Wednesday, December 31, 2008

Daily Sources 12/31

1. Ayesha Daya at Bloomberg reports that Iranian President Ahmadinejad's motion to consider scrapping fuel subsidies was approved by a majority of the Parliament yesterday, leading to a potential vote on the measure itself shortly. As of June, Iran, despite being unable to refine enough gasoline to meet its domestic requirements, was subsidizing so that it was being sold at the price of about $0.45/gallon (as per the EIA). Ahmadinejad had instituted a rationing program, which had had some success in reducing demand, but evidently has not done enough to balance government accounts.
"'It shows that they’re running out of dough,' said Dalton Garis, associate professor of economics at The Petroleum Institute of Abu Dhabi in the United Arab Emirates. 'It is extremely dangerous for the regime as it may precipitate some grass-roots action that could get out of hand, and the ultimate result might be quite chaotic in the short run.'"
The decision to abandon the subsidies will be very unpopular in the street if it is made. However, perhaps now is a good time do pass it, as most Iranian students etc. are focused on events in the Gaza strip. If the bill is enacted, and Iranians are forced to pay market rates for petroleum products, demand will likely fall in all categories except, perhaps, for electricity generation. Oil demand in Iran has grown by nearly 50% since 1998.

The AFP reports that Iranian protesters "stormed" the British diplomatic housing known as the "Gholhak Gardens" in Tehran. British, US, and Israeli flags were burnt outside the Gardens and afterward the protesters moved to the Egyptian Embassy where they shouted "Death to [Egyptian President] Hosni Mubarak." Robert Worth at the New York Times reports that Arab regimes throughout the region are facing increasing popular anger over the Gazan situation, in a decent synopsis. Shi'a media are broadcasting a narrative where Arab moderate nations are more anxious to put an end to Hamas than Israel.
"Saudi Arabia and Egypt 'are even more excited about this war than they were during the 2006 war' between Israel and Hezbollah, said Ibrahim al-Amine, the chairman of the board of Al Akhbar, a newspaper aligned with Hezbollah.

'Israel would be satisfied with a compromise, but the Arab regimes want to finish Hamas completely,' Mr. Amine said."
In the meantime, Ethan Bronner and Taghreed el-Khodary at the New York Times report that Israel has rejected the proposal for a 48 hour cease fire, originally suggested to Tel Eviv by French Foreign Minister Bernard Kouchner, in order to allow humanitarian aid to enter Gaza. Mark Landler, also at the New York Times, reported yesterday that Condoleeza Rice has been pressing Arab and Israeli leaders over the previous 24 hours, apparently to no avail.

2. Iran's Press TV reports that the Somali pirate spokesman told their correspondent that the band had decided to respect the request of Saudi Foreign Minister Saud al-Faisal and release the Sirius Star without insisting on a ransom. The spokesman did not indicate when they would release the ship.

3. Reuters reports that Ukrainian Prime Minister Yulia Tymoshenko has canceled her trip to Moscow today to try and avert the cancellation of natural gas supply from Gazprom. (Evidently the news that the problem had been worked out yesterday was false.) Daryna Krasnolutska and Stephen Bierman at Bloomberg reports that Gazprom has warned European consumers that Ukraine may siphon off supplies if Gazprom halts supply to them as threatened at 10am tomorrow morning Moscow time. Yesterday $1.52 billion was transferred to traders in payment for November and December supplies, but discussions regarding the penalty payments appear to still be going on. Naftogaz Ukrainy informed Gazprom yesterday that it would not be able to guarantee shipments to Europe via pipelines running through Ukraine should Gazprom cut off supply to the Ukraine. The sides cannot agree on a supply contract going forward; the dispute centers on price. Worth reading in full.

4. Leon Aron has an opinion piece in the Wall Street Journal which argues that the economic woes facing Russia will produce dissatisfaction with the ruling clique there which, in turn, will lead to a "reactionary retrenchment," by which he means more suppression of dissent domestically and a more aggressive foreign policy.
"If reaction advances at home, the Kremlin will continue a truculent or outright aggressive foreign policy of resurgence and retribution, intended, among other things, to distract from and justify domestic repression. The recovery of geostrategic assets lost in the Soviet collapse will remain Moscow's overarching objective, especially in the territory of the former Soviet Union."
One wonders what territories outside the former Soviet Union Moscow wants to reacquire, in Aron's view. Whatever that might be, Aron argues that the US needs to present a stern face to Russia, because anything resembling normal relations will boost the government's image internally. At the same time, Aron argues that Russia's strategy to ensure its popularity domestically will be to present the US and Russia as enemies. In an extraordinary logical somersault, Aron then argues that the US should follow the strategy of allowing Moscow to present the US as its enemy by presenting to it an unfriendly and lecturing mien.

5. In an interview with the AFP, German Finance Minister Peer Steinbr├╝ck suggested that reducing benchmark interest rates too low would have the effect of creating a new bubble based on credit.
"'It is therefore important that the focus, at least in Germany, be on sustainable investments in infrastructure and less on consumer spending financed by debt,' [he said.]"
6. Ellen Barry at the New York Times has a decent summary of the political environment Georgian President Mikheil Saakashvili faces after the conflict with Russia.
"'What is the future for Saakashvili?' said Sozar Subari, Georgia’s ombudsman for human rights and a longtime critic of the president. 'He started the war, he lost the war, he lost the territories. There is a crisis. There is no investment in Georgia. The situation is getting worse and worse. If there is no change, he will leave Georgia as the president who lost everything.'"
Russia has made clear they would prefer another Georgian interlocutor--that may be Saakashvili's saving political grace.

7. P O'Neill at Fistful of Euros reports that yesterday the US State Department released a statement regretting that Azerbaijan did not renew the broadcasting licenses of the BBC, Voice of America, or Radio Liberty.

8. Shaiq Hussain and Haq Nawaz Khan at the Washington Post report that Pakistan began a major offensive yesterday in the northwest versus the Taliban operating there.
"[Tariq Hayat, the top administrator of the Khyber Agency tribal region,] said the main objective is to secure the NATO supply lines and halt the attacks by insurgents on vehicles carrying fuel, food and ammunition to Western forces in Afghanistan."
The Post reported yesterday that State Department officials were quietly exploring the possibility of other supply routes to Afghanistan in recent weeks.

9. Lester Pimentel at Bloomberg reports that developing nations will offer the most dollar denominated sovereign debt since 2005 in 2009, reversing a shift into local debt. As the size of developed economy debt issues grow to over $3 trillion in 2009, emerging markets will find a buyer's market when it comes to their own.
"'Countries will be forced to issue in dollars,' said [Ricardo] Hausmann, [director of the Center for International Development at Harvard,] a former Venezuelan planning minister who called developing nations’ reliance on foreign markets the 'original sin' in a 1998 article in Foreign Policy magazine. 'Debt structures will deteriorate again.'"
A must read.

10. Brad Setser at Follow the Money writes that both the China Investment Corp. and the State Administration of Foreign Exchange, each having been burnt recently by investments in US financial institutions, now appear to have no appetite for anything except for "Treasury bonds—-and perhaps some German bunds and other high- quality Euro-denominated bonds." The Chinese government investment vehicles are eschewing equities and bonds with even limited risk.
"I would bet that the CIC is privately pleased that SAFE took a loss on its investment through TPG in WaMu. TPG apparently wanted the CIC to participate, and the CIC said no. SAFE didn’t."
The CIC had invested in Blackstone, Morgan Stanley, and the Reserve Primary Fund.

Yves Smith quotes Michael Pettis' blog at length, where he points out that not just China, but other emerging economies are seeking to boost exports as a way out of the financial crisis. And she asks, and the chorus is getting louder, to whom will they export? Pettis remarks that cutting interest rates may increase consumption only by a very small margin in China:
"First of all there is little to no consumer credit in China, so cutting interest rates won’t do much to boost consumption. It might do so indirectly by reducing mortgage payments (Chinese mortgages are all floating-rate mortgages) and perhaps by slowing the decline in real estate prices, but it is not clear how big an effect that might have on increasing consumption, especially since even lower interest rates aren’t likely to create much buying interest for real estate. In fact there is some evidence in China that households may actually contract spending when deposit rates are cut since they need to save more to achieve their precautionary savings targets."
Edward Harrison at Asia Economonitor writes that China is set up for a big fall. He touches on one point I haven't seen mentioned much of late--but which in the last 5-10 years have regularly been brought up as a structural weakness in China's stability prospects--the weakness of their banks. He also argues that the Chinese consumer cannot be tempted to consume more. Both of the posts are worth reading in full.

11. Stephan Kueffner at Bloomberg reports that Ecuador plans to redeem its 2012 and 2030 global bonds at a discount of at least 70%.

12. Lillian Wong has a long analysis on the history of Asian national oil company (ANOC) investment in Nigeria hosted on the Leadership Nigeria website. I haven't had time to give it a close read, but it does give a good summary of how the ANOCs eventually became involved in upstream investments in Nigeria, the politics inside Abuja at the time, and an evaluation of how beneficial the investment deals eventually struck were to Nigeria. (h/t Leanan at The Oil Drum)

13. Leslie Moore Mira at The Barrel notes that Petrobras has delayed, again, the release of their strategic plan through 2013 to January, at the least. The strategic plan would give some detail on how the corporation expects to develop the subsalt oil fields and at what prices.

14. Ikuko Kao at Reuters reported yesterday that Angola revised its crude loading program for February so that exports should average 1.6 mb/d that month, down from expectations of about 1.84 mb/d in January. A Reuters survey on December 2 suggested that November exports were about 1.8 mb/d, from which they inferred a cut in the October OPEC meeting of 99 kb/d. 1.6 mb/d would suggest that Angola was responsible for a crude allocation cut of 299 kb/d from November 1.

15. Nick Snow at the Oil & Gas Journal reports on the SEC's approval to changes as to how oil reserves are legally accounted for in quarterly and annual filings. The new rules allow companies to report as proven reserves which have not in fact been drilled, but which various technologies allow us to conclude are really there. The rules also allow corporations to use a twelve month price average to calculate recoverable reserves as opposed to the year end price. It would also allow corporations to provide numbers on possible and probable reserves as well as proven. While these last two changes appear, on the face of them, to make sense, I am suspicious of the first. Even if it is a common sense provision, it couldn't come at a worse time, given the overall total incredibility of accounting firms and their methods. (Perhaps another reason Russia decided to delay the introduction of Western accounting methods for their own reserves.)

16. Maria L. La Ganga at the Los Angeles Times reports that Bay Area residents are hostile to city plans to introduce $3 fees for all cars passing in or out of downtown during peak traffic hours. The plan is similar to the one introduced with positive effect in London, but Bay Area citizens are worried that it will reduce street traffic for shopping, given that the mass transit infrastructure might not be sufficient to handle additional load. If congestion and demand reduction plans are facing political hurdles to passage in San Francisco, they are not likely to be met with more amiable reactions elsewhere. (h/t Keith Johnson at Environmental Capital)

17. Free Exchange points out that GMAC will use its $5 billion loan from the Treasury to finance car loans to folks with credit ratings of 621 or higher. This is a reversal from a decision in October to loan only to people with ratings of at least 700. It is not clear to me if this is driven by DC--where folks might be interested in making more credit available to people who are having a hard time, currently, getting it and thus resuscitating the credit markets--or GM, as the author suggests.

18. The EIA's This Week in Petroleum reports that crude stocks grew by 500 kb in the week ended December 26 to 318.7 million barrels, near the top of the historical range. Gasoline stocks grew by 800 kb versus analyst expectations, per a survey conducted by Bloomberg, of a 1.7 million barrel build. Gasoline stocks are slightly below the middle of the historical range for this period. Distillate stocks grew by 700 kb, versus analyst expectations of a 1.5 mb build, and are at the middle of the historical range. Although the builds are below expectations, the high stocks numbers, considered in isolation, would put downward pressure on price.

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