Saturday, January 3, 2009

Daily Sources 1/5

1. Justin Lahart at Real Time Economics reports that Martin Feldstein, who until last year was head of the National Bureau of Economic Research, maintains that the European Monetary Union will cause conflict within the euro zone. Feldstein argues that the last decade has been pretty smooth sailing for Europe, and the eurozone hasn't, until now, been tested by fire.
"But now, economic conditions are deteriorating rapidly, and some countries are being much harder hit than others.

In Spain for example, the unemployment rate has risen to 12.8% and industrial production has fallen by 11% in the past year. Germany, in contrast, has an unemployment rate of 7.5% and industrial production has fallen by 3.9%. Spain would probably prefer a much looser monetary policy than it’s getting from the ECB."
He thinks that the current stresses have some likelihood of compelling one or more country to decide to withdraw from the monetary union.

2. Jill Treanor and David Hencke at the Guardian UK report that banks bailed out by the government are being accused of not making loans, which was part of the bailout agreement. A Bank of England survey revealed that less credit was made available in the final quarter of 2008, despite the terms of the bailout. Halifax--the UK's largest mortgage lender--separately released data showing that there was a record low for new mortgages in December.
"Major banks claimed that they were heeding the government's demands to maintain lending. They put the blame on the departure of Icelandic and Irish banks from the market for the reduction in credit reported by the Bank of England.

"The banks and Nationwide are approving one-third more loans as 12 months earlier but specialist lenders and small building societies have virtually disappeared from the market," the British Bankers' Association said."
One of those situations where it would be useful to have trusted independent accountants about. Too bad. Either way, surely no one would believe the accounting of the banks.

3. Taghreed el-Khodary and Isabel Kershner at the New York Times report that Israel has sent infantry and armor to cut the Gaza strip in half, supported by naval and air bombardment. Tel Eviv has rebuffed peace initiatives of which there have been many. French President Nicolas Sarkozy met with Egyptian President Hosni Mubarak in Cairo today and was scheduled to visit Jerusalem, Damascus and the West Bank city of Ramallah. Russian President Dmitri Medvedev called Israeli Prime Minister Olmert to stress the importance of a cessation of hostilities. Tony Blair, now the envoy for the Quartet Group--the US, EU, Russia, and the UN--met the Palestinian President Mahmoud Abbas in the West Bank and called for an immediate cease fire. Karl Schwarzenberg, the Czech foreign minister--the Czech Republic took over the EU presidency on Thursday--also led a delegation on Sunday, as per Stephen Castle and Katrin Bennhold at the New York Times.

4. Jérôme Guillet, a French investment banker who specializes in structured finance for energy projects and began his career financing the Russian oil and gas industry, writing under the pen name "Jerome a Paris" has a useful analysis of the perennial Russia/Ukraine natural gas disputes at the Oil Drum. Though I am suspicious his ultimate conclusion is unlikely, he makes many very worthwhile observations, including:
a) the dispute between Ukraine and Russia over gas did not begin in 2006, but in 1992, immediately after the break up of the Soviet Union and perennially ever since.

b) Russia cannot win a gas war against the Ukraine not only because Ukraine possesses a great portion of the old Soviet natural gas pipeline infrastructure, but also because "Ukraine controls most of the storage capacity of the Russian export system, something rather important when you know that winter gas demand is 2-3 times summer demand and pipelines can be made smaller if you can ship gas all year long and store it close to markets for winter use." The storage equivalent to 35% of Ukrain's yearly requirement is right on the Ukrainian border with Poland and Slovakia.

c) One reason that the perennial Moscow Kiev natural gas dispute has only recently caused waves in the West is because it was the middle of this decade that ten Central and Eastern European countries joined the EU. All of those countries are especially dependent upon Russian natural gas because most of their natural gas infrastructure was built during the Soviet era. The Soviet dominated past of those countries leads them to be extremely wary of Russian influence over their affairs. (They are also natural allies of American interests who want to expand NATO eastward in order to put the kibosh on any Russian renaissance leading to renewed western ambitions.)


d) "In Ukraine, political infighting can largely be understood, in my view, by the fight over who will be the Ukrainian counterparty to that Trade. (It's no coincidence that Yulia Timoschenko made her fortune in gas trading in the 90s, and that Yanukovich represents some of the largest gas-users from heavy-industry in Eastern Ukraine). In Russia, similarly, one has to go beyond the image of a monolithic Kremlin with its faithful Gazprom arm - both are rife with infighting and coalitions within both centers of power that come and go (as an example, just look how the 50% of Gazprom formally owned by the Russian State is split between at least two public bodies controlled by different senior Kremlin insiders)."
Critically, Guillet points out that both Moscow and Kiev are dependent on revenues from natural gas delivered to Europe. Guillet, who was at the Gaz de France Kiev office in 1994, argues that the contest in the press is a charade to hide a different contest, used by elites in all the affected capitals to pursue hard line agendas. Though I am not convinced by Guillet's ultimate conclusion, the piece is worth reading in full.

Either way, both Moscow and Kiev are essentially looking to Europe to apply pressure on the other to resolving the dispute. (And on Saturday, Jan Korselt at Reuters reported that European Union president Alexandr Vondra said that the EU did not "intend to become a participant or mediator in gas contract disputes between Russia and Ukraine, but urged both sides to reach an agreement soon.") Isabel Gorst, Chris Bryant, Roman Olearchyk, and Jan Cienski at the Financial Times reported Sunday that Poland reported an 11% drop in natural gas deliveries via Ukraine, and appeared to be the worst affected by the cut off. The reporters were unable to verify the contractual claims of either party with legal experts, as the contracts remained privileged information. That said, Alexander Medvedev, deputy CEO of Gazprom embarked on a tour of European capitals, looking to drum up support.

In order to guarantee that Turkmen natural gas goes through Russian-controlled infrastructure, ITAR-TASS reported on Friday that Gazprom agreed to a price of $340/thousand cubic meters (tcm). That more or less corresponds to the price of $9.63/MMBtu or $55.86/b on a BTU basis. Steve LeVine at BusinessWeek reported Saturday that "Russia is clearly of the consensus view that oil will average somewhere in the neighborhood of $60 a barrel this year." (LeVine writes that the majority of gas sent to Europe is produced in Turkmenistan and send on to Europe, which is false. According to the EIA, in 2006 Russia exported 5.4 trillion cubic feet (tcf) to nations outside the former Soviet Union and the Baltic and Turkmenistan produced a total of 2.2 tcf.) Natural gas contracts are typically tied to the price of crude and $60/b would roughly correspond to $365/thousand cubic meters. $250/tcm roughly corresponds to $7.08/MMBtu or $41.08/b on a Btu basis. The most recent offer of $418/tcm roughly corresponds to $11.84/MMBtu or $68.68/b on a Btu basis. Europe has reportedly been paying prices of $500/tcm, which roughly corresponds to $14.16/MMBtu or $82.15/b on a Btu basis, which is significantly less than the average price of sweet light in 2008, which was around $100/b. Ukraine has reportedly offered as much as $235/tcm which roughly corresponds to $6.66/MMBtu or $38.61/b on a Btu basis. Sweet light is trading above $48/b as I write.

5. Xinhua reports that Iran's OPEC governor Mohammad Ali Khatibi said that Iran would welcome an emergency meeting to review cut compliance in February, ahead of the next meeting scheduled for March. The story says Iran's allocation cut committed to on December 17 was for 545 kb/d, which may imply a target of 3.272 mb/d. Meanwhile, Kate Dourian at Platts reports that a Kuwaiti source told her that Kuwait was not planning for a February meeting of the cartel. He also indicated that Kuwait had already reduced supply to fully comply with its allocation set on December 17.

6. Reuters reports that Iran's Oil Minister, Gholamhossein Nozari, was quoted by local media as saying that the budget for 2009 is assuming $37.50/barrel prices.

7. Xinhua reports that Nigeria's Central Bank announced in its monthly report Friday foreign currency reserves of $52.7 billion at the of December, down from $57.4 billion in November. (In early December it had reported foreign currency holdings of $55.9 billion for November. see Daily Sources 12/4 #10)

8. Steven Bodzin at Bloomberg reports that Citgo has decided to halt the delivery of subsidized heating oil to poor neighborhoods in the US given the new low price of crude. On NYMEX Friday, heating oil for delivery in February sold at a $15.83/b premium to light sweet crude for delivery in February.

9. Christian Schmollinger and Alexander Kwiatkowski at Bloomberg report that Saudi Aramco raised the prices of Arab Medium and Arab Heavy for European and Asian customers.

10. Kartik Goyal at Bloomberg reports that the deputy head of India’s Planning Commission, Montek Singh Ahluwalia, told the wire that New Delhi plans to abandon government pricing for petroleum products and link them to prices found on the international markets. He also indicated that gasoline and diesel prices may be shortly cut again, quickly following cuts made on December 6.
"'There would be a systemic shift and as and when the prices go up, local prices will also need to be adjusted,' Ahluwalia, who worked as an economist with the World Bank, said on Jan. 2. 'We are pushing. That’s what the government should do and I hope the government will make an announcement to that regard soon.'"
Allowing prices to float freely should make Indian demand--and thus incremental global demand--much more responsive to price. (This move would follow China's decision to allow some products to float more freely while taxing consumption. see Daily Sources 12/5 #1 and Daily Sources 12/19 #1) Weilyn Loo at Platts writes that the Moody's rating agency surmises in a report released today that now would be a good time for China, India, Malaysia, and Indonesia to reform their petroleum product price subsidy programs. Moody's suggests that now might be a good time to link prices to international markets as prices are low, given that prices may rise and even further complicate already shaky budgets. Moody's endorses China's recent desubsidization plan over Malaysia's because China's product prices will be explicitly tied to international market prices. (Or perhaps it's because Moody's wouldn't want at this stage to lose Beijing's business. So nice to hear from Moody's on fiscal austerity and honest accounting. I think their findings are reasonable, but still.)

11. Xinhua reports that the Xinjian Uyghur Autonomous Region became the largest crude oil producing region in the county in 2008 at 27.4 million metric tonnes (~548 kb/d). There is an independence movement in Uyghur. After the Communists took over the region in 1949, there has been a policy of encouraging Han Chinese to settle there, which has made the Uyghurs a minority. In 1990, the region produced 7 million metric tonnes of crude oil (~140 kb/d). (In 2006, China produced altogether 3.9 mb/d of oil and consumed about 7.6 mb/d.) The more the region produces, the less likely independence for the region becomes. However, the more potentially profitable rebellion becomes, too.

Consistent with that conclusion is the report today by Edward Wong in the New York Times that 1,295 arrests were made in the Xinjiang region in 2008 on the charge of "endangering state security," up from 742 in 2007, or up 75%. In 2007, prosecutors indicted 619 of the 742 arrested.

12. Li Yanping at Bloomberg reports that the China Federation of Logistics and Purchasing Purchasing Managers' Index rose to a seasonally-adjusted 41.2 in December from 38.8 in November. (A reading above 50 indicates growth; below 50, contraction.) Beijing's PMI shows that in December manufacturing contracted for the third straight month, versus the CLSA PMI released on Friday which indicated December had been the fifth month of contraction for manufacturing in China. (See Daily Sources 1/2 #4)

13. Rama Lakshmi at the Washington Post reports that Shiv Shankar Menon, India's Foreign Secretary, announced that its evidence on the Mumbai terrorists was forwarded on to Pakistan Monday and that it expected action against the suspects named therein "as quickly as possible."

14. The Times of India reports that on January 1 the Indian government inked a $2.1 billion dollar contract for eight Boeing P-8I long-range anti-submarine warfare, anti-surface warfare, and reconnaissance aircraft.
"Sources said the P-8I contract was 'a direct commercial agreement with Boeing', with 'some issues of end-use verification yet to be fully sorted out" with the US government.'"
The contract is the largest defense contract India has ever signed. (h/t Feng at Information Dissemination)

15. Will McCants at jihadica reports that the Shabaab movement in Somalia has greatly accelerated its Arabic propaganda efforts in the last two weeks. Apparently the movement is especially concerned with targeting its more moderate Islamist competitors, the Alliance for the Re-Liberation of Somalia--an assembly arranged by former Islamic Courts Union leaders for negotiations with the Transitional Federal Government--or the folks installed by Ethiopia and recognized by the UN. Perhaps there is a contest for funds. Moderate Islamists may prove more palatable to most, if not all, of the governments in the Gulf, as well as Cairo, and thus worth funding. Meanwhile, Galrahn at Information Dissemination reports that the EU Operation Atalanta's rules of engagement now appear to be to pursue, engage, and sink ships suspected of piracy.

16. Retail analytics firm Precima recently released findings of a survey asking consumers what they are spending gasoline savings on.
"48% said they’re spending it on groceries, followed by saving (42%), holiday gift-buying (37%), paying off credit cards (30%), entertainment (10%), and other (14%)."
Since I'm not sure how consumers could instantly disaggregate gasoline savings from other forms of income, I take this as an indication of what people are spending on, generally. If IHS Global Insight is right and every $0.10 drop in gasoline equals $12 billion in reduced costs generally across the economy, then (given regular gas prices of $4.10/gallon versus ~$1.60/gallon today) Americans have received a $300 billion stimulus package in terms of gas prices or about 2% of GDP (given nominal GDP in 3Q of $14.4 trillion).

17. Keith Johnson at Environmental Capital reports that at Ford the SUV was the worst performing sales category in December, and sales were lower than November. At both GM and Honda light trucks sales fell farther than car sales. But,
"the same dismal economy spells even worse news for more expensive, fuel-efficient hybrid cars. Honda sold just over 1,000 hybrids in December, a 69% decline, while sales of the iconic Toyota Prius tumbled 45% last month. If shouldering the extra upfront costs for a hybrid was already a stretch with pricey gasoline, cheap gas seems to make it a no-brainer, for now at least."
Nick Bunkley at the New York Times reports that Ford's F-series pickup truck held onto its position as the best-selling model in the US for the 27th consecutive year.The F-150 is a big truck with a V-8 engine and at best gets 14 miles/gallon in the city and 19 on the highway. It's curb weight is 5,628 pounds. It's basically one of the biggest pickups on the market and, even with gasoline at $4/gallon, it remains the most popular.

The LA Times estimated that Ford would sell about half a million in 2008.

18. Ros Krasny at Reuters reports that the president of the Chicago Fed, Charles Evans, told reporters in San Francisco that, "based on the outlook for rising unemployment, falling industrial production and a wider output gap, economic models suggest rates should be below zero." He also said, "Quantitative easing, a way to flood the banking system with large amounts of money, 'is a way to mimic below-zero rates and provide support to the economy ....'" Evans is a voting member of the FOMC in 2009.

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