This is part of an email I receive from time to time: "The Daily Reckoning" (www.dailyreckoning.com)*****************************THE LAST PIECE OF THE OIL PUZZLEBy Sven Lorenz

I recently researched a business that has already made several generations of entrepreneurs rich beyond their wildest dreams - including the late billionaire tycoonAristotle Onassis.
His heiress, 19-year-old Athina Onassis, is now the world's richest teenager, with an estimated $2.7 billion fortune... and another $2 billion awaiting her on her 21st birthday.
It's a business the world economy couldn't do without, yet you hardly ever read about it in the financial papers. Families and entrepreneurs with an interest in this business simply prefer to keep their matters private, not least because they were earning such high returns that outside investors simply weren't needed. It's the business of running oil tanker fleets.Approximately 46% of the world's oil production is seaborne. And today, most new oil finds occur offshore rather than onshore. As a result, a staggering 80% of all new oil production capacity coming on-stream worldwiderelies on oil tankers. By 2011, it is estimated that 95% of all new oil production capacity will use oil tankers.
Without the world's oil tanker fleet, the global economy would come to a standstill. And for the first time, the stock market is about to take notice. Jeffrey Goetz, CEO of tanker broker Poten & Partners in New York, recently stated that the oil tanker business is running at close to 100% capacity. And Magnus Fyhr, a Houston-based shipping analyst, predicts that by the fourth quarter of 2004, demand will be higher than capacity. Charter rates for tankers are already exorbitant. They've rocketed more than fivefold during the last two years...but now they're likely to go even higher.
In China and India, energy demand is soaring. Just as everywhere else in the world, "energy" primarily means "oil." You can't build a pipeline from the Middle East to China or India - which is why demand for oil tankers is on the up.
At the same time, it can be said with great certainty that supply is not going to keep up, thanks to a little-noticed change in regulations. In December 2003, the International Maritime Organization, an arm of the United Nations, agreed to eliminate single-hull tankers by 2010 and to accelerate the timetable to phase out certain single-hull vessels by May 2005.
The following is hardly known by the public... but this agreement means that 13% of the world's tanker fleet will have to be scrapped by April 2005. By 2010, a staggering 40% of the world's oil tanker fleet needs to be replaced.Remember the oil tanker Prestige that sank off the coast of Spain in 2002? Due to that incident, regulators decided to tighten the screws. In the future, oil tankers need to havea double-hull to avoid accidents like that of the Prestige (or, of course, the Exxon Valdez in Alaska in 1989).The scrapping of a considerable part of the fleet comes at a time when every single tanker in existence is in operation 24/7 - the 100% capacity utilization mentioned above.

About 80% of the world's tanker fleet is owned by independent operators, with a vast chunk of that owned by Greek shipping tycoons - many of whom have bases in the City of London or in Monaco. It's a fragmented businesswith little transparency and few publicly listed companies. But that's about to change, too. Nowadays, customers chartering oil tankers are asking for much more than a ship to transport oil. Most oil tankers are chartered by mega-size oil corporations, many of which are public or at least in the public's eye. There are important issues to take into consideration, such as the quality of the ships and their crews. The safety record of a tanker fleet operator is also crucial. And customers have caught on to this, asking oil tanker operators to prove that they have an organizational structure that supports compliance with environmental and safety regulations.This means the end of the cozy world of chartering oil tankers by shaking hands over a glass of ouzo. As a result,the world will see the emergence of the publicly listed oil tanker company. This would have been an abomination to the likes of Onassis, who had little time for transparency or accountability and instead chose to spend his days (and nights) with film stars and models.
It won't come as a surprise that a number of other Greek shipping operators are already investigating a listing on the New York Stock Exchange. In the past, the few oiltanker operators listed on the stock market usually traded around the company's estimated net tangible asset value. If the typical oil tanker owner managed the company from hislocal coffee house, there wasn't much point in attributing any value to the company's organization, its brand name orits track record. The lack of transparency within the industry led to valuations hardly ever venturing into double-digit P/E territory. By and large, oil tanker shares traded at P/Es of 5 to 8, which is low compared to the general stock market.
The more oil tanker companies are listed on the stock market, the more visible the industry becomes. What's more, oil tanker companies will be rewarded with a valuationpremium for their corporate structure. After all, the more professionally a company is set up and managed, the easier it will be to gain and retain customers - which in turnmakes earnings easier to sustain and grow.
The net asset value of the ships will remain a factor when valuing oil tanker companies, but factors such as earnings and cash flow should soon take over as the prime factor. Indeed, the sector has three factors weighing assively in its favor right now - a low stock market valuation, at least two more years of high charter fees, plus the increase in the sector's visibility and, therefore, valuation. What's more, the sector could also serve as aninsurance against oil-related acts of terrorism.
Of course, there is hardly an investment analyst not peddling oil investments at the moment. Having analyzed the sector myself, I believe that oil is going to rise a lotmore. But even if OPEC found a congenial way to pump a lot more oil all of a sudden, and the price of crude oil plummeted, it would merely increase the need for oil tankers further.
The oil tanker industry is the one missing piece of the oil puzzle yet to be discovered by investors and analysts. But it shouldn't be long before they catch on.
Regards,
Sven Lorenzfor
The Daily ReckoningEditor's Note: Based in the UK, Sven Lorenz has a 15-year reputation for outwitting Europe's best financiers. Sven writes for the UK arm of Outstanding Investments.