Daily Sources 12/19

1. Platts reports that UK Energy and Climate Change Secretary Ed Miliband told a press conference after international oil talks held in London today that "Lower oil prices are something the world economy needs at the moment." He declined to directly address OPEC's production cut yesterday, but said "Whatever your views of the price...the volatility has been bad for everyone." Remember that Prime Minister Brown visited the Gulf states in late October, ostensibly to convince them to make larger contributions to the IMF so they might help stabilize the world economy. (see Daily Sources 10/30 #11) This took place after his remark on October 17 that it was scandalous that OPEC was considering production cuts in the current global economic environment. (See Daily Sources 10/20 #1 B) Platts reports that Saudi Oil Minister Ali Naimi said in the talks that Riyadh's price target of $75/b meets the needs of both consuming and producing countries.

"Earlier Friday, asked when he expected world oil prices, currently well below $50/b, would recover, Naimi said: 'When the economy recovers... If you have no cash, what do you spend your money on? Food or gasoline?'"

Juan Pablo Spinetto and Jeb Blount at Bloomberg report that Brazil’s Energy Minister Edison Lobao echoed Naimi's support for $75/b price target in London after the meeting, saying

"Up to this point prices have been tolerated, but below where they are today the world runs the risk of undersupply. We are of the conviction that $75 a barrel is very reasonable."

Rowena Mason at the UK Telegraph also reports that Naimi and Abdalla El-Badri, secretary-general of OPEC, told the London Energy Meeting that the UK, and I infer Europe generally, needed to cut their petroleum product taxes in order to support the price, given that lower prices will suppress new production. Winnie Zhu at Bloomberg reports that China announced today it will increase its fuel oil consumption tax paid by refiners and importers to 0.8 yuan/liter (~$0.11745/liter or $0.445/gallon or ~$13.78/barrel) from 0.1 yuan/liter effective January 1.

Brown himself opened the conference with a speech in which he said,

"'visionary internationalism' was needed to stamp out volatility, which he described as 'one of the most pressing problems' for the world today. 'Wild fluctuations in market prices harm nations all round the world,' [he] said. 'They damage consumers and producers alike.'"

In the meantime, Catrina Stewart at the Associated Press reports that the World Bank's chief economist in Russia, Zeljko Bogetic, suggested today that oil averaging $30/b for the next two years would be a "nightmare scenario for the global economy."

"'The pressures on the current account and public finances in Russia would quickly rise to a point where the financing constraint would become so sharp that it's possible even to envisage Russia's return from a creditor to international organizations to a borrower,' [Bogetic said.]

At $50 a barrel, Russia could drain much of its reserve funds and run budgetary deficits, but would not face a "meltdown" scenario, Bogetic said."

2. Michael Kitchen at MarketWatch reported yesterday that the Aso Administration will submit to the parliament a bill authorizing the purchase of up to 20 trillion yen (~ $226 billion) in stocks on the Japanese stock market. The government plans to submit the bill in January with an eye toward beginning purchases by March. Lindsay Whipp at the Financial Times reports that the Bank of Japan today reduced its benchmark interest rate by 20 basis points to 0.1% from 0.3%.

"The BoJ also moved to increase its outright buying of Japanese government bonds to ¥1,400bn ($15.7bn) a month from ¥1,200bn. The central bank will also add floating-rate, inflation-linked and 30-year bonds to its buying operations, and will also temporarily buy commercial paper outright."

3. Tom Barkley at Real Time Economics reports that the Institute of International Finance forecast yesterday that the global economy would contract by 0.4% next year, after posting 2% growth in 2008.

"Mature economies will lead the way into the recession, expected to decline 1.4% in 2009, while emerging markets are forecast to grow 3.1%. The euro-zone economy is forecast to contract 1.5%, with the U.S. economy seen declining 1.3% and Japan falling 1.2%."

4. China's People's Daily reported today that the China Electricity Council recently released data showing that electricity consumption in the country from January through November grew by 6.67% year over year. Residential consumption grew by 12.75% year over year while industrial consumption grew by about 5.27%.

5. Jonathan Weisman at the Wall Street Journal and Lori Montgomery at the Washington Post write that the Obama team is fashioning a stimulus plan which would amount to about $850 billion.

6. Sudarsan Raghavan and Qais Mizher in the Washington Post reports that opposition members in the Iraqi parliament are accusing the al-Maliki administration of using security forces to make politically-motivated arrests designed to instill fear in his political opponents. Worth reading in full.

7. Walter Pincus at the Washington Post reports that the US Army began advertising this week for a private company to oversee private security firm operations in Afghanistan. It has been pointed out elsewhere, especially by historian William H. McNeill of Chicago University, that the use of mercenaries has historically proven to be at times the most cost effective means of the state projecting force. He regards this outsourcing as a change driven by the infrastructural requirements of modern warfare, and not something to be feared. I, however, find this trend--and the trend away from a citizen army overall--frightening, and a threat to democratic values. McNeill's central examples come from the Italian city states of the Renaissance and the wars of the Reformation just following. I would point out that this move to outsource force project coincides neatly with a erosion of prisoner of war treatment standards and the relegation of military service to the working poor. (That is, I'm still with Machiavelli--whose idea of a citizen army informed Napoleon--on this one.)

8. Will McCants at Jihadica reports on recent publications by jihadi groups which postulates that the reason the Western powers have not cracked down hard on piracy in Somalia is because the West prefers that the pirates be in charge of the country rather than al-Shabaab, the Islamist movement in the country which has garnered the most international jihadist support. And some Western analysts have indeed suggested that support for the pirates is preferable to allowing al-Shabaab to govern the region. I do not think, however, that a tenable solution to the problem will come without recourse to an association dedicated to the establishment of a rule of law in the region. I am afraid that that may mean the best option would be to choose from among the other Islamist movements vying for power in Somalia and supporting them, in return for some means of negotiating US, European, and Gulf state interests.

9. Mark Helperin argues in the Wall Street Journal that two incompetently prosecuted wars has eroded US deterrence power. Although I think his description of the threats to look for are wrong, I think his description of the situation engendered by the wars in Iraq and Afghanistan is a fair one. Worth reading.