Goldman Sachs 2017 Letter to Shareholders...Magic Johnson on “Over-Delivering”...Small Business Owners on Challenges to Growth

Insights on markets, industries and the global economy [Goldman Sachs]( [BRIEFINGS] March 26, 2018 Goldman Sachs 2017 Annual Report and Letter to Shareholders Above (L to R): Chairman and CEO Lloyd C. Blankfein and President and COO David M. Solomon In this year's Letter to Shareholders, Chairman and CEO Lloyd C. Blankfein reflects on the firm's performance in 2017 and inflection points for the business and industry, including the shift to stronger global growth, monetary tightening and the changing regulatory landscape. In the letter, Lloyd provides an overview of the firm's progress on its strategic growth initiatives, while highlighting its investments across engineering and technology. Reflecting on the year ahead, he notes that while conditions are highly supportive of a growing economy and that interest rates are relatively low, the firm is also watchful for "low-probability, yet highly consequential events" that could affect Goldman Sachs and its clients. "With the U.S. near full employment, inflation still relatively low and the end of quantitative easing, there is a greater chance that excesses can build up. In this vein, we continue to be mindful of what can go wrong, keeping a close eye on risk, particularly in the context of the credit cycle." [Read the letter]( [Annual Report]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Goldman%20Sachs%202017%20Annual%20Report%20and%20Letter%20to%20Shareholders&body=http%3a%2f%2fwww.goldmansachs.com%2finvestor-relations%2ffinancials%2fcurrent%2fannual-reports%2f2017-annual-report%2findex.html) Talks at GS: Magic Johnson on "Over-Delivering" on and Off the Court Above: Dane Holmes of Goldman Sachs and Magic Johnson of Magic Johnson Enterprises Over the course of his storied career, Earvin "Magic" Johnson has gone from hometown hero to basketball icon to entrepreneurial powerhouse and dedicated philanthropist. At a recent Talks at GS session, Magic shared the key to his success -- always "over-deliver" for his teammates, the people he cares about and his customers, most notably in urban communities. "My mission in life now is to affect change in urban America," he said. "To put people of color to work. That's very important to me." He also emphasized the importance of failure as a catalyst for self-improvement. "Self-evaluation is the hardest thing you have to do. Taking a swat at yourself is the hardest thing you have to do. So I had to take a swat at myself (after losing the 1984 NBA Finals) and I realized I wasn't as good as I thought I was. I had to go back and work and work -- and I cried every single day -- but I put the work in." You can now find [Talks at GS,]( a show featuring some of the world's most influential leaders and thinkers, on Hulu, Amazon Prime Video, Yahoo Finance and Spotify. [Watch video]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=Talks%20at%20GS%3a%20Magic%20Johnson%20on%20%22Over-Delivering%22%20on%20and%20Off%20the%20Court&body=http%3a%2f%2fwww.goldmansachs.com%2four-thinking%2ftalks-at-gs%2fmagic-johnson.html) In Their Own Words: 10,000 Small Businesses on Challenges to Growth Above: Jake Siewert, Amanda Hindlian and Steve Strongin of Goldman Sachs Small businesses make up over 99 percent of all U.S. enterprises, and they employ 60 million Americans, nearly half the national workforce. For this episode of Exchanges at Goldman Sachs, we sat down with Steve Strongin and Amanda Hindlian of Goldman Sachs Research to discuss the state of small businesses in America. "[Small businesses] have had a tougher time getting credit, and they've had a tougher time dealing with the amount of regulations that have been running through the economy," said Strongin. We also heard directly from small business owners of Goldman Sachs' 10,000 Small Businesses program about the regulatory challenges they face, among other issues. "I do work in 18 states, and I have to deal with 18 different processes and 18 different registration systems and 1,000 different procurement systems," shared Ginny Schwartzer, owner of consulting firm All Clear Emergency Management Group. "And just the paperwork management of that is entirely too much red tape." [Listen to podcast]( [Subscribe]( SHARE: [twitter]( [facebook]( [LinkedIn]( [email](mailto:?subject=In%20Their%20Own%20Words%3a%20%3ci%3e10%2c000%20Small%20Businesses%3c%2fi%3e%20on%20Challenges%20to%20Growth&body=http%3a%2f%2fwww.goldmansachs.com%2four-thinking%2fpodcasts%2fepisodes%2f03-23-2018-hindlian-strongin.html) Briefly...on a New Era for Oil Investing: The Age of Restraint How can Big Oil thrive amid increasing focus on electric vehicles and decarbonization? By capitalizing on higher barriers to entry, through consolidation, cost deflation and ultimately higher returns, according to Michele Della Vigna of Goldman Sachs Research. We spoke with Michele on how he envisages this new Age of Restraint for the oil and gas industry. Michele, you've said we're on the cusp of a "new era of oil investing." How so? Michele Della Vigna: Historically speaking, the oil & gas sector goes through long, 30-year investment cycles driven by the market's "risk premium" for long-term investments -- the compensation demanded for taking the risk on funding new long-term supply. Since 2014 we've been in what we call the Contraction phase of the cycle, as the market absorbed the oversupply generated by the 2003-2013 Expansionary phase. The market is now giving way to what we call the Age of Restraint, as the forward curve of oil flips to backwardation and costs reset approximately 50% lower, making new investments profitable once again. This, however, does not lead to another inflationary cycle, as the market's concerns over decarbonization restrict financing of long-term projects, which become the natural oligopoly of companies which can self-fund and manage political and technical risk: We call these producers the modern-day Seven Sisters, much like the Big Oil dominating the market in the 1950s, and see this as a new golden age for them. But don't oil producers benefit from a higher price environment? MDV: That's a common misconception. Prices tend to rise in the Expansion phase of the investment cycle, led by perceived future supply shortages. This fuels easy credit, market fragmentation and ultimately cost inflation and rising inefficiencies. Cost inflation compounded at 10% per year in the 2003-13 period, destroying the producers' returns and only partially benefitting oil services. In contrast, during the Restraint phase, returns improve slowly but consistently, led by an oligopolistic market structure, better management of the supply chain, and advantaged resource access. We were last in this phase in the 1990s, where Big Oil outperformed the global market by 6% per year. Another misconception you cite in your research is that decarbonization is bad for Big Oil. Walk us through that. MDV: Sure. The focus on a Lower Carbon economy -- and EV adoption in particular -- is fueling the Age of Restraint by dis-incentivizing investments in long-cycle capacity. While shale provides enough short-cycle production to prevent the market from running into shortages, the lack of long-term investment keeps the physical markets tight and strengthens Big Oil's oligopoly on long-cycle projects such as deepwater fields and LNG. Concerns around EV demand displacement is taking more future supply off the market through lack of financing than it is likely to impact demand. We estimate that the EV impact on demand by 2030 is likely to be below 4 million barrels a day. Yet the lost supply by 2025 because of the delay in sanctioning of new long-cycle projects since 2014 is already estimated at 6 million barrels a day. Decarbonization is actually having a net tightening effect on the oil market. 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