Daily Sources 10/21

1. Brad Setser at Follow the Money continued his investigation into the fall out from the financial crisis, reiterating arguments he made some time ago about the impending demise of Bretton Woods II.

"I increasingly suspect that the combination of falling oil prices and falling demand for imported goods will produce significant fall in the US trade and current account deficit in the fourth quarter, with a corresponding fall in the emerging world’s combined surplus. The Bretton Woods 2 system – where China and then the oil-exporters provided (subsidized) financing to the US to sustain their exports – will come close to ending, at least temporarily. If the US and Europe are not importing much, the rest of the world won’t be exporting much. ...

In some sense Bretton Woods 2 has been on life support for a while now. China’s recent export growth has depended far more on Europe than on the US. US demand for non-oil imports peaked in 2006. ...

The end result of this crisis though could be rather similar: a sharp contraction in credit, a fall in US economic activity, a fall in US imports and a fall in the amount of foreign financing the US needs.* [* In one key respect the scenarios do differ: the collapse of the balance of financial terror would push Treasury yields up. The credit crisis has pushed Treasury yields down.]

Setser's post is well-worth reading in its entirety.

Oil is a cyclical commodity and can be expected to move up sooner or later. Nothing that I have read over the last four years has argued that oil can go back down to its old lows, but instead that there is a "new plateau." Views as to where the "new plateau" sits price-wise vary, but usually people have argued $50-80/b ... and the majority were on the higher end. (Actually, Verleger recently put out an analysis with a low-case scenario of $10/b and a high case of $250/b, but him aside.)

Some analysts argue that the price of oil will respond sometime as early as 2Q 2009 and no later than 2H 2009 to OPEC cuts--if Saudi Arabia goes along. On the other hand , and many analysts (and members of OPEC) believe that there is a tremendous amount of production capacity about to come on line (about 3 mb/d.) Furthermore, Gleb Bryanski and Dmitry Sergeyev at Reuters report that "Russian Energy Ministry Sergei Shmatko said Moscow would cooperate with OPEC but would not join oil output cuts despite calls from the producers' organisation to help it support flagging oil prices." On the other hand, Gilles Castonguay, also at Reuters, reports that Sheikh Ahmed Zaki Yamani, who had served as Saudi OPEC Governor for 25 years and founded the Centre for Global Energy Studies (CGES), said that the other OPEC members have already cut production, so prices are set to continue to fall unless Saudi accedes to their pressure. It sounds to me as if he suspects Riyadh might, given "Saudi Arabia is coming to the point that if the crisis starts to (worsen) it will not even have enough liquidity to pay for public administration." Stefano Ambrogi, also at Reuters, reports that according to Lloyd's Marine Intelligence Unit, OPEC's exports fell 900 kb/d in October, 400 kb/d more than called for in the September 9 meeting. The bulk of the supply cut came from the Gulf region, reducing exports by 660 kb/d.

I think what's needed in terms of a new Bretton Woods or what have you is a sense of what is the sustainable band of oil prices to maintain economic growth founded upon international trade versus what the sustainable band of oil prices to spur supply addition investment.

A reader--jboss--on Setser's blog had a very interesting remark vis-a-vis this issue:

China etc. financing a complete infrastructure overhaul in USA/EU.

That would be a policy decision. But given policy priorities in Europe and the Obama camp it’s pretty reasonable.

There is not such a big difference between building homes and building wind parks/ solar thermal installations/ electricity lines.
We’re still talking about economy restructuring on a large scale, but it’s at least doable.

All of these installations are even in China’s national interest, since they lower demand pressure on certain commodities on a long term basis and they will provide a model to copy for a step, that China too one day will have to take.

An interesting suggestion and perhaps similar to China's New Africa Policy of 2006. The difference, of course, would be the level of influence said investments in the EU and the US would provide Beijing versus the influence they weild in, say, Kartoum. Intriguing, but I wonder if China really possesses the financial resources to suppress their currency, massage their domestic economy, and embark on such a policy at the same time? And, if oil prices rapidly return to the $100/b mark, will that mark the end of China's export policy for good?

2. In an op ed I missed, Paul Krugman thinks the UK has earned tremendous international credit due to the response of Gordon Brown to the financial crisis. And there are some indicators that interbank lending rates are easing.

3. Tasneem Brogger at Bloomberg reports that Iceland is very close to a deal with the IMF, with assists from the Skadinavian countries and Japan.

4. Elisabete Tavares of Reuters reports that Brazil's Energy Minister that production costs from the newly discovered giant ultradeep water Tupi field should not exceed $40-50/b. If true, this represents a fairly cheap addition to supply capacity.

5. Somini Sengupta at the New York Times reports that India is preparing to launch an unmanned spaceship to orbit the moon Wednesday. This follows China's moon launch of last year. Folks familiar with the computer game Civilizations will feel a strange sense of deja vu.

6. Jane Perlez of the New York Times has an interesting report on the parliamentary debate in Islamabad about carrying on the fight against the Taliban in northern Pakistan. The army apparently was looking for a Parliamentary mandate for their actions, but found serious reluctance instead. Zadani promised to prosecute the war as part of his talks with Washington. Evidently, there is some preference for jaw jaw over war war in Islamabad. If it is possible to separate the Taliban from al Qaeda, that would make sense to me.

7. AP's Matti Huuhtanen reports on US and Russian military leaders meeting in Helsinki to discuss Georgia, the Black Sea, and Afghanistan. This follows on the visit to Serbia yesterday.

8. The Associated Press reports that Argentina has announced plans to nationalize $30 billion in private pension plans in an effort to secure them from the crisis.