Daily Sources 11/25

1. Brad Setser at Follow the Money argues that the time of the sovereign wealth funds is over. Those funded by oil revenues are no longer receiving the cash flows that they once enjoyed. Brazil, Russia, South Korea, and India will not have large funds in the near future in Setser's opinion. Abu Dhabi's fund will be hampered by the need to finance Dubai's debt, as the emirate's domestic state firms were heavily leveraged. Norway's fund had $380 billion earlier in the year, and now has about $300 billion. The problem is that the funds were set up to invest surplus funds in equities and it is precisely the equity markets which have been hit the hardest by the current crisis. In an ironic twist, the US is purchasing equities now that they are cheap by taking stakes in firms with large international positions. China is the wildcard. Well worth reading in full.

2. Platts reports that Russian energy minister Sergei Shmatko told reporters in New Delhi that Russia "will coordinate with OPEC." OPEC representatives have recently suggested that one critical element of the November 29 meeting in Cairo would be to secure Russia cooperation with their efforts to shore up the price of oil. Moscow has typically been cool to the idea of coordinating production with the cartel, but yesterday a senior executive at Lukoil suggested that doing so would be in the Russian interest. This is the first indication from an official government representative that Moscow might adopt the strategy of pursuing a closer relationship with producers rather than a symbiotic energy security relationship with Europe. Moscow could potentially play the role of a swing producer--it produces about as much oil as Saudi Arabia--but so far has opted to produce at full tilt and send it all to market.

3. Ulf Laessing at Reuters reports that the Kuwait Investment Authority has repatriated $3.7 billion in foreign investments in order to shore up the local stock market.

4. Eric Watkins at the Oil & Gas Journal reports that Total and Saudi Aramco have decided to delay the award of the $10 billion, 400 kb/d, export refinery in Jubail given the global economic environment. Last week Riyadh decided to suspend development of the Manifa field, which was planned to produce 900 kb/d by 2011 and which was to fuel the Jubail refinery. (Also last week Conoco and Aramco announced they would delay construction of the 400 kb/d export refinery to be built at Yanbu.)


5. The Associated Press reports that Russian warships arrived off Venezuela's coast today. The ships are slated to take part in military exercises this month and were clearly sent in response to the American presence in the Caucasus. US State Department Spokesman Scott McCormack on Monday seemed to mock the move in the State Department's daily briefing of the press, saying "You know, I don’t know. Are they accompanied by tugboats this time? I – you know, look, there’s no – I don’t think there’s any – there’s any question about, you know, who the region looks to in terms of political, economic, diplomatic and as well as military power." (Peter the Great is the Russian Navy's flagship--a nuclear cruiser--which seemed to face some operational difficulties earlier this year.) The joke suggests a certain level of insobriety at the State Department, a not entirely welcome apprehension. Almost immediately afterward, however, he gave the official American response: "I don’t know if the intention was provocative. Certainly, we don’t – we won’t view it that way."

6. Sinan Salaheddin at the Associated Press reports that the chair of the Iraqi Parliament's Committee on Oil and Gas has criticized the deal between the Oil Ministry and Shell to jointly exploit natural gas in the southeastern province of Basra.

7. Galrahn at Information Dissemination posits the argument that it is in the interests of the US to fail to police piracy originating from Somalia because to do so would deny funding to the capitalist elements of society at the very time that the Islamists are struggling for funding. The argument contains some odd presumptions, and, for example, his analysis of the operating cost additions in the shipping industry is misguided. (It is not just, for example, the oil industry which is abandoning the route via the Suez Canal, but all shipping--including container ships, etc.. When so many tonne miles are added, and so much capacity is thereby taken off line, prices should go up. And, the shipping industry certainly hopes so!) Alaric Nightingale at Bloomberg reports that tanker rates have not revived on the back of the route shift, however, with the cost of shipping Middle East crude to Asia, the global benchmark, falling to 66 Worldscale (WS). That is a big decline from the top of the market, but, if I understand correctly, much better than what other categories of shipping are receiving on the market.

"[W]hile hire rates may have declined, returns for shipowners remain profitable. The route from Saudi Arabia to Japan is paying shipowners $44,442 a day, according to the Baltic Exchange. Frontline Ltd. said Aug. 21 it needs $31,500 a day to break even on each of the vessels."

And sending tankers past the Cape of Good Hope instead of through the Suez adds a considerable amount of time to a shipment.

"Sailing at 14 knots, it takes 33.2 days to ship Saudi Arabian crude oil to Rotterdam via the Cape of Good Hope, compared with 19.2 days going through the Suez Canal, according to the world-register.net Web site."

That said, business requires the rule of law in order to operate, which, for example, is why the Islamists have supporters in Somalia, and, as an article today suggests, support is rebuilding for them in Afghanistan. Nonetheless, it would be interesting if the US were put in a position to support the pirates as the only viable governing alternative to the Islamists. It would not, as Galrahn suggests however, be especially supportive of the free market ideology.

8. Steven Bodzin at Bloomberg reports that Hugo Chavez told reporters that OPEC should reintroduce the practice of announcing a price band that it is prepared to defend, and that a fair price for oil is between $80-100/b.

9. AFP reports that on Monday China signed a protocol with Jordan to assist Amman in mining and enriching uranium, as well as with scientific training for the construction and operation of nuclear power plants. "The country's 1.2 billion tonnes of phosphate reserves are estimated to contain 130,000 tonnes of uranium and the government intends to start mining the radioactive ore to fuel its first nuclear plant."

10. Kim Barker at the Chicago Tribune reports that "pervasive corruption" is fueling anger at the Karzai government in Kabul. The corruption is causing many to long for Taliban rule as the Taliban strictly enforced the law. As I have pointed out in a few posts much earlier in the year, one of the central preoccupations of Islam is with the rule of law.

11. Calvin Lee at Platts reports that Yang Qing, deputy director of China's National Development and Reform Commission's price monitoring bureau told a forum in Beijing Tuesday that export growth was falling sharply due to the fall in US demand. According to Yang, a 1% drop in US GDP will cause Chinese export growth to contract by 7-8%. (Not exports, but export growth.) Geoff Dyer at the Financial Times reports that the World Bank's quarterly report on China predicted that China's growth rate will fall to 7.5% next year, 0.5% below the rate generally reported as necessary to absorb growth in the labor market and thus avoid social unrest.

12. José de Cordoba at the Wall Street Journal reports that the government of Hugo Chavez is providing safe havens inside Venezuela for members of FARC to carry out cross-border operations into Columbia. FARC is allegedly setting up road checks, "meting out justice to petty thieves and extorting businessmen." FARC leadership is also apparently living on and operating from the Venezuelan side of the border, and some of the organization's predatory behavior with the locals has apparently roiled some in Caracas. FARC also evidently has offices in Venezuelan cities deep inside the country. The article is worth reading in full and includes, in a sidebar, translations of some of the FARC emails found on a computer captured earlier this year. Below is the Journal's map of the regions where FARC and the ELN have set up shop inside Venezuela.



13. Tim Johnston at the Washington Post reports that Thai protesters broke through riot police lines and stormed the Suvarnabhumi Airport, shutting down the new facility. Generally speaking, this would be pretty startling news, indicating that the government is about to fall in short order. But the protest movement has only been able to muster about 20,000 people, which is not enough, usually, to do things like grab control of major ports or broadcast stations. Either the government is about to change, a crackdown is about to be instituted, or the numbers are being woefully under-reported. This seems especially the case given that the police have been fired upon by some protesters. The Post has a slide show of the protesters--looks like they overpowered a considerable force of riot police.

14. Eurointellingence reports that the Franco-German summit went badly. Angela Merkel wants to schedule another summit for January to see how successful the various national stimulae have been, and just after France has passed on the baton of the EU Presidency.

15. Aaron Eglitis and Ellen Pinchuk at Bloomberg report that the Latvian Finance Minister Atis Slakteris told the journalists that the country will likely ask the IMF and the European Union for emergency funds of as much as €3 billion (~ $3.85 billion).

"'The Baltic countries, in particular Estonia and Latvia that have experienced the strongest upswing, are now facing a severe downturn," Helge Pedersen, global chief economist for Nordea, said in a report. Estonia contracted 3.3 percent in the third quarter. Swedbank AB, the biggest bank in the Baltic states, said on Nov. 20 it expects Latvia’s economy to shrink 4 percent next year."

16. Robert Barnett has an opinion piece at the New York Times which points out that the UK on October 29 recognized Tibet as a part of the People's Republic of China, a switch from its previous position that Tibet was an autonomous region. The British recognition of Tibet as an autonomous region had provided the legal basis for negotiations between Beijing and Tibetan representatives. No more. Barnett suggests that London has reversed course because the UK requires the cooperation of Beijing in the current financial crisis.

17. Norma Cohen at the Financial Times reports that the OECD released its world economic forecast today which predicts that the US and the eurozone both are about to enter four straight quarters of economic contraction. "In pinpointing countries that will experience a severe downturn, in addition to the UK, the OECD lists Hungary, Iceland, Ireland, Spain and Turkey."

18. Stefan Wagstyl at the Financial Times reports that the European Bank for Reconstruction and Development has cut its forecast of GDP growth in 2009 for Central and Eastern Europe from 5.7% to 3%.

"In Russia, the region’s largest economy, the bank forecasts a slowdown in growth from an expected 7.3 per cent this year to 3 per cent, following the drop in oil prices. In neighbouring Ukraine, the decline is predicted to be even steeper, from 6 per cent to 1 per cent. The average for the former Soviet Union (minus the Baltic states) is likely to be 3.4 per cent, from 7.3 per cent this year.

Further west, in Poland, the second biggest economy after Russia, the EBRD predicts a decline from 5.3 per cent to 2.8 per cent.

The worst performance is expected in the Baltic states, with recession in Estonia and Latvia next year. Central Europe and the Baltic states as a whole are predicted to see growth almost halve from 4.3 per cent in 2008 to 2.2 per cent. In south-east Europe the forecast fall is even greater, from 6.5 per cent to 3.1 per cent."

19. The Associated Press reports that the Conference Board said today "that its Consumer Confidence Index was 44.9, up from a revised 38.8 in October. Last month’s reading was the lowest since the research group started tracking the index in 1967."

20. Michael M. Grynbaum at the New York Times reports that most recent numbers for the Case-Shiller Home Price Index were released today and that they suggest that home prices fell across the United States by an annual rate of 16.6% in the third quarter. Also today the Commerce Department revised its estimate of the contraction seen in the third quarter from down 0.3% from the year before to down 0.5%.

21. Damian Paletta at Real Time Economics reports that the FDIC has released its list of troubled banks and the number of challenged banks has grown from 171 at the end of the third quarter from 117 at the end of the second quarter. The post includes a link to an interactive table of the banks that have been forced to shut down by federal regulators this year.

22. Yves Smith provides a quick reaction to the news that the Treasury and Federal Reserve Bank have announced a plan to provide $800 billion to support consumer lending. Real Time Economics provides the text of the announcement.