Daily Sources 5/22

1. IEA SAYS ELECTRICITY CONSUMPTION IS TO FALL IN 2009, ONLY FALL SEEN FROM 1945, LOW FOSSIL FUEL PRICES LIKELY TO MAKE RENEWABLE INVESTMENT LESS ATTRACTIVE, IEA CHIEF ECONOMIST SAYS G20 NEEDS TO INCREASE RENEWABLE SPENDING BY 600% IN ORDER TO MEET CLIMATE PROTECTION GOALS

Ed Crooks at FT Energy Source reports that the IEA expects electricity consumption to fall in 2009, the first decline seen since 1945, per its report to be delivered to the G8 this Sunday in Rome. Crooks notes that an analysis by Colette Lewiner of consultancy Capgemini argues that the data does not suggest that renewable energy will be competitive in the near term:

"The current economic signals don’t give incentives to invest in renewable energies. The prices of fossil fuels make such investments even less profitable than before the crisis (for example for windmills compared to gas power stations). In addition, at their current low price, CO2 emissions represent only a small burden for gas or coal fired plants and therefore do not help to close the economic gap with the renewable energies.

In Europe in the second half of 2008 (compared to the second half of 2007) investments in renewable energies fell by 14% to US$21.2bn, and in the United States, there was a 50% reduction to $10.7bn."

Kate Mackenzie reports that Fatih Birol, the IEA's chief economist, made the following comment regarding the renewable energy component of the stimulus packages of the G20:

"We have looked at all G20 stimulus packages--and all the money they are putting into renewable energy. The money they have put aside for renewables is definitely important, but it is still much lower than what it should be, if we want it to be come to a sustainable level of energy trends--to bring CO2 emissions down. In order to come to that trend, [spending on] renewable energy needs to increase by a factor of six."

Meanwhile, Grant Smith at Bloomberg reports that JBC Energy's most recent technical analysis suggests that the current rise in oil prices is likely to stall at $62.65/b, and from there likely to fall back to $45/b.

"'Prices will fall to $45 before they rise in the second half of the year to $68,' JBC’s Vienna-based Chief Executive Officer Johannes Benigni said in a telephone interview. 'The recovery was too early, and as oil market fundamentals look extremely bad a correction is expected.'"

JBC Energy predicted that oil would start coming out of tankers at sea in May 5--see Daily Sources 5/5 #5--and the EIA has reported declines in US commercial crude (and gasoline) stocks in the weeks since.

2. SANFORD BERNSTEIN DEDUCES THAT CHINA IS ADDING 400 KB/D TO ITS STRATEGIC PETROLEUM RESERVES

Spencer Swartz at Environmental Capital reports that Neil McMahon at Sanford Bernstein analysts have deduced from satellite images on Google that the amount of oil entering strategic petroleum reserve ports in China has risen by as much as 400 kb/d, or about 0.5% of daily global demand or roughly 5.8% of China's implied consumption in March.

"'Our analysis confirms that tanker capacity arrivals into China have spiked up in recent months, in line with imports, but more importantly, tanker arrivals into Strategic Petroleum Reserve ports have increased materially,' Bernstein says Friday in a research report."

Kate McKenzie at FT Energy Source also quotes the following from the report:

"And satellite images confirm a significant increase in storage construction in the last few years. This suggests that China is stock-piling crude oil, in line with its stated objective to increase its days of forward cover, which currently stands at only 28 days of imports and 14 days of total consumption (if the SPR is full). This is well below the target level of 90-100 days. Overall, this recent drive by the Chinese to fill their SPR should have offered some support to crude prices, and will continue to do so going forward during implementation of the next two phases of the project."

China's current SPR storage capacity stands at about 136 million barrels or 42.5 days of import demand. The State Council in 2007 suggested that the government ought plan to build 120 days of import demand storage capacity. Xinhua reported that China plans to build an additional eight SPRs this year--see Daily Sources 2/5 #2. Gotta say the use of Google satellite images to deduce this is pretty brilliant--wish I had thought of that.

3. CHINA'S NDRC DETAILS WHAT STIMULUS HAS BEEN SPENT ON SO FAR

Sky Canaves at China Journal reports that China's National Development and Reform Commission (NDRC) has issued a report detailing the status of spending mandated by the 4 trillion yuan ($486 billion) economic stimulus package. As of April 30, the central government has spent 230 billion yuan for the stimulus. (70% of the stimulus is to originate from local governments and bank lending--the People's Bank of China noted that 92% of the lending targeted by the stimulus had already been met in the middle of May--see Daily Sources 5/12 #2.) Ms. Canaves provides a helpful breakdown of how the stimulus is to be allocated:

"1. Housing: China’s stimulus plan allocates 400 billion yuan (10% of the total stimulus) to the construction of low-income housing, upgrading shanty towns and other measures to improve housing conditions.

2. Rural Development: Basic village infrastructure and civil engineering projects, such as providing water, electricity and gas to rural areas will account for 370 billion yuan (or 9.25%) of stimulus spending.

3. Major Infrastructure. This area are set to receive the largest chunk of stimulus spending--1.5 trillion yuan, or 37.5% of the total. Projects include railroads, highways, airports, other large-scale basic infrastructure and an upgrade of the urban electricity grids.

4. Health Care, Education, Culture: Social development projects get 150 billion yuan (3.75%).

5. Environment: Energy saving, emissions reduction and ecological construction projects are allocated 210 billion yuan (5.25%).

6. Industry and Technology: China has allocated 370 billion yuan (9.25% of the total stimulus) to fund independent innovation and industrial restructuring.

7. Post-quake Reconstruction: One trillion yuan (25% of the stimulus) is to be spent on rebuilding areas hit by last year’s Sichuan earthquake."

Canaves also provides the NDRC's breakdown on what has actually been done with the monies so far.

4. S&P LOWERS OUTLOOK FOR UK DEBT TO NEGATIVE FROM STABLE

Julia Werdigier at the New York Times reports that Standard & Poor's lowered its outlook for UK sovereign debt from stable to negative.

"'Even assuming additional fiscal tightening,' S&P said in a report, 'the net general government debt burden could approach 100% of gross domestic product and remain near that level for the medium term.'

The two main rival agencies, Moody’s Investors Service and Fitch Ratings, maintained a stable rating for Britain and said it was not under review. Britain has been rated AAA by S&P since it initiated coverage in 1978 and has never received a negative outlook."

5. GAZPROM DEPUTY-HEAD SAYS GAS PRODUCTION TO BE DOWN 18% IN 2009 ON DECLINES IN EUROPEAN DEMAND, ECHOING IEA REPORT; EU AND RUSSIA FAIL TO COME TO NEW ENERGY ACCORD

Simon Shuster at Reuters writes that deputy head of Gazprom Alexander Ananenkov was reported by Interfax to have said that its natural gas output may well drop by 18% in 2009 on the back of steep falls in demand in Europe. Meanwhile, Clifford J. Levy at the New York Times reports that Russia and the EU failed to come to a new energy accord in meetings in Khabarovsk today.

6. VENEZUELA ANNOUNCES IT WILL NATIONALIZE MORE METALS COMPANIES, BRAZIL CONSIDERING FINANCING VENEZUELAN INFRASTRUCTURE PROJECTS


Daniel Cancel at Bloomberg reports that the Chávez administration announced the government will nationalize the hot-briquetted iron industry and other metal companies, without providing a schedule for the take overs.

"'These companies will be nationalized to create a single industrial complex,' Chávez said yesterday on state television. 'There’s nothing to discuss. We should have done this a long time ago.'

The companies would be brought under the same management and included in plans to build an industrial complex to refine and process raw materials into finished products in a bid to reduce expensive imports, Chávez said."

In the meantime, Brazilian papers today reported that Caracas is negotiating loans for as much as $4.3 billion from the Brazilian state development bank, per Guillermo Parra-Bernal at Reuters.

"Coutinho visited Venezuela this week to negotiate the final details of the loan accord, which could be announced when Chavez visits Brazil on May 26, according to [Brazilian daily] Folha

Some of the loans may involve trade finance deals and two credit facilities worth a total $723 million to expand the subway in the capital city Caracas. Odebrecht SA, Brazil's largest construction group, is handling the expansion."

7. MEXICO CITY RELAXES SWINE FLU ALERT, CONSUMER INFLATION DOWN 0.34% IN 1ST HALF OF MAY, UP 0.13% EX-ENERGY AND FOOD

Istra Pacheco at the Associated Press reports that Mexico City has relaxed its swine flu alert, citing a lack of new cases during a week's time.

"City Health Secretary Armando Ahued said nobody has been hospitalized with respiratory infections in the last three days, and no swine flu cases have been confirmed since May 14. 'We are seeing a 96.1% drop in cases, and that's why we are dropping the alert level to green today,' Ahued said."

Jens Erik Gould at Bloomberg reports that Mexican consumer price inflation fell by 0.34% in the first half of May.

"The annual inflation rate was 6.06 percent, remaining above the central bank’s forecast of no higher than 6 percent in the second quarter. Concern that inflation remains above target may lead central bank policy makers to slow the pace of interest rate cuts to only a quarter point in June, said Delia Paredes, a senior economist at Banco Santander SA in Mexico City."

Consumer prices fell in the first half of May mostly due to a reduction in energy prices mandated by the authorities, if you exclude energy and food prices, consumer prices rose 0.13%.

8. CFR RELEASES REPORT SAYING OIL SANDS PRODUCTION "ONLY" INCREASES GHG EMISSIONS BY 17%

Keith Johnson at Environmental Capital reports that the Council on Foreign Relations has released a report which suggests that the "well-to-wheel" environmental impact of developing Canadian and Venezuelan oil sands is "just" 17% more than regular crude. The part that is difficult to understand is the "just 17% more." Global oil consumption is roughly 84 mb/d or 30.66 billion barrels/year and accounts for a considerable portion of global greenhouse emissions. The US consumes about 25% of global oil production and its largest foreign supplier is Canada. Venezuela was our fourth largest supplier in February. When you are thinking in those terms, 17% is a lot. Perhaps the report, which I have not had time to read, will make this more comprehensible--it can be found here.

9. UNEMPLOYMENT IN US SET TO EXCEED EU'S

Floyd Norris at the New York Times reports that unemployment in the US may be higher than in the European Union once the EU data for April is compiled.

"'The current economic crisis,' wrote John Schmitt, Hye Jin Rho and Shawn Fremstad of the Center for Economic and Policy Research, a research organization in Washington, 'has turned the case for the US model almost entirely on its head.'"

The headline US unemployment rate rose to 8.9% in April with most analysts expecting further net job losses.

10. COMMERCIAL REAL ESTATE LEADING INDICATOR TANKING

Barry Ritholtz at The Big Picture links to Merrill Lynch/Bank of America analyst Neil Dutta's chart plotting the National Association of Realtors US Commercial Real Estate index from 1990:



11. BRODA GHEZZI AND LEVY-YEYATI ARGUE RECENT DOLLAR STRENGTH LIKELY TO REVERSE

The econoblogosphere is buzzing about the recent post by Christian Broda, Piero Ghezzi, and Eduardo Levy-Yeyati at Vox EU which argues that financial de-globalization will reverse the dollars gains versus other currencies.

"We believe [the global flight to safety favoring the US dollar] can be largely explained by three factors of varying degrees of persistence:

* A drastic decline in risk appetite that benefited low-risk US assets.

* A collapse of financial cross-border flows--i.e., 'financial de-globalisation'--associated with an increase in the home bias of domestic portfolios, which brought home an important stock of dollar-funded portfolio investment abroad.

* A sharp increase in US household savings due to the combined wealth effect of the burst of the housing bubble and stock market correction that, together with lower oil prices, contributed to balance the current account.

We believe this unexpected response of the US dollar will be reversed and that quantitative easing will only temporarily be able to keep US long-term rates at their current low levels. Three reasons lie behind this:

* An increase of global risk aversion that is eminently a transitory phenomenon that benefits US assets.

* The 'savings drain' that has replaced the pre-crisis savings glut, as fiscal stimulus and narrower trade surpluses take hold in major external savers (Japan, China and oil-exporting countries).

* The lower degree of financial globalization in a world with more financial regulation, which will toughen the terms at which current-account deficit countries can finance themselves."

In short, the collapse in international trade, turning toward domestic growth in China, reduced savings in Japan, should reduce foreign investment by countries with current account surpluses.

"The new financial landscape--with greater financial regulation and lower leverage--is likely to make this shortage of international capital more persistent. In turn, the retrenchment of private savers--especially in oil-exporting countries and Japan--and expansionary fiscal policies almost everywhere are likely to lead us towards a 'savings drain' by global lenders--the opposite of the 'savings glut' in pre-crisis years."

Well worth reading in full.