Oil Prices and Rebuilding Iraq
Kudlow & Cramer Interview with Dr. John Rutledge
June 02, 2004, 5 p.m. EST
LARRY KUDLOW, co-anchor: Our next guest, Dr. John Rutledge, chairman and CEO of Rutledge Capital, thinks Saudi oil isn't really vulnerable at all. In fact, the Saudis could use all that oil revenue to rebuild Iraq. Welcome back, John. John, I don't know, $30, $35, $40 a barrel--it doesn't matter--the Saudis must be making a fortune in this oil issue.
DR. JOHN RUTLEDGE: They're drowning in money, Larry. The $40 isn't going to go anywhere. It's basically driven by Chinese growth, which is a great story, and it's not going to disappear on us. But this year OPEC is going to make $270 billion selling oil; more than half of that goes into the Gulf and the Gulf Cooperation Council members: Saudi Arabia, Kuwait, United Arab Emirates, Qatar, Oman, and Bahrain.
They are the investors who have the knowledge to do the projects to rebuild Iraq. The only thing they are waiting for is property rights in Iraq. That will come with the new government. You're going to see an "Oklahoma land rush" in land, office buildings and business in Iraq next year.
JIM CRAMER, co-anchor: John, state your bona fides about why you--you've been over there a bunch of times. Talk about your background and how you know this to be the case.
DR. RUTLEDGE: I learned a long time ago from a man named Chekhov that if you want to learn about Bulgaria, you can't just read the newspapers; you have to go to Bulgaria. I've been in and out of that part of the world maybe 100 times, and that's why I've been working for the last year with the Iraq rebuilding group in the administration. And I know most of the investors in that part of the world.
You know, an investor in Abu Dhabi or Dubai with $1 billion, $2 billion or even more if it's an institution faces exactly the same investment menu that we face. You've got 1% Treasury bills, you've got 4% bonds, and you've got 6%, 8%, 10% equity expectations.
Returns on capital in Iraq are going to be three-digit numbers because its capital base has been destroyed, just like Japan after World War II. The people who bring the capital in to rebuild Iraq are going to make a fortune. It's going to cost $750 billion alone just to increase oil capacity in the Gulf because OPEC is going to need to increase its production by about 50% in order to meet the demand.
KUDLOW: Do you believe the Saudis when they say they're going to increase production? Do you believe OPEC in general when they say they're going to increase, maybe even take the ceiling off, the production for a while?
DR. RUTLEDGE: I think OPEC, as we saw yesterday with the Beirut announcement--is behaving in a very responsible way now. Oil prices getting out of hand right--which has really been driven by the hedge fund buying in the last six to eight weeks--is not helping anybody. It's taking the bottom out of growth. But there's a silver lining in that growth slowdown because it also has scared the policymakers. The European Central Bank today announced they're going to be cautious about raising interest rates because of the negative effect of oil prices on growth. When the one-time price increases we saw with steel and the like in the first quarter pass through, we're going to see a very low inflation number in the US. That's going to back off the Fed as well. That means all that selling we saw in March and April in the stock and bond markets should reverse when it becomes clear that the 20 to 25 percent profit growth is real but rising interest rates are not.
CRAMER: I want to go back over the Iraq scenario because I think there are a lot of people who are listening and say, "I don't know. Dr. Rutledge thinks that that's going to happen, but I see Russia pulling out, I see a lot of companies very worried about their workers." Now I know there's a profit motive, and a profit motive can make a lot of people take a lot of risk. But is it too risky to do business in Iraq?
DR. RUTLEDGE: Well, you know, one man's risk is another man's opportunity, Jim. The people I'm talking about, the professional investors around the Gulf, have been investing in these situations for decades. These are the people that put up the money to rebuild Beirut after the civil war.
CRAMER: Right. Good point.
DR. RUTLEDGE: And so, you know, the people in Iraq are cousins and family members. We learned in business school that you can measure the risk of a business with its volatility--and everybody's risk is the same. It's just not true. With the right investor, the risk of a project goes down. And the right investors are the people right there who have the money and the experience to be able to do the work.
KUDLOW: So let's get this right. The Saudis and the Gulf Cooperation Council, quote, "our allies," unquote...
DR. RUTLEDGE: Yes.
KUDLOW: alright, they're going to have the money, plenty of it. They also have the knowledge base. They also have an experience base. And they also have a profit motive to buy low and sell high .inside Iraq.
DR. RUTLEDGE: Absolutely.
KUDLOW: So you believe they will come in, they're going to be the economic developers. And that, of course, would free the United States from a lot of burdens, allow us to get out of there probably a whole lot sooner.
DR. RUTLEDGE: Exactly, Larry. I think they can--and should--be the money that rebuilds Iraq. Remember, in the year after the invasion of Iraq, the Gulf stock markets doubled. And the reason they doubled is because the value of a company in that part of the world is the present value of the oil receipts in the future.
DR. RUTLEDGE: The longer you stay there to pump the oil, the higher the value gets. So increased political stability comes right back down to rising stock prices in those countries. In the last couple of months, by the way, those stock prices have come down because our commitment to the area is being questioned.
But I think the money that will come into Iraq, once property rights are established and there's a government in place, will vacate the need for big sums of money coming in from the U.S.
CRAMER: All right. We've got to leave it there.