U.S. economy's fate in Saudi hands

And it won't end soon

I have bad news for anybody who thinks that this Saudi control over the U.S. and global economies is a brief phase that will end by itself. The decision among oil producers such as Saudi Arabia to shift away from being a mere producer of crude oil to becoming a producer of value-added products made from oil -- such as gasoline, fertilizer and plastics -- will prolong the economic clout of these countries. Saudi Arabia will go from being the low-cost swing producer of crude oil to being the low-cost dominant producer in gasoline, fertilizer and plastics.

The cost advantages that Saudi Arabia brings to the game are huge. Methane and ethane, key feed stocks for petrochemical production, cost about 75 cents per million BTU in Saudi Arabia and $7.50 per million BTU (for methane) on New York commodity markets. Within five or 10 years, new industries now being built in Saudi Arabia are likely to soak up cheap natural-gas-feed stocks such as these. But even if the country has to switch to refined feed stocks such as naphtha, Saudi Arabia will have a huge cost advantage. Naphtha from a Saudi refinery might cost $50 per metric ton compared to a market price of 10 times that from a refinery elsewhere in the world.

It's up to the consumer

The only thing that changes this game -- that redresses the balance between supplier economies and consumer economies -- is a change in the price signals that consumer economies send in response to price increases. As long as the response to an increase in the price of oil is an increase in consumption, then oil prices will drift higher at a pace set by the self-interest of oil producers. Those of us who live in the consuming economies will just have to hope that the Saudis and other oil producers efficiently milk consuming countries' cash-cow economies.

On the other hand, if higher prices lead to less consumption because consumers become permanently more efficient in the ways they use energy, and because consuming economies adopt lasting sources of alternative supply (and don't abandon them at the next dip in oil prices), then consuming countries have a chance to take back some degree of control over their own economies.

And then -- oh joy, oh rapture -- once again, investors would be justified in hanging on every one of Fed Chairman Ben Bernanke's words.

New developments on past columns

"Make a profit, save the world": It's a common problem for young companies with big potential but small sales. In its May 2 report of first-quarter results, Maxwell Technologies (MXWL, news, msgs) announced that two big customers had delayed ultracapacitor shipments late in the quarter. Instead of revenue of $14 million for the quarter -- the Wall Street consensus -- the company saw only $12.3 million. The loss for the quarter came to 25 cents a share, a couple of pennies greater than expected.

Worst of all, the company said that because of rising orders (good news from other perspectives) and delays in shipment, inventory was climbing and that was eating cash. Unrestricted cash declined to $2.1 million from $11.4 million at the end of 2006. To meet its cash needs, the company will do a stock offering -- a million shares to raise a little more than $10 million. That would dilute the stake held by current shareholders.

So it's no wonder that the stock fell to a low of $11.24 on May 15. It's been on the rebound ever since as investors got over the disappointment at the near-term bad news and again focused on the long-term picture. Shipments to those two big customers were only delayed -- not canceled -- and shipments to a big former customer, a European telecommunications company, should resume late in the second quarter. Design wins for the company's ultracapacitors in heavy transportation and industrial uses are just slowly starting to turn into orders -- and the company's position in this energy-storage technology is the reason to own the stock, in my opinion. Revenue in the ultracapacitor business, about 26% of Maxwell's revenue right now, should grow by about 40% in 2007 and then accelerate to 100% in 2008.

As of June 5, I'm keeping my target price at $22 a share but stretching out the target to March 2008. (Full disclosure: I own shares of Maxwell Technologies in my personal portfolio.)

"Why the debt bubble hasn't burst -- yet": Investors, traders and speculators continue to suck up high-risk-debt offerings. Even though the supply of new high-risk or junk-bond debt soared to May to $23.4 billion, second only to the November 2006 record to $29.2 billion, demand was so strong that the risk premium for buying junk instead of safer Treasury bonds shrank to an all-time record of just 2.42 percentage points. (The old record, 2.49 percentage points, had been set in Aug. 1997.) The historical monthly average from 1997-2006 is 5.29 percentage points. So why are buyers so willing to own junk bonds when the risk premium is so small? Because default rates for these bonds remain so low that investors don't think there's much risk that the company's issuing the bonds will go belly up and be unable to repay bond holders. The recent strong jobs report -- 57,000 new jobs were created in May, up from 80,000 in April -- is likely to add to that confidence. If the U.S. economy is over its slowdown and picking up speed again, companies will have plenty of cash to cover their debt obligations. If the economy has turned the corner, that is. Stay tuned.

Meet Jim Jubak at the Money Shows

MSN Money's Jim Jubak will be among the dozens of renowned money experts, advisers and analysts sharing their wisdom in free workshops at two upcoming Money Shows -- in San Francisco, July 26-28, and in Washington, D.C., Sept. 6-8. You'll also have a chance to network with fellow market enthusiasts, exchange investment ideas, share your experiences and enjoy the fellowship of like-minded investors. Admission is free for MSN Money readers. For complete details or to register for free admission, visit the San Francisco Money Web site or the Washington D.C. Money Show Web site. Or phone 1-800-970-4355 (be sure to mention priority code #007420) and tell them which show you're interested in.

Editor's note: A new Jubak's Journal is posted every Tuesday and Friday. Please note that recommendations in Jubak's Picks are for a 12- to 18-month time horizon. For suggestions to help navigate the treacherous interest rate environment, see Jim Jubak's portfolio of Dividend stocks for income investors. For picks with a truly long-term perspective, see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio. E-mail Jim Jubak at jjmail@microsoft.com.

At the time of publication, Jim Jubak owned or controlled shares of the following equities mentioned in this column: Maxwell Technologies. He did not own short positions in any stock mentioned in this column.

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