Daily Sources 10/9

1. James R. Hagerty and Ruth Simon at the Wall Street Journal report that 1 in 6 homeowners are "under water"--the market value of their homes is less than their mortgage. Look at the interactive map on the Journal's site it seems the states hit hardest by this are California, Florida, Arizona, and Michigan. McCain's campaign just abandoned Michigan. Arizona is his home state. Florida is of course the key swing state. More evidence that Obama is likely to be the next President of the United States.

2. The Wall Street Journal's editorial board has a comment today entitled "Dmitry's Diatribe: Chavez, Ahmadinejad, Medvedev." It notes that yesterday in Evian, France, President Medvedev said that the US missed a chance to build a democratic world order after 9/11. It quotes him as saying, "Sovietology, like paranoia, is a very dangerous disease, and it is a pity that part of the U.S. Administration still suffers from it." Evidently the Wall Street Journal's editorial board does not think these are fair criticisms; the inferred critique is that Russia continues in its "defiance." I would note that the notion of defiance includes the notion of authority, which the US does not have in a legal, or sovereign, sense over the world. Indeed, it is standard American foreign policy to reject the--rather quixotic--notion of an international legal authority.

I would also point out that George Bush did squander America's moral authority after 9/11 with the foolish use of American power ... and that the Wall Street Journal led the cheer as he did it. Perhaps that is why the Wall Street Journal is so sensitive about the critique. Moreover, domestic critics of this stupid use of power were--and are--branded traitors. I guess you can't quite label Medvedev that. However, as an American, I think that there is a good argument that the cheerleaders of the Bush Administration and its war in Iraq themselves were traitors. The campaign to sell the Iraq war to the American public very clearly aided and abetted our enemy: al Qaeda. I personally am reluctant to go that far. But after all the inflammatory rhetoric coming from the right over the last 8 years, I really wouldn't be surprised if the argument surfaced elsewhere and if it had legs.

But, insofar as the question of Russia goes, the United States wins nothing if the Kremlin is demonized in the American political dialogue. It is not in America's national interest to subordinate our relationship with Moscow to the vagaries of the American political argument. Medvedev is right to argue that old Sovietologists represent the bulk of the analysis on Russia, because there is less status and money in understanding Russia than there was during the Cold War. Surely the Wall Street Journal editorial board can understand the economic underpinnings of rhetoric--that, after all, is their specialty. It should not be the ambition of the American press to push the country into decision trees similar to Ghadaffi's. It's rough seas for the papers, but even if alarmist language serves to sell papers in the short term, it ain't gonna help the balance sheets of the sector in the long term if the country becomes a banana republic as a result!

John Roberts, a Energy Security Analyst for Platts, has a decent summary of the question of energy security from the perspective of Europe. It seems more and more evident that some political elements in Europe are being tempted by Moscow's evident call for a realignment towards the East on the part of Brussels. Tara Bahrampour at the Washington Post reports that Russia removed its troops from positions in Georgia proper two days ahead of schedule. Tblisi says that the troop withdrawal is not yet complete. This deference to European opinion is taking place in stark contrast to the naval exercises taking place with Caracas.

As former Secretaries of State Kissinger and Schultz--both of whom could hardly be characterized as soft on Russia--argued just yesterday, now is the time to emphasize the shared interests of Washington, London, Brussels, Berlin and Moscow, not to invent bogeyman for short term political advantage. As it is, it is the G7 that meets this Friday to discuss the crisis, not the G8. Given the criticism of the US coming from the emerging markets on the cusp of the meeting reported by Blaine Harden at the Washington Post, this may actually be doing Russia the favor of disassociation while, at the same time, making it more difficult for us to persuade Moscow of our views. Neil Irwin at the Washington Post reports that in addition to the central banks mentioned yesterday, the total number of central banks that simultaneously cut benchmark lending rates came to 21. No roster of participating countries was provided. Today the central banks of South Korea, Taiwan and Hong Kong also cut their benchmark lending rates.

3. Reuters reports that the Managing Director of Iranian petrochemical company Qeshm Energy told an industry conference in Amsterdam today that Iran would likely favor Asian buyers of their gas to Europe. I only link to this because:

a) Just now, Iran isn't selling its natural gas to anyone ... but Turkey. It is simpler to expand the existing pipeline infrastructure towards the West than eastwards.

b) Given the financial requirements of any major natural gas project, just now neither Asia, Europe, nor the US are likely financiers of Iran's projects, because they never seem to go anywhere and money is tight. By dithering forever on South Pars and deliberately feeding the rhetorical fire over its nuclear program, Iran missed the low cost moment in terms of developing South Pars for the medium term, at least. Iran missed the boat and is trying to disguise this.

c) Iran knows, just as Russia knows, that tying Europe's economy to Iranian gas supplies increases their security vis-a-vis Europe. Just now Iran is not particularly concerned about military security issues coming from China or India, though this may change. The Iran-Pakistan-India pipeline is effectively dead right now, mostly because of Pakistan's dire situation and the never ending argument over price. (Will Iran provide Zadari with the $100 billion he is asking for? Short answer: no.)

d) Evidence that Iran is becoming a bit more compromising--even desperate--regarding natural gas projects ... Ladane Nasseri article in Bloomberg today reporting that Iran has offered to jointly develop the disputed Arash natural gas field with Saudi Arabia and Kuwait.

And thus this statement can be dismissed as diplomatic bluster and not an honest assessment of the political-economic possibilities of Iran's natural gas exports.

4. Bloomberg reports that Libya has stopped oil deliveries to its refining unit Tamoil in Switzerland. Tamoil's 50 kb/d capacity Collombey refinery provides about 20% of Switzerland's oil supply. The story is that this is in retaliation for the arrest in July of one of Ghaddafi's sons for misbehavior in a Geneva hotel. If so, it is a fine example of a nation behaving contrary to its national interest, either out of the simple emotional pique of a dictator or due to domestic political considerations. (That is the arrest if left unanswered might have been seen in Tripoli as a sign of weakness that could have undermined Ghadaffi's position.)

5. More evidence of an economic slow down in China: Weilyn Loo's Platts report that a gigantic jet fuel arbitrage trade from Asia to Europe is forming. Jet fuel is the only real petroleum product with a global market, because there are only two commercial specifications globally and they are very similar. (Specifications meaning legal requirements as to the quality and characteristics of the fuel.) So, were gasoline demand dropping, it would not necessarily be simply a matter of shipping it to Europe if stocks were overflowing, because specifications are different.

With the current steep contango in Asia, it does make sense to store jet fuel, but the fact that traders are sending barrels to Europe suggests tanks are full to the brim, sources said.

[Spot] demand from top consuming nation China has slumped post-Olympics. China's jet fuel import demand, which is closely tied to jet fuel produced by domestic refineries, is expected to come in around 1 million mt (~ 86 kb/d) for Q4 and could remain around this level going into Q1 2009, trade sources said.

6. The Associated Press reports that OPEC will meet ahead of schedule on November 18th to discuss a response to falling oil prices.

7. The World Bank released a report today entitled “Rising food and fuel prices: addressing the risks to future generations”. It states that high food and fuel prices will increase the number of malnourished people in the world by 44 millions, to 967 million.

8. Chika Amanze-Nwachuku and Ejiofor Alike at This Day report that the crippling of a feeder pipeline to the Kaduna Refinery may bring petroleum product production to zero in November, from running at 30% capacity. Petroleum product imports have already created a budget crisis of sorts in Nigeria.

9. Edmund L. Andrews and Mark Landler at the New York Times have the story that the Fed is considering using the funds entrusted to it by Congress to purchase equity shares in troubled banks, thus recapitalizing them. It seems that a fairly large share of the economist community are of the consensus that capitalization is the real problem facing the financial community, more so than a liquidity crisis.

10. Glenn Kessler at the Washington Post reports that North Korea banned IEAE inspectors from the Yongbyon nuclear complex today. This is in response to the US refusal to remove Pyongyang from the state sponsors of terrorism list.