Daily Sources 9/30

1. Ethan Bronner at the New York Times has the story that the former Prime Minister of Israel, Ehud Olmert, said in an interview that Israel must withdraw from the West Bank and East Jerusalem if it wants peace with the Palestinians. He also rejected as “megalomania” the notion that Israel would or even should attack Iran on its own in order to disrupt its nuclear program.

2. AFP has the story that France and India have signed a major nuclear deal by which France would eventually be able to sell nuclear reactors to Delhi. Looks like the American-led deal is making progress with other members of the Nuclear Suppliers Group.

3. Archana Chaudhary at Bloomberg reports that the Indian Oil Company has predicted that their oil import costs will grow to $45 billion this year. India's Oil Secretary R.S. Pandey said in an interview September 25 that Indian Oil and its state-run counterparts may lose $37 billion in 2008 from the selling fuels at prices fixed by the government in order to reduce the pain to consumers. The company is paying for the outlay via short term foreign currency loans.

4. Edward Cody and Mary Jordan at the Washington Post report that the financial crisis is spreading across the world's markets. Markets in Asia continued to fall after they opened Tuesday morning. The European Central Bank President met with several European finance ministers on Sunday to discuss relaxing the rules governing bank lending in the EU. Latin America is expected to suffer from credit shortages soon, given that "Foreign banks account for 80% of the financial system in Mexico, 51% in Peru, 29% in Chile and 22% in Brazil." "Nicolas Véron, a research fellow at the Bruegel center in Brussels, said concern has risen about strains in the banking system spreading to the Baltic countries and Eastern Europe, where several nations also have experienced property bubbles." Useful survey of the situation. The two journalists also have the story on the French and Belgian authorities have stepping in to rescue Dexia today, a Franco-Belgian bank. The two governments injected $9.2 billion into the bank, which was facing a run on its assets as its stock collapsed by 30% yesterday. (Much of the analysis is identical to the first article linked.)

5. Wolfgang Reuter and Thomas Tuma at Spiegel published an interview with German Finance Minister Peer Steinbrück yesterday which carries more details on the remarks reported on earlier. Among other revelations, the G7 evidently discussed the possibility of world wide market meltdown should AIG fail, and prevailed upon American fiscal authorities to save them.

SPIEGEL: The German government is unwilling to participate in America's $700 billion bailout package. Is this your final word?
Steinbrück: I see neither the need for nor the possibility of taking on the responsibility for American banks. Besides, our situation is more robust.

Prisoner's dilemma anyone?

6. Blaine Harden at the Washington Post reports that Japan has fallen into a recession. The Nikkei stock average fell 4.12% and unemployment rose to a two-year high of 4.2%. Car shipments to the US are down 30%. As I noted yesterday, Japan reported a trade deficit in the second quarter. More evidence: Takeo Kumagai at Platts reports that Japanese gasoline demand was down 14% in August year over year. August gasoline consumption in Japan was 4,689,280 kl or 1.29 mb/d, down from about 1.5 mb/d in August 2007.

7. Ariana Eunjung Cha at the Washington Post reports that the Chinese are anxiously watching the American response as they watch their orders shrink drastically. One anecdote has orders from the US to a shipping company dropping by 40%.

"In the U.S., the workers at the gold-chip companies are carrying out their desks in boxes," Xiong [Ming, a marketing manager at Dragontrade Logistics, said. "But in China, the jobs are still here because they are more protected."

8. Dave Ernsberger at Platts blog The Barrel speaks of the erosion of faith in the oil futures markets: "You can see that people are losing faith in the ability of free markets to deliver what we all look to the markets to give: a clear and rational valuation." And people would be right to be skeptical, but I do not think we should blame the futures markets for the extremely opaque, fragmented, and politically distorted nature of the business underlying the contract. Getting rid of the futures markets wouldn't change the fact that traders must guess at all and sundry variables given the opaque nature of national oil companies producing more than 70% of the resource. Of course, the end of the futures markets would be a boon to Platts, returning to them the role of price discovery.

9. The Associated Press published excerpts of an interview with Iraqi Prime Minster Nouri al-Maliki Monday, where he said that Iraq wanted to assert more of its sovereignty going forward (h/t informed comment). In particular, he wants American servicemen who are not specifically acting under orders and not inside official US military encampments to be subject to the jurisdiction of the Iraqi courts. He also argued that the most effective way that Iraq can help with the American financial crisis is to bear more of the burden of policing the country.

10. Platts has the story that Eni will give Gazprom a stake in Libya's Elephant field in return for Eni and Gazprom jointly developing Arcticgaz, a former Yukos subsidiary. By Eni taking a piece of a former Yukos property they put another barrier in the way of any eventual recovery of its assets by its former shareholders, much less Michal Khodorovsky. The Elephant field produced about 140 kb/d last year.

11. Topnews has the story that the Pakistani government has hiked the minimum purchase price of wheat by 45% in an attempt to boost domestic production there. Pakistan has been wracked by food riots in the last year due to the soaring inflation in basic food commodities. The government's actions also were designed to ensure an ample supply of urea and fertilizers as well as fuel for generators given frequent brownouts which shut down electric water pumps.

12. Erin Voegele at Ethanol Producer Magazine reported that a bill designed to increase energy cooperation in the Western Hemisphere and in particular between Brazil and the United States was approved by the Senate Foreign Relations Committee on September 23. The bill was sponsored by Richard Lugar (R-IN) and directs the Secretary of State to work with Brazil and other nations to accelerate the development of biofuels production, research, and infrastructure.

13. The Chicago Climate Exchange (CCX) on September 25 announced the opening of the Tainjin Climate Exchange (TCX) not far from Beijing. TCX is a joint venture of a subsidiary of the China National Petroleum Corporation (CNPC), CCX, and the city of Tainjin. TCX will design carbon trading instruments by which the Chinese government hopes to reduce sulphur oxide emissions and water pollutants as per the 11th Five Year Plan.

The Financial Crisis and Public Diplomacy

Today the Washington Post ran an editorial entitled Congressional Neroes: Republicans and Democrats fiddle as the economy burns. The headline was well-written; I feel sure you've got the gist of the piece entire. There are a number of competing narratives being shopped around the marketplace of ideas and this is the one with the most currency: that Congress must act immediately or the economy will completely melt down, and that by having failed to pass the bill as is the House (fortissimo) Republicans and (sotto voce) Democrats have betrayed the nation in search of political advantage.

I am uncomfortable with this narrative because for the most part it is not being pitched by people particularly conversant with financial derivatives, their place in the overall financial system, and monetary economics. I am not especially conversant in these things myself, so I have to depend on the read of those who are.

Ordinarily you can find a fair number of economists to take any position you feel like taking on any subject of your choosing, which is nice, because it means you can usually safely ignore the prospectus of any one or other. But, is it mere serendipity that it seems that the great majority of economists--across the entire spectrum--are against the bailout as proposed or as modified? Call me Nero's partisan if you like, but to me that argues it is likely worth weighing their concerns.

I also find the way this "bailout plan" was structured curious. Did the Administration really expect the House to accept a plan which included the following provision?

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Did Secretary Paulson truly believe the House would write him a blank check for $700 billion and simultaneously surrender the power to review his decisions on how to spend the money, completely abdicating their power of the purse? I don't think so. It's possible, but extremely implausible--incredible, in the original sense of the term. Why would a spokesperson for the Treasury respond to a reporter's question on the reasoning behind the number in the bailout with, "It's not based on any particular data point. We just wanted to choose a really large number," as per Forbes?

In the financial world, this provision is known as a "poison pill"

A strategy used by corporations to discourage a hostile takeover by another company. The target company attempts to make its stock less attractive to the acquirer. There are two types of poison pills:
1. A "flip-in" allows existing shareholders (except the acquirer) to buy more shares at a discount.
2. The "flip-over" allows stockholders to buy the acquirer's shares at a discounted price after the merger.

The argument for taking this at face value is that the people of the US Treasury Department are total political incompetents--nincompoops, really. Possible, I suppose, but hardly plausible.

This argues for the conclusion that what we have witnessed over the last week or so is political kabuki. Would the Bush Administration politicize the breakdown of the financial system for some perceived advantage? Given that the Administration was comfortable politicizing the collection of national security intelligence, perhaps.

But, what could the GOP conceivably have to gain from producing a piece of political theater of this sort--one likely to destroy the chances of election for their Presidential nominee?

Here's one possibility:

a) The Bush Administration's political allies in the GOP are not allies of McCain, and would be happy to see his bid for the presidency fail if that meant they could continue to control the direction of the party.
b) The Bush Administration's political allies in the GOP saw an opportunity for them to re-brand the party, figuring that the Presidential contest is lost, but that they can rebuild--given the way the Congressional districts have been gerrymandered--on the strength of their heroic opposition to Bush's plan.

Here's another:

a) There is advantage, from the perspective of the Treasury and the Fed, to delay the reaction of Congress. Consider the prisoners' dilemma. In it, all the prisoners get the most advantage if they act in concert. However, if some act in concert, and others act merely for their own advantage, those who acted to the benefit of all receive the worst compensation, and those who acted in self-interest receive the second-greatest return/advantage.
b) Given that the fiscal stability of the United States is dependent upon the fiscal decisions of the central banks of many other nations (as well as the decisions of the much larger private sector), the fiscal Administration of the US may have decided to include a poison pill in order to encourage other nations to play their hands first.
c) Both parties are using this international gambit for domestic political advantage.

Either way, I simply do not believe that the bail out plan was expected to pass as is, or even necessarily as modified.

Daily Sources 9/29

1. Carl Hulse and David M. Herszenhorn at the New York Times report that the bailout bill failed in the House by a vote of 228-205. The bailout plan, which originally called for no oversight, was significantly modified (from a three page plan to 106 pages), but most economists still seemed to think the plan was not in the interests of tax payers and in the interests of the bankers. House Republicans led the opposition to the bill.

2. James Politi, Krishna Guha, Daniel Dombey and Harvey Morris at the Financial Times report that central banks announced today that they will redouble their efforts at coordinating a response to the crisis, with the Fed more than doubling swap lines with the European Central Bank [ECB] and others from $290 billion just this Friday to $620 billion today. The key central banks involved are the ECB, the Bank of Japan, the Bank of England, the Reserve Bank of Australia, the Bank of Canada, the Bank of Sweden, the National Bank of Denmark, the Bank of Norway, and the Swiss National Bank.

3. Reuters reports that Iran's Central Bank Governor, Mahmoud Bahmani, announced today that he would inject $15 billion from Iran's Oil Stabilization Fund into the banking system in order to give a boost to the economy. Even though sanctions have more or less isolated Iran's banking system from the developed world, the notion that the move might be a reaction to the ongoing financial crisis is plausible.

4. Lars Borchert at Platts reported that the head of the IEA, Nobuo Tanaka, predicted that, given stable output from OPEC, prices will fall as demand continues to drop.

"Demand in Europe and the US is going down because of the high price, so the price situation is going to get better until the end of the year, if OPEC continues producing as they have done in the last month. ... Demand is going to expand by 1.2% because of India and China and their necessity for oil, but since the US and Europe are buying less because of high prices, prices are going to go down."

In the medium and long term, however, Tanaka expects prices to rise as demand continues to grow rapidly in the emerging economies. "The low-price age is over," he said.

5. Eric Watkins at the Oil & Gas Journal has more details on Russian Energy Minister Sergei Shmatko's remarks on how Moscow viewed its international energy strategy going forward:

"A Russian delegation attended the recent OPEC meeting, and I want to tell you what many of those in our delegation were saying: Russia needs to take a more active position concerning the current market price for oil." ...
"There needs to be a Russian factor." ...
"We have always told OPEC, which tries to regulate it, that there are other factors: financial speculation, US inventories, etc. From our standpoint, we occupy such an important place in oil 'high society' we should be our own, Russian factor, perhaps not just one." ...
"In any case, the [Russian] energy ministry has set that goal for itself. We will be preparing if not proposals then at least approaches. We haven't done this before; We want to formulate these approaches. And in that sense the decisions might be most unexpected. Why not, for example, revise oil production forecasts?" ...
"We believe we should more actively engage with the markets. Technological considerations prevent us from simply turning off the tap. We can't simply shut down a field and then open it up again at any time. We have different climatic conditions. In my view we can give our opinion from the point of view of forecasts, perhaps even engage in that in actuality." ...
"The idea of reserving potential fields is very interesting in my view. Instead of discovering a field tomorrow and then proceeding [with development], we prepare a field from the point of view that it won't be touched for the time being, but there will be the ability to start it up in a fairly clearly defined term." ...
"We are absolutely convinced, given those 'American bumps' oil prices have experienced in recent times, that we, a big, important oil power, need to formulate our relation to that—the Russian factor." ...
"We are going to the next OPEC meeting in December, and I think we will have something before then." ...
"This is not a joint effort with OPEC."

6. Alonso Soto at Reuters reports that the Ecuadorian President, Rafaela Correa, has ruled out the nationalization of oil companies operating in Ecuador, which recently rejoined OPEC. Ecuador has adopted a moderate voice in terms of OPEC pricing despite its close ties to Venezuela's Chavez Administration.

7. Dorothy Kosich at Mineweb has the very interesting story that the conservative party of Canada has pledged to ban the export of raw bitumen to countries with bitumen processing methods which do not meet Canada's environmental standards. Evidently the only country that imports raw bitumen that meets those standards is the United States. China, the other major raw bitumen importer, does not. (Bitumen is what is extracted from the "oil sands." It is an extremely heavy carbon resource, or very heavy, unconventional oil. It can be processed into a synthetic crude oil, which can then be refined into oil products like gasoline, diesel, plastics, etc. Bitumen is the basis of the Canada has more oil than Saudi Arabia narrative you've heard before.

Daily Sources 9/26

Irony row ...

1. John Heilprin of the Associated Press reports that Russia has come to a deal with the US to work on passing a new UN Iran resolution. This comes after Russia refused to attend a working meeting earlier this week on how to proceed on Iran after it was excluded from a meeting of the other developed powers (G-7 as opposed to G-8) on the ongoing financial crisis. The new resolution carries no new sanctions, but is worded to emphasize that Security Council resolutions are binding. Whatever you think of the impact of a new resolution so worded (and I don't think there will be much), this does signal to me continued understanding by US and Russian officials that mutual interests outweigh the differences, which is encouraging (to me, at least). It also seems to signal willingness to compromise on both sides--also encouraging to me. But it comes on top of the report by Jonathan Steele yesterday in the Guardian that in May Israeli Prime Minister Olmert asked Bush for a green light for an attack on Iran, and that Bush refused and also indicated that he was very unlikely to change his mind for the rest of his term.

2. Denis Maternovsky and William Mauldin at Bloomberg have the story that Moody's Investor Service has given the grade of "negative outlook" to Russia's banking system. Russia's markets have fallen further as a result--the MICEX index has fallen 43% in 2008.

3. Nadia Rodova at Platts reports that Russian President Medvedev and Hugo Chavez have met in Orenburg today to discuss a wide variety of cooperative projects. Apparently Russia has proposed to Venezuela that they set up a join energy consortium between PdVSA and the run of Russian oil concerns, including Gazprom Neft, Rosneft, Lukoil, Surgutneftegaz, and TNK-BP. "It's a colossus being born," said Chavez in televised remarks. It has also become news that Moscow has recently granted Venezuela a $1 billion loan in order to purchase Russian arms. In televised comments, Medvedev said, "The dynamic of our relationship has indicated how strong [our] ties are." The two can play that game point has been made, I think, in spades. Ultimately, the question has to be to what are our interests, on balance, in Georgia and Venezuela, and what are Russia's? I still haven't seen any statements, much less analysis, on this subject.

4. Rajesh Nair at Platts has the story that Hong Kong bunker fuel suppliers have turned to South America for bunker fuel as the Singapore market has tightened. (The spread between heavy and light products has tightened in Asia over all as new sophisticated refining capacity has come online over this year.) Freight rates have also come down, helping to make longer haul purchases economical. Most interestingly, though, is that ExxonMobil has been sourcing bunker fuel (high sulfur fuel oil) directly from Venezuela, or via PetroChina, which has been importing 500,000 tonnes of bunker fuel from PdVSA every month. At 6.5 barrels per tonne that comes to about 108 kb/d--a considerable portion of stated Venezuelan flows to China. The ExxonMobil bit is icing, no?

5. Zhao Yidi and Zhang Shidong at Bloomberg report that China's State Council, or Cabinet, signed off on a plan submitted by the Securities Regulatory Commission which would allow margin lending and short selling, in an attempt to bolster volumes on falling markets. In effect, the Communist Chinese are allowing short selling while we, as a palliative, ban it.

6. Blaine Harden at the Washington Post has the story that Japan posted a trade deficit on Friday.

7. John Bresnahan & Ryan Grim at Politico have the story on the House Republicans scuttling a deal on the bailout package yesterday. Whatever you think of the package, the following has to be sobering:

"According to one GOP lawmaker, some House Republicans are saying privately that they’d rather 'let the markets crash' than sign on to a massive bailout."

8. A good story in BusinessWeek by Stanley Reed which points out that Saudi interests tend to be closer to the consumer than to the other producers in OPEC. A useful antidote to some of the rhetoric out there. Ultimately, however, Riyadh decides. As the story notes, only they have the capacity to really overwhelm market direction in one way or the other. The rest of OPEC usually tends to produce absolutely as much as they can; if that's more than the OPEC quota, so be it. The worst offender, so to speak, in general? Iran. The problem remains the transparent signal of actual production numbers, which OPEC complicates even further.

9. Ross Sheil at the Jamaica Observer reports that Kingston is in the process of establishing a panel to determine the feasibility of nuclear power for the island nation.

Daily Sources 9/25

1. Kevin Hamlin at Bloomberg has the much commented on story (h/t Naked Capitalism) that Chinese academic Yu Yongding said today that the leaders of the major Asian economies need to come to some sort of agreement whereby they would agree not to dump US debt. I think it is important to stress that Mr. Yu is not speaking for the government of China. He has served as the Director-General of the Institute of World Economics and Politics (IWEP) since 1998 and as the President of the China Society of World Economics since 2001, as Editor of China and World Economy, and Associate Editor of Asian Economic Policy Review.

This is not to say that Dr. Yu is not influential: he was formerly the academic member of the Monetary Policy Committee of the People's Ban of China (PBOC) and a member of National Advisory Committee of the 11th Five Year Plan of the National Reform and Development Commission (NDRC). The NDRC, formerly the State Planning Committee, was expanded into a sort of super-ministry with 26 departments in 2003. It plays the dominant role in setting Chinese energy policy, for example, though this is set to be transferred to the new National Energy Bureau in an effort to centralize Chinese energy policy making and oversight.

Either way, he is not a member of government now. As per Hamlin:

"China is very worried about the safety of its assets," [Yu] said. "If you want China to keep calm, you must ensure China that its assets are safe." ... Yu said China is helping the U.S. "in a very big way" and added that it should get something in return. The U.S. should avoid labeling it an unfair trader and a currency manipulator and not politicize other issues, he said.
...
"Our export-growth strategy has run its natural course,'' he said. ``We should change course." ... China should stop intervening in the foreign currency markets and thus allow rapid appreciation of the yuan, he said. ... If China doesn't allow the yuan to appreciate and continues to promote export-led growth it will lead to confrontation with the U.S. and Europe, Yu said.
...
"China knows what to do. We don't need your intervention."

... in an evident allusion to the bail out plan. In a related story by Alan Wheatley and Langi Chiang at Reuters, Chinese regulators have allegedly told Chinese banks to stop interbank lending to US banks.


As to Chinese policy going forward, Leslie Hook has an opinion piece at the Wall Street Journal Asia which is mostly an interview with Liu Mingkang, the Chairman of China's Banking Regulation Commission. He thinks that the abandonment of Glass-Steagall was a pivotal mistake by US legislators:

According to Mr. Liu, the chief regulator for China's banking sector, "the problem started a good 10 years ago, when people over there [in the U.S.] thought, 'We've got to boost innovations. So the Glass-Steagall Act is just the last stumbling stone on our way ahead. Move it away.'" ... Mr. Liu isn't "100%" in favor of the Act, which separated commercial and investment banking in the post-Depression era. (The U.S. repealed the law in 1999, under the Clinton administration.) But he maintains that this separation is good for China, where, he says, the capital market is the capital market, and the banking industry is the banking industry.

(Although the Act was repealed during the Clinton Administration, it was repealed by a GOP dominated Congress.)

2. Edmund L. Andrews at the New York Times reports that Ben Bernanke told the Congressional Joint Economic Committee that "economic activity appears to have decelerated broadly" across the spectrum of industries and services.

3. William Branigin, Dan Eggen and Paul Kane at the Washington Post have the story that Congressional negotiators have emerged from off-the-record meetings and announced that they are close to an agreement regarding the bailout proposal. The Dems have apparently gotten the GOP to agree to strict oversight, curbs on executive pay, help for homeowners, and an equity position for taxpayer monies. Headlines aside, the House Minority Leader John A. Boehner, also declared today that there was no deal on the bailout package.

4. Real Time Economics reports that the German Finance Minister, Peer Steinbrueck, in a parliamentary debate said he approved of recent actions by US authorities to stem the financial melt-down, though he argued they were late to act, and added that it's "'not necessary nor reasonable' for Germany or Europe to take similar action because 'the financial market crisis is most of all an American problem.'" He also argued that this meltdown signaled that "The U.S. will lose its status as the super power of the global financial system, not abruptly but it will erode. The global financial system will become more multipolar." What I find odd about this statement is the inferred notion that international finance is national in nature, though perhaps he was merely signaling that the central role of the dollar is going to erode ... further.

5. On Tuesday, Neil MacFarquhar had the story that the UN General Assembly meeting in New York was being used by "one world leader after another" to criticize the US for the financial crisis. Out of those mentioned in the story, the unusual (and significant) suspects are: Brazil and Germany (though the critique came from Berlin, not in NY). The Secretary General of the UN, Ban Ki-Moon, used his opening speech to criticize the notion of free markets.

“What you are seeing here is the letting off of some political steam,” said Mark Malloch Brown, a British cabinet minister and former senior United Nations official. “They are all remembering the very hard, unforgiving advice that they got from American financial institutions” to “deflate your economy, let your banks go to the wall,” he said. “There is a resentment at what they would see as a further evidence of double standards.”

6. Neil MacFarquhar and Thom Shanker at the New York Times report that leaders from Ukraine, Poland, and Latvia urged the UN to "stand up to" Russia in the General Assembly this week. Did other neighbors refrain or was it simply not reported? If they refrained from comment, or joining in assent with the others, that would be interesting to know.

7. Colum Lynch at the Washington Post has the story that the Russian Foreign Minister, Sergei Lavrov, said yesterday that Russia has refused to attend a high level meeting to discuss options regarding Iran in retaliation for not being invited to the meeting held by the G-7 to discuss the financial meltdown. And Philip P. Pan at the Washington Post reports that a former Chechen rebel leader who switched sides and helped bring Chechnya under control, so to speak, was assassinated in Moscow yesterday. Though it seems to fall on deaf ears, as I keep on reiterating, American and Russian interests are more aligned than, say, Russian and Iranian, or even Chinese, interests. I wish the relevant authorities would begin to act on that hypothesis, at least.

8. Seeking Alpha has an analysis of ENI's (Italy's largest oil company) evident strategy of long term and close cooperation with Gazprom. I would add that American sound and fury about oil diplomacy notwithstanding, it still appears that Europe as a whole is continuing to pursue a policy of energy interdependence with Russia as their view to security.

9. Russian Energy Minister Sergei Shmatko said, apropos the high level delegation Moscow will send to OPEC's December meeting, "Russia must deal [more] actively with issues of influencing the level of crude prices. A Russian factor must appear." He said Russia might best do this by providing more regular production forecasts from its fields. (So this could either mean for manipulation or for improved transparency.) Shmatko made clear that Russia was not contemplating joint actions with OPEC.

10. Ronald Buchanan at Platts reports that Mexico's state oil company, Pemex, has shut in 250 kb/d of crude production because US refineries shut down for Hurricane Ike has meant a lack of demand. Storage tanks were full. Two tankers were to arrive yesterday to help free up some storage. This is on top of reduced overall crude production from Mexico.

11. Tom Doggett at Reuters has the very interesting story that the head of the IEA, Nobuo Tanaka, appeared to agree with the US decision not to draw on IEA emergency gasoline stockpiles, saying that the market was taking care of the issue.

"We have consulted very closely with the Department of Energy on the current situation," Tanaka said, adding that the U.S. oil industry was "much better prepared" to handle the supply disruption caused by hurricanes Gustav and Ike than it was when Hurricane Katrina hit three years ago. ... "If the disruption continues in a very serious level, we definitely will use our (petroleum reserves) ... activate them, if necessary," he said."

Second guessing these statements is a bit of a dog's game, but the IEA is a particularly political organization and cannot really be seen to be publicly disagreeing with its member nations--and the US is a member nation. The clear signal that IEA was ready to supply gasoline should be good for the markets. But I would point out that gasoline lines are growing in the American south-east and that the lowest stock levels since 1967 should increase gasoline prices significantly.

12. Eric Schmitt at the New York Times reports that Pakistani and American forces exchanged fire on the Afghan border today. This is becoming worrisome.

13. Geoff Dyer and Benedict Mander of the Financial Times reported yesterday that Hugo Chavez struck a deal in Beijing to jointly build a refinery in Venezuela. He also announced that the two would double the size of their joint investment fund to $12 billion (€8.2bn, £6.5bn). Chavez announced before he set foot there that Venezuela would purchase 24 military air craft from China and was set to sign some 30 agreements while there, including the construction of four oil tankers and projects in agriculture, telecommunications, agriculture and electronics. Bilateral trade between the two is expected to exceed $8 billion, up from under $200 a decade ago. Nonetheless, announcements that refineries are going to be built are made all the time. They very rarely are actually made, and there aren't a lot of reasons for China to think it likely to be worth the effort. As I wrote to a buddy of mine last night:

I don't really see why China would think Venezuela attractive. Refineries cost several billion dollars, even small ones, and especially ones complicated enough to handle venezuelan crudes cost even more, and require lots of technical expertise. That's the technical expertise which the Venezuelans basically announced via recent prerequisite of technology transfer in all joint efforts that they didn't have themselves. Therefore, Chavez is asking China to:

a) pony up money
b) pony up expertise
c) pony up technology

and

d) trust that Chavez will not nationalize the effort once China has sunk all of the above into the effort,

even though China has

e) no ability to really project power into the region.

(After all, Chavez would still be protected behind an American umbrella of power. Venezuela has a history, actually, of utilizing the Monroe Doctrine to their advantage with colonial powers.)

But you pays your monies you makes your choice.

Daily Sources 9/24

1. Joshua Partlow at the Washington Post has an interesting analysis of the Castro-Bush tango over hurricane relief. Evidently, the Cuban American National Foundation, the main pillar of support for the embargo in the US has mellowed some, now actively campaigning against the travel and remittance restrictions to the island. There is no mention in the story of a counter-proposal by Cuba where the US would relax the embargo so that Havana might purchase construction materials on credit. A reader caught the strange dissonance in the story where 500,000 homes were reportedly destroyed, but just 200,000 have been left homeless. Surely the embargo is counterproductive in the extreme, but to be criticized for it by the Cuban-American community via El Nuevo Herald is just a tad unreal.

2. The EIA's Week in Petroleum reports that crude stocks fell in the week ended September 19th, by 1.5 mb versus expectations of a 1.6 mb increase. The draw is definitely counter intuitive given the number of refineries shut down in response to the hurricanes. Gasoline stocks fell by 5.9 mb, which is more than the 5.1 mb that analysts expected, but still well below the 8.5 mb draw that a DOE official warned of last week. "At 179 million barrels, total motor gasoline inventories stand at the lowest level since 1967, based on monthly EIA data. Continuing reports of spot shortages of gasoline at some retail outlets where supplies have been most disrupted can be expected over the next several weeks

Mother Jones' Blue Marble Blog has the story of shortages in the Asheville, NC area. The EIA report states that about 890 kb/d of US production is still shut in from the hurricanes. So far in 2008, US crude oil production has averaged about 5.1 mb/d, so 890 kb/d is about 17% of US total production. The federal petroleum district which includes Texas and Louisiana has so far this year produced about 2.9 mb/d, so 890 kb/d is about 31% of the region's production. The EIA reports that 1.7 mb/d of refining capacity is still shut in by the storms. Total US operable refining capacity stands at about 17.6 mb/d, so that represents about 10% of US operable capacity. Contrary to predictions, gasoline prices have fallen in all regions across the US, by an average of $0.11/gallon. This might indicate lower demand.

3. Nouriel Roubini argues in the Financial Times that the next stage of the financial crisis is a run on the hedge funds. He thinks that a severe US recession is in the works and that it will spread to all the developed economies on the back of an expensive Euro, the European housing bubble, falling US imports, high oil prices, and a hawkish European Central Bank. Yikes.

4. Keith Bradsher and Heather Timmons at the New York Times report that small depositors have begun a run on the Bank of East Asia Wednesday. It is the third largest bank in Hong Kong, with assets of $51 billion.

5. The AAP has the story that BHP Billington is planning to be a long-term supplier of uranium to China. Not exactly surprising considering BHP's bid for Rio Tinto and the number of nuclear plants proposed and under construction in China. Still, it is interesting given the Australian parliament's recent investigation into proposed supply contracts with Russia.

6. Christopher Bodeen of the Associated Press reported on Chavez's visit to China where he was due to meet Hu Jintao Wednesday (China is past the international date line). In televised remarks in Venezuela, Chavez said exports to China will increase to 500 kb/d next year and that they are planned to go to 1 mb/d by 2012. This has been the rhetoric for some time now, but those numbers are very unlikely to be reached any time soon.

7. Reuters has the story that Petrologistics forecasts that OPEC production in September will fall 33.4 mb/d to 32.6 mb/d. Saudi Arabia is predicted to cut its supply from 9.7 mb/d to 9.55 mb/d. Iran is predicted to produce 4.05 mb/d, down from 4.4 mb/d.

8. The Associated Press reported Sunday that Iraqi oil exports declined to 1.75 mb/d in August, a 4% decline from the month previous.

9. A UCLA study of satellite imagery suggests that the surge was not responsible for the reduction in violence in Iraq, but rather that it was due to a correlation with the final stages of successful ethnic cleansing by various sectarian groups in Baghdad.

"If the surge had truly 'worked,' we would expect to see a steady increase in night-light output over time, as electrical infrastructure continued to be repaired and restored, with little discrimination across neighborhoods," said co-author Thomas Gillespie, an associate professor of geography at UCLA. "Instead, we found that the night-light signature diminished only in certain neighborhoods, and the pattern appears to be associated with ethno-sectarian violence and neighborhood ethnic cleansing."

10. From Platt's Quote of the Day:

"The business model has to change or we will be non-existent in the future. Collaboration is critical." Independent oil companies need to change their business models and increasingly collaborate with national oil companies, ConocoPhillips Senior Vice President of Technology Stephen Brand said Tuesday at the IHS Herold Pacesetters Energy Conference.

11. Elaine Sciolino at the New York Times reports that the IEAE has announced that North Korea has barred their inspectors from a nuclear reprocessing plant that produces weapons-grade plutonium. Pretty vigorous action given reports of Kim Jong-Il's being on his deathbed recently.

12. Jesse's Cafe Americain may have discovered the historical basis of Ben Bernanke's thinking in terms of the bailout. In 1929, many of the leading Wall Street bankers met to find a solution to the market situation. They pooled their resources and bid for various blue chips at prices well above market. Apparently, this bid to shore up the market worked in 1907 during a "liquidity panic." As we all know the 1929 intervention did not work, which would make this an odd historical precedent to attempt to repeat. Interesting nonetheless ...

Spot Life CL Oct 08 (entire)

Well, it sure looks as if the October contract will live on in the memories of many. Explanations given so far for the weird disconnect between the spot price and the rest of the futures contracts pretty much don't say much that fits the evidence outside of some guys got squeezed ... and the market was very shallow.



Here is what the Euro was doing during the Oct 08's spot life (interbank rate):



And here are forward differentials ... heh, some's gonna have some fun explaining this to all and sundry (like, for example, the US Senate) ...hard to see, given the day of expiry, but differentials narrowing further ...

Daily Sources 9/23

1. Real Time Economics had the story that the Central Bank Governors and Finance Ministers of the G7 had a conference call yesterday and released a statement in support of the actions they had collectively taken to support the financial system. "We reaffirm our strong and shared commitment to protect the integrity of the international financial system and facilitate liquid, smooth functioning markets, which are essential for supporting the health of the world economy. We strongly welcome the extraordinary actions taken by the United States to enhance the stability of financial markets and address credit concerns, especially through its plan to implement a program to remove illiquid assets that are destabilizing financial institutions. We also strongly welcome the measures taken by other G-7 countries." The G-7 is comprised of Canada, France, Germany, Italy, Japan, United Kingdom, and United States of America. Nota bene: Russia was not included, as that would be the G-8. Is this as punishment for Georgia or a sign that the Russian government really no longer supports the financial system as is?

2. The AFP has the story that the Russian Foreign Ministry released a statement today stating that the country has no intention to unilaterally determine the borders of the Arctic--"Russia strictly abides by the norms and principles of international law and is firmly determined to act within existing international agreements and mechanisms."

3. Brian Baskin at Dow Jones has the story that refiners in the US are not facing cut backs in crude allocated to them by Riyadh. Given that refiners in Texas and Louisiana take two thirds of the crude Saudi Arabia exports to the US, and that Hurricanes Ike and Gustav have shut down most of the refineries in those two states, the remainder of that allocation has either not been, in fact, produced or sold to refiners in Europe or Asia or sold on the spot markets. "The U.S. is often the last to feel the impact of a cut in Saudi production as refiners rarely purchase the full amount they are allocated each month." If it is being produced, where is the demand coming from? Somewhere, evidently, as Stefano Ambrogi at Reuters reports that Lloyd's Marine Intelligence Unit said today that "oil shipments from 11 OPEC producers, including Iraq, rose to 23.644 million bpd from Aug. 17 to Sept. 7, versus 23.485 million bpd in the previous four weeks." Gustav made landfall on September 1st. OPEC's meeting which produced promise to more closely hone to quotas took place on the 9th.

4. I wrote a few posts ago that it looked as if there was a change in official policy in Iran to recognize that the holocaust happened, in response to remarks made in New York by the Ambassador to the UN and to remarks on Friday by President Ahmadinejad. However, on Friday, as noted yesterday, the Supreme Leader, Khamenei, made clear that he regarded the Isreali people as an enemy. And today, in the Los Angeles Times, Ahmadinejad reiterated a position of at best ambiguity, at worst denial, of the holocaust. To wit,

"If we agree and accept that certain events had occurred during World War II, well, where did they indeed happen? In Germany, in Poland and in Great Britain. Now, what does this exactly have to do with Palestine? Why is it that the Palestinian people should pay for it?"

The companion article to the interview included the context around this statement:

"'Who are these people? Where did they come from?' he asked in reference to Jews who founded the state of Israel in the wake of the Nazi slaughter in Europe during World War II. He spoke in Persian through an interpreter, whose translation of his next sentence began: 'We've agreed. . . .' before she was cut off and corrected by Ahmadinejad: 'If we agree and accept that certain events had occurred during World War II,' came the next sentence, 'well, where did they indeed happen?'"

This comes on top of the news reported by Thomas Erdbrink at the Washington Post that Ahmadinejad has dismissed the Governor of the Iranian Central Bank, Tahmasb Mazaheri.

"Mazaheri's departure clears the path for Ahmadinejad to change the economy the way he wants," said Mohammad Atrianfar, a journalist, politician and critic of Ahmadinejad. "Mazaheri, who was much more professional than the president, would delay or alter government plans. Now the president has a free hand."

This would apparently eliminate all obstacles to Ahmadinejad's plan to stop subsidizing basic goods generally, and instead distribute money to the poor directly via individual bank accounts. Inflation in August in Iran was 27.2%. If Ahmadinejad succeeds in implementing this plan and it corresponds to a strengthening in Iran's economic situation generally, it could hugely strengthen his hand. If not ...

5. Nick Tattersall at Reuters reports that MEND said today that the Nigerian air force had launched an air assault on their encampments today. MEND said they will continue to respect their unilateral cease fire nonetheless.

6. John Kingston at Platt's blog "The Barrel" notes that production at Mexico's largest field--Cantarell--dropped below 1 mb/d in August (to 998 kb/d). He writes, "There's nobody who thinks the Mexican problem is a weak reserve basis. It's simply a mismanaged approach toward developing those reserves." In point of fact, there are some who believe that mismanagement has little to do with it, specifically some at the Oil Drum, who note that the production profile of Mexico looks quite similar to peak production profiles of oil fields. They argue that management or mismanagement would do little to change the picture. Mexico is in the process of re-examining its oil laws to allow for the participation of foreign majors in the hopes of increasing production and efficiency at Pemex.

7. Emma Graham-Harrison at Reuters has the story that Chinese oil consumption grew by 7% year over year in the month of August to cover Olympics-driven demand, but points to analysts who think that inventories are full to the brim, and that demand is dropping. (Which would be consistent with yesterday's story regarding Sinopec's announcement that they will import 239 kb/d less from September through December, or a reduction of about 3% in Chinese consumption from August.)

8. The African Press Agency reports that the Kenyan Association of Manufacturers warned Monday that 80,000 Kenyans were at risk of losing their jobs because of the high energy price environment. Electricity costs have gone up by 600% in the past year. There are about 37.9 million people in Kenya (est. July 2008), 42% (15.2 million) of whom are 14 years old or under (2008 est.). The labor force is estimated to comprise about 11.85 million people (or ~ 31.2% of the population as per 2005 est.) and the unemployment rate is estimated--as of 2001--to be 40%, or 4.7 millions. 73% of Kenya's power generation is met via hydroelectric dams, which are affected by changes in the climate, and there are limits to new capacity. (On September 11, Sinohydro was chosen to build a new hydroelectric dam at Sang’oro, which is hoped to mitigate the risks of changes in the weather to the power supply.) Low rainfall in late 2007 and early 2008 have reduced electrical while demand has grown rapidly, which probably accounts for some of the price issues. A quick search hasn't yielded what feedstock accounts for the rest of Kenyan power generation, but, for example, if it is produced by coal and/or diesel / fuel oil, that also would account for increase in costs if those inputs are passed through to consumers.

Because it's Funny

Spam Du Jour: “I am Ministry of the Treasury…”

Daily Sources 9/22

1. Salman Masood at the New York Times gives a short analysis of the political situation the new Pakistani government faces after the hotel bombing Saturday, described elsewhere as "Pakistan's 9/11." Evidently, many believe that the instigators were from the Federally administered tribal areas in the north, where there is plenty of sympathy for the Taliban and Osama bin Ladin. Some in the street think the US must be behind it. American help in the ongoing investigation has been rejected.

2. Mary Anastasia O'Grady has an editorial in the Wall Street Journal regarding the Cuban relief effort imbroglio that Daily Sources noted on 9/16. Rejecting outright aid relief, Raul Castro proposes that the US relax the embargo on Cuba to permit purchases with credit by Havana for reconstruction efforts after the hurricanes. O'Grady notes that "Cuba can already buy from U.S. producers all the food and medicine it can pay cash for." I would point out that this particular relaxation in the embargo--allowing sales of food and medicine to Cuba--is less than 10 years old and that it doesn't, in fact, address the issue of reconstruction. Still, if American citizens cannot get credit for buying homes or building small businesses in the US, I could see why the US government might be a tad leery of extending it to Cuba. O'Grady argues that Cuba has been forced by its credit history with European financiers to turn to the US. OK. Well, what do we have to fear? If Cuba's credit history is so bad, then surely US banks won't take Castro up on his offers. Unless the real fear is that the US bankers would ...

3. Itar-Tass reports that the Russian First Deputy Prime Minister, Igor Sechin, said today that Russian energy companies may form a consortium with PdVSA to explore and produce in Latin and South America. This followed his return from a working trip that took him to Cuba, Nicaragua, and Venezuela. Also today a Russian naval squadron of four--including one capital ship (a nuclear powered cruiser)--left Severomorsk for Caracas for maneuvers in November, as per the AP.

4. RIA Novosti reports that in a press conference with President Medvedev in Kazakhstan, the Kazakh President, Nursultan Nazarbayev, said that it was "very important that Kazakh oil should pass through Russia." He stated that Kazakh crude production should increase by 12 million tonnes (87.6 mb or 240 kb/d) in 2009.

5. Doris LeBlond at the Oil & Gas Journal had an interesting story today about the establishment, on September 8, of an Africa-EU energy "partnership" by the African Union Commission and the European Commission. The partnership has revived the idea of the trans-Saharan gas pipeline project--a 4,300 km (2,672 mile) pipeline with a 20 billion cubic meter/ year capacity linking Nigeria to Algeria at a cost of about €7 billion (~ $10.1 billion). (Currently Nigeria flares most of its gas.) An informal joint experts group on energy has been put together and will meet for the first time in October.

6. Ibanga Isine, Sola Adebayo and Mudiaga Affe at Punch report that MEND has unilaterally called a ceasefire, suspending Operation Barbarossa Hurricane, in the Niger Delta. Operation "Tropical Storm Vigilant" will replace Hurricane, with only International Red Cross staffers allowed into the region to collect the dead. The spokesman for the Nigerian military's Joint Task Force told reporters that the ceasefire was good for the militants, the region, and the country. MEND states that the oil war was ignited by an unprovoked attack by the military on one of their positions as well as indiscriminate attacks on civilian communities. Emma Amaize & Jimitota Onoyume at the Vanguard report that leaders of the various Niger Delta militant movements are sending separate delegations to Abuja for negotiations with the government.

7. Richard Holbrooke, R. James Woolsey, Dennis B. Ross and Mark D. Wallace have an op ed in today's Wall Street Journal entitled "Everyone Needs to Worry
About Iran." A pretty well-regarded and experienced bunch. Bipartisan, too. But the notion that Iran has no economic argument for nuclear power, whatever the merit of the charge that Tehran seeks nuclear weapons, is dead wrong.

8. Ramin Mostaghim and Borzou Daragahi at the Los Angeles Times had the story Friday that the Iranian Leader of the Revolution aka "Supreme Leader" Ayatollah Ali Khamenei said that Iran and Israel were on a "collision course," which would seem to negate the story in the New York Times that day where I argued that it was beginning to look like holocaust recognition had become official Iranian policy. In his remarks he explicitly contradicted Ahmadinejad, saying that Iran was an enemy of the "Israeli people," and not just their government.

9. Reuters reports that the head of the International Atomic Energy Agency, Mohamed El Baradei, said today that IAEA agents have been asked by North Korean officials to remove seals and surveillance equipment from the Yongbyon plant.

10. Blaine Harden at the Washington Posts reports that Japan's ruling Liberal Democratic Party has selected Taro Aso, a former foreign minister, to be the next Prime Minister. Aso's younger sister is married to a cousin of the Emperor and his family's cement business used slave labor during WWII. Aso competed in the 1976 Olympics in Montreal (as a marksman) and is a Roman Catholic. About 0.5% of Japanese are Catholics. He is also a nationalist that has repeatedly upset Japan's neighbors by allegedly whitewashing Japan's imperial past. Jesper Koll, the President of Tokyo-based investment firm TRJ KK, has an interesting op ed essentially endorsing Aso in Wall Street Journal Asia.

11. Samuel Sockol and Griff Witte at the Washington Post report that Israeli Prime Minister Ehud Olmert also resigned on Sunday. His term was marred by corruption probes. The current US-backed peace talks with Palestine were initiated by Olmert and may be kaput due to his exit.

12. Karin Brulliard at the Washington Post reports that in a television address Sunday South African President Thabo Mbeki announced his resignation. The ANC had voted to oust him the day prior.

13. Jad Mouawad at the New York Times has a story on the $16.37/b rise in the spot price for oil today. Of course, that's only part of the story ... tomorrow's spot contract "only" went up $6.62/b, or to $109.37/b as opposed to $120.92/b. Although the House passed the "anti-speculation" bill on Friday, the Senate has yet to take up the bill, and so traders are saying that the general rise is due to investors looking for a safe place to invest in.

Key "fundamentals" arguing for a higher price for crude include:

- the news from the EIA Wednesday that stocks were down the week previous and the unusual step it took of telegraphing Friday the likely stats report this Wednesday of a draw on gasoline of over 8 mb;
- the odd news, given the overall situation, that the US would not ask the IEA to supply emergency gasoline to American markets;
- the "oil war" in Nigeria, though a cease fire was unilaterally declared by MEND today;
- slight reduction in oil supplied to the market by Saudi Arabia in keeping with the September OPEC meeting's decision,
- Angola set to cut exports by 10% come November,
- a dollar possibly about to be "crushed" due to the worsening news on the financial front and worldwide government attempts to calm the markets
- two more months left in the hurricane season
- increase in tensions with Russia

Key "fundamentals" arguing for the drop in the price of oil include:

- the length and number of refineries in the US which remain shut down due to Hurricanes Ike and Gustav, amounting to around 20% of American refining capacity, thus to about 2 mb/d of imports, or about 2.4% of world demand;
- on top of this, demand appears to be sinking in the US as the price of gasoline becomes too expensive for many to afford. department of transportation data each month shows a decline, year over year, in vehicle miles driven;
- OECD demand down by 1 mb/d, or 1.1% of world demand;
- demand down in emerging markets which have been the main source of demand growth over the last five years, including the story from Jim Bai of Reuters that Sinopec will import 1 million tonnes less crude per month from September through December, or about 239 kb/d--around 3% of Chinese implied demand, or 0.3% of world consumption. demand should fall in both China and India as subsidies have been reduced substantially;
- Russia cut their export tariff substantially in response to the fall in the price of crude;
- Apparent increase in security in Iraq / apparent (overall) reduction in tensions between Iran and the US
- it is beginning to appear as if the world's economies are not structured to profit at $100/b, especially export-based economies where transport costs would be significantly affected
- a "crushed" dollar would presumably have the same effect as high transportation costs on export-based economies, especially those founded on exporting primarily to the United States

Although the above is just a sampler, it is my sense that the reduction in open interest in NYMEX, which in part is due to the anti-speculation legislation, will mean for more volatility over time. But, I suspect that even with investor money entering the contract for oil (and other commodities) in order to hedge against the fall in the dollar, that the price of oil as expressed in the futures market, will have to fall as worldwide demand appears to be faltering, and, should a worldwide recession be under way, likely to fall even further.

Week Three in the Spot Life of CL Oct 08

Whoa, as everyone's been saying. It's basically all about the financial crisis, though no one seems exactly sure as to how it should affect the oil market.



For the beginning of the 7 trading days, it looked like the euro and light sweet crude were going in completely opposite directions, and in lockstep at the end.



No longer in perfect contango. Spot is getting more expensive as the contract heads towards expiry. Overall differentials still narrowing.

Daily Sources, 9/19

Paradoxes abound this week ...

1. William Branigin at the Washington Post reports that yesterday Condoleeza Rice delivered a speech in Washington which stepped up criticism of Russia. In it, she stated that Europe and the US had to stand up to Russian bullying, complained of "anachronistic Russian displays of military power" in South America, and asserted that the US "will not allow Russia to wield a veto over the future of our Euro-Atlantic community." In a strange echo of Ahmadinejad's rhetoric today regarding Israel, she made clear that the US had no issue with the people of Russia, merely its government. This comes on top of the report by Thom Shanker at the New York Times that Secretary of Defense Robert Gates said yesterday that he would adopt an approach to relations with new members of NATO bordering Russia which would speak to their security concerns without unnecessarily provoking Moscow. That day President Medvedev also said that he was hopeful that Russia and the United States would find a way to repair their relationship. But, as Vladimir Soldatkin at Reuters reports, Russian Energy Minister Sergei Shmatko said Russia will send a high-level delegation to the next OPEC meeting in Algeria on December 17. Their participation in the September meeting caused a lot of worried speculation in Europe. Meanwhile, trading on the Russian stock market was halted again today, but this time because the market was surging too quickly, not falling, as per Edward Hugh at Russia Economy Watch.

2. Barbara Powell at Bloomberg reports that John Duff, the survey manager for the EIA's Week in Petroleum, warned today that next week's report was likely to show a draw of between 6.5 and 8.5 million barrels in gasoline stocks. Jonathan Cogan, a spokesman for the DOE, stated that stock levels are at the lowest seen since November 1967. However, in a story reported by Tina Seeley at Bloomberg, another spokesperson for the DOE, Healy Baumgardner, said in a telephone interview that the US would not seek emergency fuel supplies from the International Energy Agency. This comes on top of an interview by Alex Lawler at Reuters with the head of the IEA, Nobuo Tanaka, where Tanaka said that he thought the current price environment for oil was likely to precipitate a global recession.

3. Nick Snow at the Oil & Gas Journal reports that the US Congress passed the anti-speculation bill today by a large margin. Rep. John Dingell's (D-MI) press release gives the legislation the credit for the fall in oil prices since July, arguing that it is the only factor since then which could account for the price situation. I can think of a few ....

4. Todd Benson at Reuters reports that Brazilian President Luiz Inacio Lula da Silva on Thursday said that he thought the resurrection of the US Fourth Fleet--which was decided early this year--might be because the US covets Brazilian oil supplies. Chavez also has complained about this decision. Brazil is in the process of negotiating a strategic defense alliance with France which would include the construction of a nuclear-powered submarine with which Brazil could police its shores.

5. In an important clarification reported by Nazila Fathi at the New York Times, Mahmoud Ahmadinejad made clear that when he said that "Israel will be wiped off the map" he meant that the Israeli state would cease to exist, not that Iran was working for the genocide of the Jews. He remained extremely hostile to the presence of a state based on Zionist principles, but it appears the the recognition of the holocaust and the assertion of Iranian goodwill to the people of Israel, as opposed to the government, are now state policy. This is an important shift. Ahmadinejad will be in New York next week to address the UN General Assembly.

6. Mahmoud Abbas, President of the Palestinian National Authority, has an op ed in the Wall Street Journal today which argues that peace between Palestine and Israel is still possible, but that if a modus vivendi is not arrived at soon, it will soon become much more difficult.

7. Carlotta Gall at the New York Times reports that Afghanistan had had a very poor harvest and that aid officials are warning of an acute food shortage this winter, which is likely to make an already difficult situation worse.

8. Rob Foulkes and Daniel Litvin of Critical Resource have an interesting piece in Mineweb, where they consider the situation of Areva, an uranium mining company, in Niger. The Tuareg rebel movement of the 1990s, the MNJ or Mouvement des Nigériens pour la Justice, was resurrected last year amidst calls for a fairer redistribution of resource wealth and the Niger Government has begun to allow foreign competition into the mining arena from Chinese, Indian, and Canadian firms. Paris is likely aggravated by these changes, as 80% of French electicity generation comes from nuclear power.

9. An exhausting week of financial news. Today:

The SEC banned all short selling on financial securities.

The Treasury established a temporary guaranty program for money market funds.

Secretary Paulson and Chairmans Bernanke and Cox began discussions with Congress last night on a bailout plan. Paulson's statement on a comprehensive approach to market developments was carried verbatim by the WSJ.

Brad Setser wonders why the dollar hasn't completely tanked.

Because it's Funny

today's Op-Ed cartoon from the Washington Post, and yet another funny piece from the same venue:

For a Bailout, Press 'One' . . . by Alan Neff

Hard to believe but Tom Toles isn't fantasy, have a look at the Wall Street Journal's opinion page which has pieces which actually blame regulation for today's problems ... and warns against a return to it!

And, if you think that folks are angry now ...

Daily Sources 9/18

1. AFP reported that Jacques Diouf, Director General of the UN Food and Agriculture Organization [FAO], told the Italian Parliament that the number of people in the world facing "acute hunger" by the end of 2008 is likely to exceed one billion. So far this year the number globally has risen to 925 million from 850 million. The World Bank estimates that 100 million people have been pushed below the poverty line by risign food prices. The rise in food prices globally are mostly attributed to the rise in oil prices, the dedication of arable land to biofuel production, and the increased consumption of land, food and energy intensive meat in the emerging economies. "Hunger hotspots" identified by the FAO include Ethiopia, Djibouti, Ghana, Guinea, Haiti, Liberia, Mauritania, Mozambique, Nepal, the occupied Palestinian territories, Pakistan, Senegal, Tajikistan, Uganda and Yemen.

2. Dow Jones Newswires reported that Abbas Naki, Secretary General of OAPEC (Organization of Arab Petroleum Exporting Countries), said that Middle Eastern oil producing countries are likely to shelve a number of production boosting projects should the price of oil drop below $80/b.

3. Lyubov Pronina and Greg Walters at Bloomberg report that Alexei Kudrin, Russian Finance Minister, announced today that Russia will reduce its duty on crude exports from $495.90 a tonne to $372 a tonne beginning October 1. (A metric ton of oil roughly equals 7.3 barrels assuming 33 ºAPI. Urals Blend is about 30.9 ºAPI. Various Urals crudes range from 26.69-33.61 ºAPI. i.e. ~ 6 - 7.3 barrels/tonne) The tarrif on light oil products will be cut to $263.10/tonne and the heavy products tarrif will be cut to $141.70/tonne. Light products generally include jet fuel, diesel, and gasoline. Heavy products usually refers to the various varieties of fuel oil, asphalt, etc.

4. Dow Jones reports that the Norwegian Foreign Minister Jonas Gahr Stoere told reporters today that all territorial claims in the Artic must fall, as it has so far, under the international Law of the Sea, following Russian call to formally establish the claims of all bordering countries.

5. Marcin Grajewski at Reuters reports that the European Commission has denied Lithuania's request to keep its Ignalina nuclear power plant open. The Baltic States hope to build a modern nuclear plant to handle energy generation requirements, but one will not be operational until 2015 at the earliest. Under its treaty to join the European Union, Lithuania was obliged to shutter the plant by the end of 2009. There is a question of how the Baltic states are to handle their energy requirements in the interim. Russia is considered especially suspect given Polish control of the Mazeikiai Refinery (in Lithuania and the only refinery in the Baltic) and rumors surrounding a fire that shut the complex down in 2006. Russia stopped all deliveries of crude oil to Lithuania via the Druzhba pipeline system in 2006, apparently in retaliation for selling the Yukos stake in the Mazeikiai to PKN Orlen instead of a Russian company. Druzhba is Russian for "friendship."

6. The Wall Street Journal has an editorial about the "Run on Russia." Though the crowing tone, probable mistaking of correlation with causation, and self-congratulatory bellicose tone is useless, the implied admission of the correlation of Russian interests with Western interests is, at least, useful.

7. Henry A. Kissinger and Martin Feldstein have an interesting op-ed in the Washington Post advocating the establishment of closer cooperation between oil consumers. I think this is a good idea, generally speaking, and have argued as much in the past. The devil is in the details, though. Making coal clean by any environmental standard, for example, would be a neat trick.

8. Chris Buckley at Reuters reported that on Wednesday the People's Daily called for a new world financial order that was not dependent upon the United States. (h/t Jesse's Cafe Americain) Still, Vice Premier Wang Qishan told U.S. trade officials in a meeting in the US on Tuesday, "The Chinese government is well aware of the fact that the United States, which is the world's largest developed country, and China, which is the world's largest developing country, should have constructive and cooperative economic and trade relations."

9. Dealbook writes that the rumor mill now floats the story that Goldman Sachs and Morgan Stanley, the two remaining investment banks, are not long for this earth. Yesterday, Morgan Stanley and Goldman Sachs were down 24% and 14%, respectively. Brad Setser's Follow the Money has a response to the news that the Chinese Investment Company is being asked if it would be interested in acquiring 49% of Morgan Stanley by executives there. I can only begin to imagine the political storm that would take place if that happened. Remember Unocal?

10. The Associated Press reported that the British Financial Authority has banned all short selling until January 16, 2009, as per Jesse's Cafe Americain.

11. The Global Director of Market Pricing at Platts, Jorge Montepeque, told a Standard & Poor's commodity investing conference today in London that oil companies are unwilling to trade with their banks, according to Chanyaporn Chanjaroen, Alaric Nightingale and Lars Paulsson at Bloomberg. Nonetheless, E.ON Energy Trading said the had not seen liquidity drying up in any of the energy markets.

12. Patricia Lui and Wes Goodman at Bloomberg report that central bankers in South Korea, the Philippines, India and Thailand are stopping using their currency reserves to defend their currencies for now, accepting lower rates versus the dollar. South Korea's cash reserves dropped 8% in the last five months to $243.2 billion. India's dropped 7.4% this quarter to $280 billion. Thailand's dropped 5% to $101 billion. "Barclays Plc, the third-biggest currency trader, predicts the won will fall to 1,200 by year-end, the baht to 37 and the rupiah to 9,450 and is now revising those forecasts lower."

13. Platts reports that the Nigerian government has been forced to use proceeds from crude export sales to pay for the subsidies on oil product imports, as the cost has exceeded the budgeted amount. The cost of subsidies this year are expected to exceed 1 trillion Naira, or about $8.6 billion.

Because it's Funny

Barney Frank Celebrates Free Market Day

Daily Sources 9/17

1. Andrew E. Kramer at the New York Times reports that trading was halted on the Russian stock market for the second time this week. The market has dropped by more than 25% this week and is off 57% since its peak in May. The Russian Central Bank and regulators also announced a 4% reduction in bank reserve requirements today, which the central bank’s chairman, Sergei Ignatyev, said would free up $11.76 billion. The Russian finance minister, Aleksei L. Kudrin, also announced he would free up about $44 billion by increasing the repayment time of state loans to state banks from one week to three months. Kudrin also said that the discussed measure of having Russia's Sovereign Wealth Fund invest in the market has, for now, been deemed unnecessary.

2. The Moscow Times reports that UBS analysts have said that the price of crude has dropped so much that a barrel is now worth less than the cost of transport and Russian taxes. If you are a pure crude exporter--and don't have a refinery from which you then sell products--you are losing money. (Evidently the mandated prices of transportation fuels in Russia now would not be counted as subsidies.)

3. Margarita Antidze and Matt Robinson at Reuters report that Russia has signed treaties with Abkhazia and South Ossetia which formally commits Moscow to coming to their defense should they be attacked. In 19th century gunboat diplomatic terms, you would call it a "guarantee of independence."

4. AP reports the US Embassy in Yemen was assaulted with a car suicide bomb, rocket-propelled grenades, and automatic weapons today. At least 16 are dead, although apparently no Americans were hurt. President Bush used the incident to say that the attack is a "reminder" that we are "at war with extremists." Officials believe it is likely an al-Qaeda attack. Non-essential personnel were just allowed back into the facility last month.

5. MEND's oil war continues to heat up in Nigeria, as per Ibanga Isine and Victor Sam at the Punch. The "oil war" is also referred to by MEND as "Operation Hurricane Barbarossa"--which is probably meant to evoke the Turkish privateer "Redbeard" who put an end to the damage the Knights of Saint John were doing to Ottoman shipping and eventually became the Fleet Admiral of the Ottoman Navy(a) and not Hitler's "Operation Barbarossa" (or the code name for the invasion plan of the Soviet Union.) The Hurricane part I understand ... and so far many of the attacks seem to have come via speed boats.

It is in this environment that the Nigerian Senate is considering an anti-terrorism bill reports John Alechenu at the Punch. Yet another foreign political utilization of the Bush Administration's "War on Terror" (by the way, just yesterday Putin referred to the Georgian terrorist situation)--and it is worth remembering that America remains very popular in Nigeria.(b) "If passed, the attorney-general will be empowered to detain persons for up to 60 days where he has reasonable grounds to 'believe or suspect' that 'the entity knowingly committed; attempted to commit, participate in committing; or facilitated the commission of terrorist acts.'" I think that such broad language tends to erode the rule of law, and this would be in a country where the rule of law is not particularly strong to begin with.

6. Juan Forero at the Washington Post has an important report on a witness in ongoing trials in Colombia linking Gen. Mario Montoya to death squads in Medellin. Montoya is apparently well-known in Washington and was one of the generals involved in orchestrating the spectacular rescue of hostage Ingrid Betancourt from FARC. The State Department stood behind Montoya today in interviews. Should these allegations prove true, they will likely be very damaging to the Uribe Administration as well as further undermine the American image in South America.

7. Thom Shanker at the New York Times reports that Defense Secretary Gates has apologized for the deaths of non-combatants in recent strikes in Afghanistan. I think that--though it might stick in the craw a little--this was a very wise move.

8. Xinhua reports that China will allow local governments to raise the cost of heating in response to the increased costs of coal.

9. Tom Doggett at Reuters reports that Sam Bodman, Secretary of Energy, told reporters that the Administration is considering asking the IEA for some of its gasoline reserves.

10. Edmund L. Andrews, Michael J. de la Merced and Mary Williams Walsh at the New York Times report that The Federal Reserve Bank has agreed to lend AIG $85 billion for a majority equity stake in the company.

11. David Cho at the Washington Post reports that the Federal Reserve has asked the Treasury for a $40 billion deposit.

12. Brain Setser at Follow the Money yesterday had a blog entry which partially answered my question regarding where foreign banks were going to put their money, following the Treasury's release of the Treasury International Capital data for July (TIC.) Answer: fleeing the US, and insofar as they are investing in the US, investing in the safest possible instrument, Treasuries. To paraphrase:

Before the crisis, foreigners bought roughly:

- $205b of long-term Treasury bonds
- reduced their holdings of bills by $10b
- $285b of long-term Agencies
- $540b of long-term corporate bonds
- $210b of US equity.
or about $1,230 billion per month.

After the crisis:
- $350b of long-term US treasury bonds
- $125b of short-term bills
- $150b in Agency bonds
- $210b of corporate bonds
- $55b of US equity
or about $890 billion per month.

Today the yield on the 3 month Treasury bill went to zero. That suggests to me that the market believes that the dollar will be worth more tomorrow, versus a basket of goods, than it is today. By basket of goods, I mean basket of currencies and securities because commodities appear to have rebounded recently. (Gold for December went up, if I understand correctly, $70 today! h/t Jesse's Cafe Americain) So, does this mean that foreign central banks will now be forced to sell dollars in order to defend their currencies or that they will be forced to buy dollars in order to defend their exports? I dunno.

(a) Wikipedia: Hayreddin Barbarossa
(b) Pew's 47-Nation Global Attitudes Study of 2007 has 70% of Nigerians having favorable views of the United States. Table: "Favorable Views of the U.S.", page 17. You also might want to check out my blog entry from March: The Geopolitical Consequences of the Candidates.

Daily Sources 9/16

1. The Federal Reserve announces it will keep the Federal Funds Rate at 2%. Given the financial environment, probably the most significant news today. "Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth." "The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability."

My sense is that this provides little support to the dollar, the consequences / desirability of which I am still thinking on. Paul Krugman mentions the strong v weak dollar debate in a recent blog post, and refers to how a weak dollar strengthens the American balance sheet vis-a-vis foreign governments and provides impetus to US exports, but ignores the savings of the elderly (and most unsophisticated--read not wealthy--investors who quite rationally tend to choose "safer" "fixed income" investments like Treasuries). My question is whether or not a weak dollar policy forces export-based economies in Asia to pursue a strong dollar policy by purchasing more US debt? If the Asian tigers (and the EU) begin to avoid US debt, who will they sell to? I dunno; I'm not an economist. I do know something about the oil markets, though, and I can tell you that the notion of 25% of your customer base all of a sudden going broke is likely not viewed as good news in the Middle East, even if their Sovereign Wealth Funds can go bottom fishing.

From a geopolitical perspective, the consequences of a worldwide financial system breakdown are ... um ... not good. The most famous antecedent of course is the Great Depression, on which many blame WWII. The comparison, on the face of it, is alarming to say the least. Joseph Stiglitz, Economics Professor at Columbia, appears, given his piece in the Guardian, to think the comparison to the Great Depression relatively apt. (I am not sure of the helpfulness of Stiglitz's arguments here, but liked the way he pointed out once upon a time that the neo-liberals were, in large part, responsible for the mess Russia got into as a result of its transition from communism.)

That this is big is indisputable, Bred Setser points out that in terms of sheer size, Lehman's bankruptcy is larger than Argentina's default of 2001. He also mentions that a large percentage of those being burned just now are financiers in Asia. Michael Lewis also thinks American financial credibility, and likability, in Asia is approaching zero.

Ralph Atkins and Chris Giles at the Financial Times report that on Tuesday the Bank of Japan injected $24 billion into the international money markets, the New York Federal Reserve Bank $50 billion, the European Central Bank €70 billion (~ $100 billion), the Bank of England £20 billion (~ $36 billion). In the meantime, the Associated Press writes that the Labor Department reported Tuesday that consumer prices were down 0.1% in August.

2. Reuters reports that OPEC cut its forecast for oil demand growth in 2008 to 880 kb/d in its Monthly Oil Market Report for September. That is 120 kb/d less than its previous forecast. In the meantime, according to Ayesha Daya and Maher Chmaytelli at Bloomberg, the OPEC governors from Libya and Iran both said today that an emergency OPEC meeting was not warranted by the current situation. But the chief economist at the British Saudi Bank said in an interview with Juan Pablo Spinetto and Grant Smith at Bloomberg that Saudi Arabia would likely cut production in advance of the December OPEC meeting. (Saudi Arabia is currently producing more than its quota. Just how much more is a subject of much debate.)

Meanwhile, Austin Ekeinde at Reuters reports that the Nigerian "oil war" by MEND continues to heat up, with several facilities coming under attack. Over the last four days, the militants have shut in as much as 110 kb/d. Also, Alexander Kwiatkowski at Bloomberg reports that Angola will cut its crude oil exports by 10% in November. Moreover, AP reports that Brazil has turned down the offer of OPEC membership.

Deisy Buitrago at Reuters also reports that Hugo Chavez said today that oil will settle at $90-100/b. This comes on top of news that Chavez is planning to visit China next month and renewed alarms about China becoming the destination for Venezuelan oil. And as part of the poisonous rhetorical mix, it is worth having a look at Maria O'Grady's opinion piece in the Wall Street Journal yesterday which argues that Chavez's dalliance with Russia is a good sign of his difficulties.

3. Dan Bilefsky and Stephen Castle at the New York Times report that the US Ambassador to NATO is arguing that Georgia's conflict with Russia regarding Abkhazia and South Ossetia should not prevent Georgia from becoming a NATO member. Also, Free Exchange at the economist has a little piece on how the Georgia conflict has punished Russia's economy. Given the fall in the price of oil, this is a double whammy.

All that aside, William Schomberg at Reuters reports that the EU has approved the purchase of an Italian electric energy producer by a unit of Gazprom. And the AP reports that the governing (pro-Western) coalition in Ukraine collapsed today. President Viktor Yushchenko accused Russia of attempting to destabilize the Ukraine by encouraging ethnic Russian separatists in the Crimean peninsula.

4. Esteban Israel at Reuters reports that Cuba has conditionally accepted the resumption of a formal political dialogue with the EU this month. This comes on top of the interesting news reported by Karen DeYoung at the Washington Post that the Bush Administration has asked Cuba to reconsider its rejection of aid the US has proposed in response to Hurricanes Ike and Gustav's devastation of that country. Cuba has rejected aid via an airlift by commercial aircraft, but asked the United States to temporarily drop certain provisions of the embargo which prevent it from purchasing reconstruction materials on credit. (Credit? If Lehman can't get any, ... .) The US has rejected this counter-proposal.

5. Stephen Graham at the Associated Press reports that Pakistan has authorized its troops to fire on coalition forces should they cross over into Pakistan from Afghanistan.

6. Jeff Wilson at Bloomberg reports that corn and soybeans fell precipitously on the CBOT today. This comes on top of a study that argues high grain prices are here to stay from the University of Illinois at Urbana-Champaign.

7. If you wanted to quantify--outside of the difference between eating well and starvation--what pollination is worth, the Helmholtz Association of German Research Centres released a study today which posits that the worldwide economic value of pollination is €153 billion (~$220 billion). I would think this is a ginormous underestimation.