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A Casual Conversation With...

Tim Guinness
Chairman, Chief Investment Officer, Fund Manager
Global Energy Fund (GAGEX)

Quick Fund Overview: I find it annoying that every time I go to the gas station the cost per gallon of gas has changed. Sometimes up. Sometimes down. Rarely the same. With summer on its way, I'm expecting it to go up again. It always seems to.

To help me make sense out of the oil and gas prices I went to an expert. Tim Guinness is the portfolio manager of the Global Energy Fund.

He is also the founder and chief investment officer of Guinness Atkinson Funds, a Brit and a logic-based value investor. During his 35 years in the money management business, Tim has spent the last 10 specializing in the fields of oil, gas and global energy.

I see this fund as best suited for those who like investing into a fund that holds between 20 and 35 stocks from around the world in its portfolio, can handle price volatility and believe in the future growth of this sector.

The Global Energy Fund is a no-load mutual fund that's been around since June 2004. Find out more about it, visit www.gafunds.com/funds_global_energy.asp; at www.lipperweb.com (enter GAGEX under "Fund Lookup"); and at www.Morningstar.com (click on the "Funds" tab and then in the search bar enter GAGEX.)

Date of this interview: 3-19-09

Dian: Can you help me understand what's happened to the price of oil lately? For a while it was down and now it has rallied and is going up. Why?

Tim: I can tell you exactly what's happening.

There are five important moving parts here. One is obviously what's happening to supply- as in the growth in the supply of oil outside of OPEC. And by that I mean in North America, Alaska, Canada, off shore of the US and in places like the North Sea, Amman, Mexico and Brazil. Places, again, that aren't in OPEC.

The short point to make about that is supply outside of OPEC is simply not growing. One of the things that's happened recently, and is what we've been saying for several months, is that the supply is not there. Even the IEA (International Energy Agency), who publish a monthly oil report, have now revised their projections; instead of showing it (supply) growing at one-half a million barrels a day they've now said, "Ok, we've agreed it's going to be flat."

By the way, one of the big reasons it's going to be flat is that Russia -which was a source of supply outside of OPEC-has now slapped on the breaks and gone into reverse. Russian supply is actually now declining

There are, however, four main areas where supply is growing. If you look around the world, you'll find supply growing in Brazil, West Africa, in the Canadian oil sands and Caspian area. But lots of countries have gone past peak production.

The next thing is demand.

Everybody is aware that demand has been destroyed by this recession. And there has been a big debate about how much it has been destroyed by it. What people are now recognizing is that the effect of the worldwide recession is to a large extent being offset by the very sharp unwinding of the price of oil. But in fact, the oil price was having a big effect on dampening demand in 2007 and in 2008 when it got up to $150 a barrel. Now, suddenly that effect has gone away and, Ok, you have a new effect-which is recession.

What people didn't know was how big a recession it was going to be with regard to oil prices.

It's turning out that the fall in world demand this year compared to 2008, is increasingly looking like what happened in the '70s. Then there was sort of a 5 percent decline in world demand unlike the early '90s when it was about 10 percent. But the big difference is in the early '80s the price of oil remained very high. Today it's low.

So, what's happening to demand is that it's going to be flat or may decline by about 5 percent, not the 10 percent we feared.

Now, what's OPEC doing? When OPEC announced it was cutting its production by about 4 million barrels from its September level in December, everyone was skeptical as to whether it were disciplined enough to achieve that. I think that the market has woken up to the fact that OPEC actually has been pretty successful and pretty disciplined in achieving what it said it was going to do.

So with demand down and OPEC cutting production, the result is that the world oil market is now tightening. And it's tightening sufficiently so that people like us are taking the view that oil inventories around the world will be worked off maybe late May, maybe mid- July,

You can't be exact as to when, but the result is that the physical oil market is moving from a very sloppy oversupply to actually a tightening up and constrained market. And that's what is causing the price changes that got as low as $40 a barrel and have gone up through $50 as you saw today. (March 19, 2009)

Dian: Is there enough oil in the world or are we running out of it?

Tim: No, we're not running out tomorrow. Are we running out in the next 50 years? Yes. So those are two different things.

I am extremely tuned in to the need for the world to get off oil. But we've got about 50 years to do it. We haven't got to do it this year.

Dian: How about all of this green stuff? Everybody is going green. Does that have anything to do with oil prices?

Tim: If you want my honest opinion, not much except in one quite sort of important respect. And that is that we will see a change in the attitude of politicians at the head of governments in the developed world.

Seven years ago I think the unanimous view was to keep oil prices as low as we can because that is what was needed to keep growing our standard of living. Low energy prices have really stimulated economic growth for the last 40 years, so it was advantageous to keep them low.

I think a comfortable level for oil prices is sort of medium- high. Very high is uncomfortable.

Dian: Medium-high like 60 to 80 dollars?

Tim: Yes, that's the sort of level that makes it much easier to get the financing in place for alternative energy projects.

Dian: In your fund you have a little bit of coal too, but not much. What's the deal with coal?

Tim: Well, it's the cheapest fossil fuel. The thing about it is it's going to last the longest. Peabody has hydrocarbon reserves equivalent to those of Exxon, and you can buy it for 5 percent of the market capitalization of Exxon.

Coal is cheap. Coal is not going to remain cheap forever. Although I do not believe US coal consumption will grow materially over the next five years given the hostility of the culture toward it.

But the place that is ramping up the use of coal is China. And that has been driving up the world price of coal. We've got a small investment and it's partly because it's cheap but it may not stay cheap.

Dian: You just mentioned China. Is China going to be a huge user of oil?

Tim: Huge? Of course it is. This is what tipped the oil price when it started moving up in 2003. The world got hit by a China demand truck.

Dian: And then what happened?

Tim: That carried on pretty powerfully through 2004, 2005 and 2006, and then when the oil price got up to over $100 a barrel, China's demanded tempered and slowed. Now, of course, they've been hit like everybody, their economy is slowing down and so their demand also is slowing.

But I can tell you that their demand will come back with a vengeance. And here's why: In very simple terms, in 2003 China was manufacturing between 1 and 2 million vehicles a year. This year it's going to make 8 to 10 million. By the way, the U.S. has historically consumed about 16 million cars. So China is on the point of overtaking the U.S. in the number of motorcars it's consuming.

Going forward it's not very difficult to imagine how China's car population is going to grow from 30 million to 100 million. This rise in the vehicle fleet in China over the next 20 years creates an incredible popular wave of demand for fuel for those cars. But unless they go electric, and I don't believe they will, that is going to manifest itself in huge demand for oil.

Dian: Why don't you think they are going to go electric?

Tim: Because I think the earliest adopters of electric cars will be the richer countries. You can expect it to first happen in places like America and Europe.

Dian: So what's the bottom line on the price of a barrel of oil?

Tim: I think the market sees that the oil price is going to average $50 this year even though in February it was fearful that it was going to average $35. I'm betting my money that oil will average over $60 dollars next year and $70 the year after.

Dian: How long have you been specializing in oil and gas?

Tim: 10 years.

Dian: What do you like most and the least about this field?

Tim: If you specialize in this field you have to juggle with politics, economics and technology on a global scale and I find all of that very challenging and stimulating.

Um, what I like least about it, I suppose, is the short-term unpredictability in the price of oil.

And I do have one bit of advice for anyone who has an interest in the energy industry. Read the book The Prize: The Epic Quest for Oil, Money, & Power by Daniel Yergin. It's a history of the world looked at through the oil and gas industry and basically covers the years from 1850 to 1990. Reading it will both enlighten and perhaps change your life.

Dian: Will do. And thank you.

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