Monday, December 15, 2008

Daily Sources 12/15

1. Platts reports that the Centre for Global Energy Studies--a petroleum consulting outfit founded by former Saudi oil minister Zaki Yamani--released a report today arguing that were OPEC to cut supply by one million barrels, and fully implement the allocation reduction, that would be enough to arrest the fall in oil prices in 2009. Full compliance would likely provide the foundation for a rise in price, the report argues, but not to $75/b levels. However, the report also argues, critically:
"A bigger output cut, in pursuit of much higher prices, risks undermining the already fragile global economy, sending oil demand down further and undermining the very price rally it was meant to stimulate."
CGES also expects global oil demand to fall by 500 kb/d next year. In a related story, Jim Bai at Reuters reports that Chinese apparent oil demand fell by 2.3% year over year in November.

China exported a little over 79.6 kb/d of gasoline in the month of November. It imported no gasoline in November. Platts reports that Chinese refiners have cut throughput further in December after a 13% decrease in throughput November. Managers told reporters that Sinopec and PetroChina expected to reduce throughput by 810,000 metric tonnes in December combined, or about 191.5 kb/d. Total throughput by the two refiners--and Sinopec affiliates--is expected to be 24.73 million tonnes of crude in December, or 5.84 mb/d.

Nadia Rodova at Platts reports that Peter O'Brien, Vice President at Rosneft, told journalists today that the company--which expects no natural decline in production in 2009--stands ready to implement any cut coordinated by Moscow with OPEC. Rosneft is expected to negotiate a $1-1.5 billion bridge loan from Western banks in early 2009 to refinance its debts. Jacob Gronholt-Pedersen at Dow Jones reports that Vagit Alekperov, CEO of Lukoil, said today that OPEC expects Moscow to reduce production by between 200-300 kb/d. Such a cut itself may not be regarded as part of an overall OPEC production cut, because some in the market have already priced in a 400 kb/d decline in Russian production for 2009.

For Russia, supporting crude prices should have the effect of supporting the price of the ruble, which has been falling precipitously of late. William Mauldin and Alex Nicholson at Bloomberg report that Bank Rossii has widened the rate at which the ruble is allowed to trade against a basket of dollars and rubles for the second time in a week by 1%. (The currency basket is 55% dollars and 45% euros.) Traditional austerity measures to defend the currency appear to be unpopular in Moscow, especially given the results of the first privatization efforts after the fall of the Soviet Union. In that context, there is a piece in the Economist pointing out that several developing countries are asking themselves whether they ought to be pursuing counter-cyclical policies to shore up demand at the expense of their currencies. Doing so reduces international appetite for new debt, but reduces the country's current debt burden.

Dani Rodrik, professor of Political Economy at Harvard's Kennedy School of Government, published an article Friday arguing that developing nations should institute a tax on currency exchanges, "at a low enough level – say, 0.25% – [so that] such a tax would have little adverse effect on the global economy while raising considerable revenue" ... and discourage excessive speculation or capital flows profiting from tiny differences in currency exchanges. (Rodrik also argues that developing nations should lobby for lending rules by international government creditors which correctly value redundancies and subsidies designed to support critical stability arenas, like food security, are compatible with rational international credit policies. I couldn't agree more.)

And, as recrimination grows, Ecuador has, according to Lester Pimentel and Stephan Kueffner at Bloomberg, decided to default on its national debt.
"[President] Correa, a 45-year-old economist who won election in 2006 promising to spend on the poor before paying debt, said Dec. 13 that his government is preparing to defeat legal challenges from 'vultures.' The day before, he ordered officials not to make the $30.6 million interest payment due today on $510 million of 12 percent bonds maturing in 2012.

The bonds were 'always structured for the benefit of the creditors, trampling on the national interests, dignity and sovereignty of our countries,' Correa told reporters in Guayaquil. 'It is now time to bring in justice and dignity.'
Ecuador, of course, is a member of OPEC, and the fall in the price of crude has hurt it.

In a related piece, Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and former chief economist for the IMF, writes that inflationary policy is the only way forward for the Project Syndicate. This as Yves Smith approvingly quotes in full a post by "London Banker", a former central banker who blogs, which argues that deflation is now inevitable. Also, Jonathan House at Real Time Economics reports that Dominique Strauss-Kahn, head of the IMF, said in a speech in Madrid today that "Actions taken so far aren’t enough. We are facing an unprecedented decline to output."
"Strauss Kahn said governments need to take measures to support financial markets - by, for example, recapitalizing banks - and they need to ramp up spending to stimulate domestic demand.

The IMF recently recommended a fiscal stimulus effort equivalent to 2% of world GDP. Strauss-Kahn said some countries face external financial difficulties or have high debt burdens that will constrain their efforts."
(Strauss-Kahn also encouraged member countries to increase their contributions to the fund, saying that he was not sure whether in 6 months' time there would be enough to finance financial stability projects.) And Michael Hudson and Jeffrey Sommers in a piece in Counterpunch calling for the end of the Washington Consensus argue:
"Today’s desperate U.S. attempt to re-inflate post-crash prices cannot cure the bad-debt problem. Foreign attempts to do this will merely aid foreign bankers and financial investors, not the domestic economy. Countries need to invest in their real economy, to raise productivity and wages. Governments must punish speculation and capital gains that merely reflect asset-price inflation, not real value. Otherwise, the real economy’s productive powers and living standards will be impaired and, in the neoliberal model, loaded down with debt."
All four of the pieces just mentioned are well-worth reading in their entirety.

The argument with Germany about coordinating a European stimulus package seems, from my limited experience in monetary economics, to be part of the same agon as the pro and cons of counter-cyclical economic policies for developing nations. Paul Krugman, in an op-ed in today's New York Times, argues that there is little time for Germany to join the stimulus crowd. In his blog Krugman provides the math behind his assumptions, arguing that a coordinated stimulus program has a significantly higher multiplier effect upon GDP and much more bang for the euro. Wolfgang Münchau in the Financial Times argues that the global trade slowdown will hit Germany especially hard, and that therefore to maintain an independent stimulus package of only 0.5% of GDP is likely to hurt. But he also says that household consumption is providing the economy with some support, and Eurointelligence reports that in a meeting with industrial representatives, Chancellor Merkel was promised no layoffs until the general elections, which I believe is scheduled to take place in September 2009. Münchau goes on to say,
"The electoral timetable in the US has delayed an effective policy response and I fear that the new economics team of President-elect Barack Obama will be too much focused on domestic stimulus and not enough on global co-ordination. The Europeans and Asians, meanwhile, are unbelievably complacent. Even a US stimulus at 10 per cent of GDP will not miraculously pull the world economy out of recession. It will most likely focus on domestic infrastructure investment rather than private consumption. US households, meanwhile, will continue to adjust their balance sheets, which will take some time."
Again, I am not competent to give intelligent criticism of these analyses, but have some, I hope, pertinent comments.

It is clear that the US response will be delayed until next year, this puts the major exporting countries with large current account balances in a dilemma, because it is not clear where the dollar will go. (See arguments about deflation versus inflation. I suspect that if dollar denominated debts have mostly been unwound, it will not require further stimulus to push devaluation of the dollar versus international currencies.) If Beijing wants to support its economy via exports, it will want to buy dollars to maintain US purchasing power--as long as the stimulus programs result in US and developed world inflation. This is probably true of Germany and Japan as well. If we see dollar deflation despite a stimulus, then Beijing might want to unwind its position in US debt as quickly as it can before an inevitable default. In any case, would it be irrational in a US dollar deflationary spiral for Beijing to provide extra domestic stimulus, as exports should recover?

Moscow clearly wants to support its currency in order to avoid defaults on dollar-denominated debts, but does not want to institute pro-cyclical policies--such as high interest rates on government debt--because that would slow down growth even further, likely causing political instability. (Their last experience with default was ugly and the source of many of the political outcomes DC is so unhappy with today.) This is probably true of every member of OPEC that has not pegged its currency to the dollar. (And, perhaps there are some OPEC members who have pegged to the dollar which would like to see their dollar or domestic currency denominated debt burden eased as well versus crude.) That said, OPEC is almost certain to cut, by at least one million barrels, with a supporting coordinated cut coming from Russia. They may overshoot--and further cripple a hobbling global economy--but their policy will be to inflate the dollar to support the financing of their current obligations. Beijing and Berlin may want to see how OPEC's decisions will pan out and what the eventual stimulus package from the Obama Administration will be before they decide where to commit the bulk of their available financial resources and fiscal policy options.

2. Kevin Hamlin and Li Yanping at Bloomberg write that the Chinese statistics bureau report that industrial production grew by 5.4% in November, a rate much lower than seen in a long time. Analysts worry that if GDP grows by less than an annual rate of 8% in China, there will not be enough job growth in order to absorb new entries to the labor market, which could result in social unrest.

3. Simeon Djankov at the Crisis Talk blog hosted by the International Finance Corporation of the World Bank writes that export growth nations are seeing steeper falls in trade than China. In November, Chile's exports fell at an annual rate of 19.1%, South Korea's fell by 18.3%, Taiwan's fell 21.6%, and Isreal's fell 17%. Chile's imports fell by an annual rate of 14%, Korea's fell by 14.6%, Taiwan's fell by 11.3%, and Vietnam's fell by 7.8%. Global air cargo in October fell by 8% year-over-year, "with a 12% decline in Latin America, 11% decline in East Asia, and 5.4% in Europe."

4. Bertrand Benoit and James Wilson of the Financial Times report that the German Parliament's Financial Committee has written a letter to the Finance Minister--Peer Steinbrück--stating that the €400 billion fund set up to guarantee bank debt has not resulted in the resumption of lending, and thus failed.

5. Bettina Wassener at the New York Times reports that the Bank of Japan's quarterly Tankan survey of manufacturer sentiment was released Monday showing a fall in the index from -3 to -24. "The deterioration in sentiment was in line with what economists had expected."

6. Joellen Perry at Real Time Economics reported Friday that the European Central Bank is considering additional ways to get credit flowing again.
"One idea the ECB would consider is a clearinghouse to guarantee the short-term loans euro-zone banks make to one another. How such a clearinghouse might work remains unclear, but a working group at Germany’s central bank is studying whether the central bank itself or other authorities could guarantee such loans for terms of three months or less.

The ECB’s main goal: ensuring that any measures taken to guarantee bank-to-bank loans aren’t national."
The ECB is also considering directly purchasing corporate or government debt. Of course, given 15 different countries with corporations with different financing traditions, the question is which corporations, which debt instruments, and/or whose government debt? Worth reading in full.

7. In a press release dated Friday, December 12, WTO Director-General Pascal Lamy said that in his judgment there was not sufficient political will to spend the political capital required for further trade openings at this time to justify a ministerial meeting next week.

8. Keith Wallis at Lloyd's List reports that Taiwanese shipping companies launched direct services to mainland China today.
"Five vessels, one from [Evergreen Marine, Yang Ming Marine, Wan Hai Lines, Taiwan Navigation, and Huarong Marine] each, took part in the historical reconnection of direct links across the Taiwan Strait that were severed in 1949 when the communists took control of China and nationalists fled to Taiwan."
Mark McDonald at the New York Times reports on the establishiment of direct air routes as well:
"As many as 108 direct passenger charters are scheduled to operate each week across the strait, state media reported Monday, as well as 60 direct cargo flights a month. The flights will come and go from 21 cities on the mainland and 8 cities in Taiwan."
9. Mohamed Olad Hassan at the Associated Press reports that Somalia's President fired the Prime Minister Sunday, accusing him of ""corruption, inefficiency and treason." The Prime Minister will contest his ouster as unconstitutional as Islamist insurgents assert their control over most of the country. Colum Lynch at the Washington Post reports that the Bush Administration will launch an effort this week in the UN to garner international backing for a small peacekeeping force in Somalia, in an effort to put down piracy and prevent the assumption of control of the country by Islamists. The proposed group would be restricted to the area around Mogadishu in southern Somalia and has support from China as well as some key African nations like South Africa. However, it seems to me that the notion of putting yourself in between several competing factions which have support in the country, while attempting to arrest the growth of all, is unlikely to have much success. Perhaps quietly backing an Islamist group other than al-Shabaab--which has the support of the international Islamist community--would be a way of tamping down international Islamist ambitions in the country while re-establishing law and order. The Post article is worth reading in full.

10. Richard A. Oppel Jr. and Salman Masood at the New York Times report that the Prime Minister of the United Kingdom, Gordon Brown, shuttled from India to Pakistan in efforts to try and reduce the tensions between the countries in the wake of the Mumbai attacks.
"Three-fourths of serious terrorist plots investigated in Britain have links to Al Qaeda in Pakistan, Mr. Brown said at a news conference with Pakistan’s president, Asif Ali Zardari, in Islamabad. 'The time has come for action, and not words' from Pakistan, he said."
11. Deborah Haynes at the London Times reports that the UK will withdraw its troops by July 31, 2009. The Times characterized this deal as humiliating because their presence was negotiated with the Iraqi government en bloc with other relatively smaller armed force contributors, such as Romania, El Salvador and Estonia. (On Thursday the Washington Post reported that the English media was mooting rumors that the UK contingent would leave Iraq come March. See Daily Sources 12/11 #12.)

12. The Editorial Board at the Wall Street Journal praises the courage of students openly criticizing the regime in Tehran. The Journal suggests that the choice the US has is to engage these brave students or engage the regime they criticize. The problem is that the Journal presumes that the students are any less critical of the United States' role in the world than they are of their own leadership. They are not, and most are actually afraid that the American government might decide to engage with them, because they think it will de-legitimize them in their eyes of their colleagues.

13. The Baltic Dry Index appears to be rebounding slightly recently, as you can see from this one month chart:

Possible reasons for this include the rerouting of ships away from the Suez Canal and around the Cape of Good Hope--a much longer haul--and several ships being mothballed, including as use for storage for companies wanting to capture the profits of the super-contango in oil. I'd guess that a further cut in OPEC supply would have the short-term effect of reducing shipping rate indices, given less demand for tankers, but a medium-term effect of increasing them, given increases in cost of fuel. (Also, apparently higher fuel costs apparently push captains to sail more slowly, to conserve on those costs, which reduces the amount of cargo space available at any given time due to increased time at sea. An effect which would be multiplied by avoidance of the Suez Canal.)

14. Jack Healy at the New York Times reports that US industrial production fell by 0.6% in November. Estimates of industrial production for October were revised upwards to growth of 1.5% in October, from initial estimates of 1.3%. "Capacity utilization, the percentage of plants in use, fell to 75.4% from 76% in October."

No comments: