Daily Sources 5/6

1. THE PBOC THINKS QUANTITATIVE EASING BY OTHER CENTRAL BANKS MIGHT NOT BE IN CHINA'S INTERESTS, LET'S EVERYONE KNOW JUST IN ADVANCE OF ECB MEETING; THE ECB CHIEF ORDERS ALL GOVERNORS NOT TO DISCUSS THE BANK'S DIVISION OF OPINION PUBLICLY, BUT WE KNOW IT'S THERE

Sandy Hendry at Bloomberg records that the People's Bank of China said in its quarterly monetary policy report released today that the policy of quantitative easing pursued by some of the world's central banks risks spreading inflation around the world.

"'A policy mistake made by some major central bank may bring inflation risks to the whole world,' China’s central bank said in the report today. 'As more and more economies are adopting unconventional monetary policies, such as quantitative easing, major currencies’ devaluation risks may rise.'"

The language comes as the European Central Bank appears to be divided on how best to move going forward, with the open dispute between the governors having actually had to have been silenced by the bank's chief. Claus Vistesen at Fistful of Euros notes that the ECB does not appear, at this stage, to be ready to adopt the policy of "quantitative easing" that the Fed, Bank of England and Bank of Japan have adopted. Vistesen concludes:

"I think the ECB and indeed Eurozone policy makers have a responsibility towards on the one hand, the CEE; and on the other keeping the Eurozone in one piece. I think that this responsibility should be conveyed very clearly in speech and action. You can always argue that measures already have been taking, but I think there is good chance (risk) that the whole European economic system needs a serious re-boot on the back of this crisis. Such re-structuring need to be intimately tuned to these two challenges which means that we need to be able to speak openly about them and not narrate anything in the context of one set of aggregate inflation expectations measures. If it is not, then we will truly be all at sea."

Well worth reading in full. The ECB will be meeting tomorrow to decide on further measures.

2. UK ENERGY SECY SAYS BRITAIN TO TRANSFER CARBON CAPTURE TECHNOLOGY TO EMERGING NATIONS, THE UK ECONOMY IN SAME TRAJECTORY AS THE GREAT DEPRESSION (WHICH IS ACTUALLY GOOD NEWS, RELATIVELY SPEAKING), RATE OF SPANISH UNEMPLOYMENT GROWTH FALLING, AND ED HUGH SAYS GLOBAL MANUFACTURING STABILIZED IN APRIL

Jonathan Watts at the UK Guardian reports that the British Energy Secretary, Ed Miliband, suggested today that London would share the fruits of its R&D in carbon capture and other low carbon technology with Beijing and other developing countries.

"'We're approaching this from the mindset where we can co-operate more with China on things like carbon capture and storage,' Miliband said.

While not abandoning the industrial potential of being a leader in the field, he said Britain could benefit from transferring knowledge.

'Eventually we hope to see this technology across the world because coal is something that is used in many countries and the key to that is making it a clean fuel of the future.'"

Recently China, India, and South Africa called upon the developed world to contribute $200 billion (annually, I infer) to the emerging world to help them institute best carbon reduction practices--see Daily Sources 4/29 #1.

Meantime, Stephanie Flanders at Stephanomics reports that the National Institute of Economic and Social Research (NIESR) thinks the UK's economy is likely to follow mostly the same path it took during the Great Depression. That's bad, she notes, but the UK's economy contracted by much less than the rest of the world, and, in particular, the US, during the Great Depression, and so is good news, relatively speaking.

"Still, economically speaking, 1931 was not half as bad for the UK as it was for other parts of the world--notably the US, which shrank by more than 10% that year, and by around 30% between 1929 and 1933.

Where the UK is concerned, the year you really don't want to replicate is 1921, when the economy shrank by nearly 10%."

Victor Mallet at the Financial Times reports that the rate of the rise in Spanish unemployment is slowing.

"The number of unemployment benefit claimants in the labor ministry announcement are lower than the jobless figures released last month by the quarterly labor survey of the National Statistics Institute. Those showed Spanish unemployment exceeding 4 million by the end of March, equivalent to 17.4% of the workforce and double the European Union average."

Spain's consumer confidence index also registered a rise to 61.9 in April from 53.7 in March, according to the Official Credit Institute. Edward Hugh at Fistful of Euros has an extremely long piece showing that manufacturing has stabilized globally in April. His commentary:

"The global manufacturing recession continued in April, with rates of contraction for output, new orders and employment all showing what are effectively sharp contractions by historical standards. The rates of contraction however moderated almost universally, and this is now the fourth month where this moderation has been evident. Thus, while the contraction is far from over, it is reasonable to say the it has stabilized, and the big issue is at what rate it will hold in the months to come. The initial shock has now been absorbed, but that is a far cry from saying that we already have the worst behind us. The general deterioration in employment conditions raises the concern that as the impact of the government stimulus 'shocks' in their turn wane, and as national banking systems come under the impact of the additional loan defaults the growing unemployment and falling property values will cause, then we may see a series of second round effects, not as severe as the initial 'hit' last October, but certainly not to something to be taken lightly or 'factored out of the picture' at this point."

Worth a look.

3. IF TALIBAN REFUSES TO RECOGNIZE PAKISTANI CONSTITUTION, THEN THAT, IN AND OF ITSELF, WOULD BE IN VIOLATION OF ANY DEAL

Susanne Koelbl at Der Spiegel conducted an interview of Pakistan's President, Ali Zadari. Key excerpt:

"SPIEGEL: The chief Taliban negotiator in Swat, Sufi Mohammed, claims that democracy is opposed to Islam. So what are the foundations for a treaty?

Zardari: When he refuses to recognize Pakistan's constitution, he is breaking the terms of the peace deal. That gives our negotiators and the populace the support they need to take him on. If the deal doesn't work, then parliament will have to decide on it again. That's democracy and, as you can see, it works."

My emphasis. Well worth reading in full.

4. WORLD CLASS GIANT OIL FIELD FOUND IN KURDISH REGION OF IRAQ, QUESTION ON HOW BEST TO TRANSPORT IT TO MARKETS OPEN, HOWEVER

Heritage Oil Corp.--a UK independent oil and gas E&P firm--published a press release today announcing that they their initial test of the Miran West structure in Kurdistan indicates that it contains 2.3 to 4.2 billion barrels of oil. Not quite a super giant find (a field with at least 5 billion barrels), but a world class giant field, though Heritage expects recoverable oil to be about 50-70% "due to the highly fractured nature of the reservoirs."



The upper end of recoverable oil would be at about 35 days of global oil consumption (at 84 mb/d) with the lower end being 13.7 days of global oil consumption--a considerable find by any measure. Spencer Swartz at Environmental Capital comments:

"The only problem: there’s still no prospect of Heritage or any other firm being legally permitted to export crude discovered in Kurdish territory to world markets because Baghdad and Erbil, the capital of the autonomous region, remain at loggerheads over oil contracts. Iraq gets oil revenues from exports of crude that comes mainly from Southern Iraq fields.

Iraq oil minister Hussein al-Shahristani said last week in London that Baghdad still won’t recognize any of the oil drilling contracts Erbil has signed with 25 mostly small companies and, as a result, won’t provide export licenses to companies operating in Kurdish territory. DNO International of Norway was the first company ready to export oil--two years ago.

Baghdad and Erbil have made virtually no progress resolving their differences."

I would note that the so called Pars Pipeline recently proposed by Tehran could now potentially, logically even, go through the Kurdish Autonomous Region through Syria and on through the Mediterranean.

5. VENEZUELA TO PASS LAW MAKING EXPROPRIATIONS EASIER

Rachel Jones at the Associated Press reports that the Venezuelan National Assembly gave preliminary approval yesterday to a law which would simplify the legal procedure by which the Chávez Administration might seize control of oil and gas services operations.

"The draft law would let PDVSA impose control over some service businesses without further legal measures, while any disputes would be settled in court. Expropriations normally take effect only after the publication of a presidential decree in the Official Gazette or if the National Assembly approves a measure."

6. JATROPHA TREE--A MAJOR POTENTIAL SOURCE OF BIODIESEL--PROVES UNPRODUCTIVE IN WASTELANDS; NEW CALL TO DROP TARIFFS ON "GREEN" IMPORTS; ORGANIC FARMS IN THE US NOT DISTRIBUTED ACCORDING TO LAND AVAILABILITY BUT CULTURAL PREFERENCES

Jon R. Luoma at Environment 360 reports that research results for the jatropha tree show that although it will grow in arid and barren lands, its oil yield from such acreage is quite low and unlikely to result in a net energy addition. India, in particular, is one nation that had pinned some hopes on the jatropha tree, for which New Delhi created a subsidization program in "wastelands."

"According to the Indian environmental group, Navdanya, government foresters have drained rice paddies in order to plant jatropha in the poor and mostly tribal state of Chhattisgarh. As early as mid-2007, protests broke out in the mostly desert state of Rajasthan over a government scheme to reclassify village commons lands--widely used for grazing livestock--as 'wastelands' targeted for biofuel production, primarily jatropha."

Unrest over reduced food crop yields due to biodiesel programs via the jatropha tree have also broken out in the Philippines and Myanmar.

"Late in 2005, Myanmar’s military dictatorship--newly enamored with what’s been called 'the biofuel tree'--ordered all of that nation’s states and other political divisions to plant about a half-million acres each. In a predominantly agrarian country where child malnutrition is rampant, entire plantations have sprung up where food crops once grew. Under the threat of imprisonment, households have been forced to buy seed and plant jatropha in backyard gardens. Human rights groups report that teachers and their pupils, along with medical and government workers, have all been pressed into service to plant jatropha.

Yet according to scattered stories that have leaked out of a country generally closed to the foreign news media, the same government that infamously bungled its response to a devastating May 2008 typhoon did not have the foresight to build adequate infrastructure to mill the jatropha seeds or process them into biofuel. The seeds--grown at the expense of food crops--were left to simply rot on the ground."

Well worth reading in full. (And I suspect that the jatropha may provide part of the solution nonetheless. That said, crude palm oil futures tend to trade at about a $40/b premium to ultra low sulfur diesel.) Daniel M. Price has an opinion piece at the New York Times calling specifically for the reduction of import duties on green technologies and products.

"The United States should call on each of the major economies to choose any of the products from the World Bank’s list of 43 climate-friendly technologies--for example, solar and wind energy equipment--and end tariffs on them. The only requirement would be that each country reduce the tariffs collected on these 43 products in total by at least 20 percent.

This proposal is simple and easy to put into place, and need not await the outcome of drawn-out international trade negotiations. Countries merely need to choose the products on which they want to cut tariffs, and reduce those tariffs to zero."

I suspect the counter-argument will be something along the lines of protectionism doesn't only take the form of duties, but of subsidies as well.

In a related story, The New York Times has a short piece pointing out that the growth of organic farms appears to be closely correlated to cultural preferences, as opposed to standard food economics. Organic farm distribution:



All farms:



The full graph and commentary can be found here.

7. CRUDE STOCKS UP, BUT MARKETS SHRUG ... THE FOLKS LEFT WITH DISPOSABLE INCOME ARE SAVING IT

The EIA reports today that commercial stocks of crude oil were up 600,000 barrels for the week ended May 1 to 375.3 million barrels, the largest amount held in storage seen since 1990. A survey conducted by Bloomberg of analysts showed the median expectation for crude stocks was a 2.5 million barrel gain. Gasoline stocks fell 167,000 barrels versus Wall Street expectations of a 550,000 gain, though the stock level is still at the high end of the five year historical range for this time of year. Distillate stocks, by which the EIA primarily means diesel and heating oil held in storage, jumped by 2.4 million barrels, versus expectations of a 900,000 barrel gain, and totally disconnecting from the US distillate stocks cycle, as you can see from the EIA graph:



The news is slightly mixed, and contrary to expectations, but it should be bearish in terms of price. The traders don't appear to have thought so, however, with the price of WTI trading at over $56.31/b as I write. (You'll remember that yesterday Bloomberg reported that Barclays had published an analysis which suggested that were the price of the front month--June--contract move above $56.10/b, then the price will go to over $71/b, as a large number of folks try to exit their short positions--see Daily Sources 5/5 #5.)

Meantime, Joshua Schneyer and Rebekah Kebede at Reuters report that some expect the US to cut refinery runs this Summer as a result of the huge distillate surplus, which would be completely counter-cyclical because the Summer is "driving season," pushing consumption.

"A distillate surplus 'is screaming out, because it's far above any other recent (inventory) highs,' said Edward Morse, LCM Commodities director in New York."
...
"'This is the first time ever we've seen distillate being stored offshore,' Morse said."

However, this week's EIA Summary of Weekly Petroleum Data actually indicate that refinery runs have crept up by 2.7% to 85.3%. I suspect that this is because gasoline cracks appear to have stabilized after having gone to zero in the beginning of the year (I'm using front month WTI subtracted from that contract month for RBOB and HO as a proxy for the crack spread for gasoline and diesel.)



In terms of long-term fundamentals, the EIA also produced a useful graph illustrating how responsive US oil drilling is to price, with a large number of rigs coming off the market since the price peaked last July.



Also, Bruce Nichols at Reuters reports that the US Minerals and Mines Service reduced their forecast of how much oil will be produced in the Gulf of Mexico over the next ten years from an average of between 1.9 million and more than 2.2 mb/d to between 1.6 and 1.9 mb/d. "Oil output in the Gulf was more than 1.3 mb/d before Hurricane Ike hit in 2008."

In light of all the speculation above, Vinod Dar at Seeking Alpha asks why there are so many energy experts and so few energy billionaires. He concludes:

"Almost all energy experts are paid by people who have a vested interest in seeing forecasts of 'problem' and 'crisis' gain currency and credence. An energy problem or 'crisis' immediately creates opportunities for political, public policy and capital market deal making. Money and power gravitate to those who promise to 'do something' about the problem or crisis. Armies of analysts, planners, lobbyists, public policy and government agency bureaucrats, corporate managers, Capitol Hill staffers, consultants, and political operatives find tenure and lucrative living 'solving' the problem. Of course, their sole objective is to perpetuate the problem since there is no percentage in solving the problem. As soon as the problem of the moment or decade solves itself with no discernible contribution from these false legions, another energy “problem” invariably rises to take its place: bigger, better, more dangerous, requiring an ever expanding share of power, money and prestige to address. Only ordinary, working people and retail investors and tax payers suffer but then, since they don’t pay the experts, it hardly matters."

He concludes that only those who pursue ideas scorned by others and make money in the energy business are the true experts. Well, I might make the tiny objection that most folks, no matter how much they know, do not have the financial resources to make bets on technology or even the price fluctuations of commodities in a huge global and capital intensive business. However, I agree, if anyone truly knew how to predict where the price of oil was going to go, they would be obscenely rich. That might be evidence that no one does. In any case, I surely don't. (And take it from me, Vinod Dar doesn't either.)

Speaking of the rich, Rebecca Wilder at News N Economics notes that the rich in the US are saving, which means that they aren't consuming. Her graph:



Given the data yesterday which suggests that disposable income has been shrinking for the bottom 90% for some time now, that household consumption accounts for about 70% of the economy, the news that the only portion of society with spare cash is choosing to horde it is, well, not so good.