superior. I think that's a good development. Detroit will go there, Japan's going there. I think we’re going toward plug-in hybrids, which will then bridge the electric sector and the transportation sector.

COLVIN: Because we'll be getting some of our auto power from the electrical grid, and that electricity is generated for the most part not with oil.

HUBER: Almost no oil behind the electricity.

COLVIN: Is this the future you see for automobiles?

LASHOF: I agree with that. I think hybrids are going to grow rapidly. I still think we need a little push. I mean they're still, they're very popular right now, but they're still less than 1 percent of the auto market. So we're going to need some incentives to get them out there and we're going to need to raise fuel efficiency standards to drive that technology.

COLVIN: You guys disagree on an awful lot, but I'm wondering if you might agree on something. What should those of us who are interested in this debate but don't know what to think, what should we watch? What indicators should we watch to tell us which way it's going, to tell us who’s right as things develop? Peter?

HUBER: Well, you can watch the price of oil, okay. Be patient. Remember that seven years ago oil was at record low prices, okay. These are volatile markets. And then look at the political situation. A lot of the volatility in oil markets is political uncertainty. If democracy breaks out all over the Mideast, you’ll see dramatic things happen to the price of oil and vice versa.

COLVIN: Dan, what should we watch?

LASHOF: Well, you have to watch the percentage of the world's oil that's being produced from the Middle East, which is going to go up regardless of what happens to prices. The other thing you have to watch is the concentration of carbon dioxide in the atmosphere, because that's going to drive a real change in energy policy that we need to prevent dangerous global warming.

COLVIN: It is a fascinating topic and really at the top of the news and I think going to stay there for quite a while, so Dan Lashof and Peter Huber, thank you very much.

Boomer bonanza

(segment originally aired Oct. 15, 2004)

KAREN GIBBS: It's no secret that we live in a youth-obsessed culture. All you need to do is turn on a TV or open a magazine to have that idea slammed in your face. But now as the first wave of baby boomers are hitting what used to be known as the retirement years, everything is changing. Corporate America is starting to wake up to the fact that people over 50 are sitting on roughly $7 trillion. Ken Dychtwald has spent a career trying to help companies figure out how to get a piece of that pie. He's president of Age Wave and author of numerous books on the topic. William Sterling created an investment firm, Trilogy Advisors, designed to capitalize on that boomer plus market. Gentlemen, welcome.

Well, Ken, let me ask you, how are boomers affecting the retirement years or the so-called golden years?

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KEN DYCHTWALD: First, the boomers, because of their enormous size, and remember this is the generation of 76 million people born right after World War II, every time they've migrated across the lifeline, their enormous demographic heft has forced companies to wake up and take notice. And those that have been clever enough to position in front of this wave have made a fortune. So whether that was Gerber's baby foods or Johnson & Johnson or McDonald's or Ford Mustang, anybody who could catch that wave at the right moment is going to profit. So number one, the fact that the boomers are no longer kids but are beginning to look towards their 60th birthday as the next major milestone is beginning to cause the marketplace to take notice of this knew stage of life. Second, the boomers have no intention of growing old as their parents did. They intend to grow old youthfully with the spirit of adventure, with an idea of personal reinvention, with the hope of maintaining all the things they like in life, but just for longer.

GIBBS: Bill, what does this push, this momentum that baby boomers are bringing to the marketplace, mean for corporate America?

WILLIAM STERLING: If you look at where the growth in the population is going to be most pronounced over the next five to 10 years, it will be in people above the age of 55 or people sort of in their late 40s to late 50s. There's an actual bust, baby bust in the number of people in their mid-30s to mid-40s, and then there's also an echo boom. The children of the boomers are now in their teens to mid-20s, so that's the other area of greatest population growth. So this basic pattern is boom, bust, and echo, and we think it's going to have implications for lots of different industries.

GIBBS: Ken, what about the implications for the economy?

DYCHTWALD: Well, it depends on which scenario one buys. If we assume that when the boomers reach their 62nd birthday, as today's elders have done, and retire and cease earning, then there's a pretty scary scenario for the economy. Because what it implies is that you'll have a huge population of taxpaying, high-earning, high-spending people who will go into a state of frugality and spend down. I don't believe that's what's going to happen. I actually think the boomers will continue working, even if it's part or phase work or flex retirement, for decades. And so I actually think the boomers will continue to be very active in the marketplace. The economy will continue to grow.

But I think, as Bill is pointing out, you're going to see a decline in those enterprises oriented towards youth. As you mentioned, we've been a youth-focused culture, but that must come to an end. During the 1990s, the number of 18-to-34 year olds in America actually shrank by 9 million people, while the number of people over 50 grew by 12 million. So while you might see a decline in youth-focused businesses, you're going to see an enormous growth in products and services that cater to the 50-plus crowd.

DYCHTWALD: If you look around, you see Sean Connery is approaching 80 and he's still considered a sex symbol and Sophia Loren is around 70 and she's still pretty terrific, and the average age of the Rolling Stones right now is 60, Sting just hit 54. What's happening is that we're beginning to kind of relax our notion that people over 50 or 60 are kind of over the hill. Alan Greenspan runs the Fed at 78. We're beginning to get the idea that maybe some of our notions about aging are old fashioned and simply wrong. And in its place we're presenting a more boomerish notion that a 50 or 60 or 70 or 80 year old still may have quite a bit of life in them.

GIBBS: You bring up a very important point. You know, it does look like a rosy picture, but one of the guys you mentioned, Fed Chairman Alan Greenspan, is not quite as optimistic. In fact, recently he warned Congress that baby boomers are starting to retire in a few years and house spending continuing to soar, our budget position will almost surely deteriorate substantially in coming years if current policies remain in place. That means that we're going to have to see a shifting of expectations, whether it is in the boomers or whether it's in society as a whole. Am I right, Ken?

DYCHTWALD: Yeah, let's keep in mind that Social Security was crafted first of all in an era when there was a 25 percent unemployment, and so the reason Social Security was put in place was not so much to give people 20 years of entitled leisure but rather to move them out of the way to make room for the young. There were 40 workers for each recipient, and the life expectancy was only 63. Thanks to the triumph of increased longevity, we now have only 3.4 workers to each recipient. And I think what Mr. Greenspan is indicating is that as we live longer and longer and as this boomer generation becomes the new mature generation, we're going to have to rethink a lot of our entitlement programs because we simply can't afford to cover so many people who are going to live so long.

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STERLING: The origins of Social Security actually go back to Otto von Bismarck in Germany when they introduced a 65-year-old retirement age, but the average life expectancy there was 49. So from our point of view, that would be like saying, well, we'll give you Social Security when you're 95 or 100. It wasn't a big deal then, but it's obviously a much bigger deal now.

GIBBS: Well, whether politicians are willing to admit it or not, you did mention not only the swelling number of baby boomers but the increase in life expectancy. So what sectors, Bill, are poised then to benefit from this seminal shift?

STERLING: Well, I think the sectors that are favorably positioned, you know, first of all, if you do the demographic numbers, what we try to do is look at how people's spending patterns change as they age, and then we use the age projections to factor in what industries will grow most rapidly. The top of the list is health care. You know, some comedian recently said that the famous rock stars now are taking more drugs now than they did in the '70s, but they're doing it all with Medicare drugs. And the problem with that is that the drug industry demographics look so great, but it's actually a problem for the industry because the government, which is funding, you know, roughly half of the purchases, is saying we can't do this, so the pricing pressure on the big pharmaceutical companies I think could be tremendous. As investors, we're looking at sort of other areas in health care, like medical devices and medical equipment, orthopedics. We think a big theme for investors will be the sort of spare parts for aging baby boomers.

So a company like Zimmer Holdings, which focuses on orthopedic implants and the like, we think is very well positioned for this age wave that's coming.

Zimmer Holdings

There are, outside of that area, for example, there's a diabetes epidemic that's very much associated with the age wave. There's actually a German company called Fresenius which, even though it's located in Germany, operates the biggest chain of dialysis treatment clinics in the United States. We think that's a very well positioned company for the age wave.

If you look beyond health care, the other industries, leisure and retirement spending, most people don't have a vacation home until they're in their 50s. We've had a boom in recent years in vacation homes, and I think that's likely to continue for the most decade. Most people don't take an ocean cruise until they're in their 50s, and I think that's probably a pretty well positioned industry because of this pattern. So leisure, retirement spending, health care.

GIBBS: Ken, let me ask about two things, corporate America and we talked about big pharmaceuticals and how they are responding to the aging of America. Have you seen any specific ads that kind of ring your bell in terms of big pharma and diabetes in particular?

DYCHTWALD: Yeah, diabetes as you mentioned is a good example. There's 18 million diabetics in America. That's half the population of Canada as a comparison. A very clever ad appeared recently that had B.B. King in it, and B.B. King is himself in his 70s, he is a diabetic, and he doesn't particularly want to be hurting his fingers with the old traditional technology of taking samples. A very clever use of an older icon in a growing problem.

If I could add to what Bill's saying, that I think you're not only going to see anything having to do with the body, such as health and health care and anti-aging and spas and fitness and wellness and medical devices, but I also think the financial services industry itself is going to rise up as tens of millions of boomers start to play a little catch up game with their wealth accumulation. There's also going to be somewhere between $10 and $20 trillion of inheritance passed over this next 15-year period, and so the whole idea of estate management is going to be a growth area as well.

I also add the whole notion of experience activities. When we're young we want to accumulate things. It makes us feel we've arrived. Once you've lost a loved one or you've achieved either success or failure in your life, at around 50 you take a deep breath and you realize that the experiences you have are way more important than things. So whether that means time at the theater, adult education, lifelong learning, family vacations, remodeling your home, learning to cook, you're going to see a mature population moving towards an experience-based purchasing pattern versus a thing-based purchasing pattern. And I think that companies who can line up with that are going to do great.

STERLING: One stock we like on that very theme, sort of the leisure and entertainment company of the future, right now is InterActive Corp.

InterActive Corp.

The stock's down this year, but it's run by Barry Diller. It has a very interesting portfolio of businesses, all the way from the online Expedia travel company to Ticketmaster to Home Shopping Network, kind of great businesses for either couch potatoes or people who want to get experience. It's an Internet company essentially, but with businesses that make money, and it's also got about a billion dollars of cash on the balance sheet. But I think it's a portfolio of companies that are targeted toward the needs of the aging boomer generation. It's a pretty interesting play we think.

GIBBS: What other companies jump out at you?

STERLING: Well, you know, we also think that again in the leisure entertainment area, we like some areas of consumer electronics, and that's partly getting back to the echo boomers as well. But when we look around the world for what we think is probably likely to be a great story in terms of a new brand emerging in consumer electronics, look at Samsung. Samsung is a Korean company.

Samsung

They've actually made a great hit in terms of the cell phones with these cell phones that take pictures and the like. The 'Net appeals to all age groups. That's not just a demographic story. But they have about 13 percent of the world market now compared to Nokia's 36, but they're pretty determined to catch up or exceed Nokia by the end of this decade. We think they have a terrific sort of brand that's being built right now, and it's a stock trading at about 13 times earnings.

STERLING: Casinos, believe it or not, gambling is one of the, you know, it's a low-impact sport. It's like not aerobic, but it is low-impact. And the demographics for that whole resort sort of casino industry look very favorable.

GIBBS: Ken Dychtwald, Bill Sterling, wonderful conversation. Thanks very much for joining us.

DYCHTWALD: Thanks, Karen.

STERLING: Thanks.

 

NEXT WEEK: Death Taz

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