Daily Sources 7/20

1. MORNINGSTAR OUTLINES US COMMITMENT TO EUROPEAN ENERGY SECURITY IN SENATE REMARKS

Richard Morningstar, the US Special Envoy for Eurasian Energy, emphasized the American commitment to European energy security in remarks made before the Senate Foreign Relations Committee on Friday. Key excerpt:

"There are three main components of our Eurasian energy strategy. First, we want to encourage the development of new oil and gas resources and also promote efficiency and conservation in the use of all energy resources. Because there is a world market for oil, new production can meet growing demand anywhere in the world, including in the US. When we are talking about new natural gas production in the Caspian region, it is unlikely that even one molecule of that gas will reach the US, but it is still important because it would add to international gas supply. Additional supply in one place naturally frees up supply in another. And as the market for liquefied natural gas grows, we can start to think about gas moving around markets in much the same way oil does.

Second, we want to assist Europe in its quest for energy security. Taking goods and services together, the EU27 and the US account for the largest bilateral trade relationship in the world. Europe is our partner on any number of global issues. We have an interest in an economically strong Europe. Of course, Europe is composed of many different states and energy security is a more pressing issue to some than to others. Some countries in Europe do not have a diverse energy mix and depend to a great degree on one supplier and one transport route. When that route is disrupted, as we witnessed in January 2009, the consequences can be severe. The populations of Bulgaria and Serbia and others who suffered in the cold can attest to that. So our aim is to encourage the development of multiple energy sources with multiple routes to market. This approach furthers competitive, efficient markets and the best prices for consumers.

Third, we want to help Caspian and Central Asian countries find new routes to market. We want to help foster economic growth and prosperity in these countries. By expanding export routes, they can increase competition for their resources and demand a higher price.

Some people have portrayed our energy policy and Russia’s as the next round in the Great Game in Central Asia. I reject this analogy. Energy security should not be a zero sum game. Zero sum games are too expensive and we need to find areas where we try to cooperate with Russia. In this spirit, on July 6, the White House announced a new binational presidential commission that will cover a host of different issues, including energy."

2. BERLIN CONSIDERS NEW MEANS OF JUMP STARTING CREDIT FLOWS AGAIN

Christian Reiermann, Christian Salewski and Michael Sauga at Der Spiegel report that Berlin, worried that a deepening credit crunch will undermine any recovery in the second half of the year, are considering various plans to restore the flow of credit to the country.

"[Finance Minister Peer] Steinbrück is now pursuing yet another plan. Officials at the Finance Ministry have prepared another version of an emergency financing plan, which calls for the government-owned KfW development bank to take action, instead of the Bundesbank. Before the crisis began, KfW and the banks through which it channels its loans onto the market each bore half the credit risk. In exceptional cases, KfW may assume 80 percent of the risk, while the other bank assumes the remaining 20 percent. In the future, however, KfW's share could be even higher, perhaps even 100 percent, according to the Finance Ministry's latest plans. The Economics Ministry is fashioning similar schemes.

Some plans are even more radical, including the possibility of KfW lending directly to businesses in the future. The funds for the new loans would come from the existing stimulus programs."

3. ADVISORY BOARD TO OUTGOING BULGARIAN GOV'T WARNS OF RUSSIAN INFLUENCE

The European Union Law blog reports that the Financial Times has acquired a report written by a six-member advisory board of Bulgaria's recently ousted Stanishev government, chaired by Dominique de Villepin, a former French prime minister, which argues that Bulgaria is at risk of falling under Russian economic and political influence. The blog quotes from the report:

"If Bulgaria fails in the fulfillment of this objective, different consequences could arise. First, the Bulgarian state could become more vulnerable, encouraging populist movements and planting the seeds of discouragement among Bulgarian civil society.

Second, the efforts undertaken to build up a stronger, more modern and efficient state apparatus could weaken, and so would the trust of the people in the state. Finally, it could undo the ties between the EU and Bulgaria, prompting a shift of Bulgaria towards Russian political and economic interests."

4. US AND INDIA ANNOUNCE END-USE MONITORING AGREEMENT, CITIBANK TO ADVISE ONGC ON GHANA ACQUISITION

Matthew Rosenberg at the Wall Street Journal reports that Secretary of State Hillary Clinton and Indian External Affairs Minister SM Krishna announced an "end-use monitoring" agreement which will facilitate sales of arms from the US to India. Meanwhile, Joseph Chaney and Narayanan Somasundaram at Reuters reports that Indian state oil company ONGC has hired Citigroup to advise it on a bid for Kosmos Energy's stake in the Jubilee oil field offshore Ghana. The deal is reportedly worth around $3 billion.

5. FORMER IRANIAN PRESIDENT CALLS FOR REFERENDUM ON ELECTION LEGITIMACY, SHIRIN EBADI NOTES ANTI-RUSSIAN AND ANTI-CHINESE SLOGANS IN FRIDAY PRAYERS

Robert F Worth at the New York Times reported that former president Mohammad Khatami called for a referendum on the legitimacy of the recent elections.

"Mr Khatami on Sunday praised Mr Rafsanjani’s speech and said a referendum would help achieve Mr Rafsanjani’s goal of restoring trust, reformist Web sites and the BBC’s Persian service reported. He said it should be carried out by an independent body, like the Expediency Council, an arbitration group that is headed by Mr Rafsanjani.

'If the majority of people accept the situation, we also will accept it,' Mr Khatami said, Web sites reported."

"Although some Iranian conservatives have criticized Mr Rafsanjani for his speech on Friday, more have made stinging criticisms of Mr Ahmadinejad over a controversial cabinet appointment made public on the same day. The president named as his first vice president Esfandiar Rahim Mashaei, who angered hard-liners by saying in 2008 that Iranians are 'friends of all people in the world--even Israelis.' Mr Mashaei, whose daughter is married to the president’s son, also angered clerics in 2007 when he attended a ceremony in Turkey in which women performed a traditional dance.

On Saturday, Ayatollah Ahmad Khatami, a prominent conservative, called the appointment of Mr Mashaei 'completely unbelievable' and said to promote him was to 'ridicule the highest religious authorities.'"

Der Spiegel carried an interview with Iranian Nobel prize winning human rights lawyer Shirin Ebadi in which she said the following:

"[The Friday prayers led by Rafsanjani and attended by Mir Hossein Mousavi and Mehdi Karroubi] was bordering on an historic event, not just for Iran, but for the entire Islamist world--because so many people from the protest movement participated in these Friday prayers. The slogans were also important. The crowd for the first time chanted 'Death to China' and 'Death to Russia!,' they attacked the two most important countries that have supported the leadership in Tehran--at the United Nations, for example. The people have seen just who has been on the side of this regime for decades--two countries that themselves massively violate human rights."

Worth reading in full.

6. RENEWED INTEREST IN KURDISH OIL CONCESSIONS, KURDISH MINORITY IN NINEVEH THREATENS SECESSION

William MacNamara at FT Energy Source reports that Gulf Keystone was awarded two Kurdistan oil licenses this weekend at Sheihk Adi and Ber Bahr.

"One of Gulf Keystone’s joint venture partners will be Genel Energy, the Turkish company leading the incipient consolidation of the Iraqi Kurdish concessions through its proposed merger with Heritage Oil."

Geoff King at Platts reports that

"The work programs for both blocks include the drilling of one exploratory well on each block using current, existing and to be acquired data, Gulf Keystone said, and both [production sharing contracts] PSCs are subject to a 20% KRG carry and no third-party back-in rights."

Meanwhile, Jamal al-Badrani at Reuters reports that Kurdish local councilors in a Nineveh--a northern province in Iraq--are boycotting all contact with the Arab governor of the region and threatening to set up their own governing body unless he successfully addresses their concerns about marginalization. Kurdish representatives hold 16 of 37 seats in Nineveh's governing council.

"The Kurds see parts of majority Arab Nineveh as part of their ancient homeland and want them included in Iraq's semi-autonomous region of Kurdistan. They complain that [Governor Atheel] Nujaifi has marginalized them in the provincial council since he was elected in January.

'If no solution is found, we will be forced to form the Nineveh council to run the 16 administrative units,' said Kurdish councilor Derrman Khitari, adding that he would ask the central government to divert part of its Nineveh budget."

"Nujaifi told Reuters he would come down hard on any local councilors who attempt to secede.

"Their demand is illegal and the constitution will not endorse it. It violates the provincial council law. If any local council within these areas violates the constitution, we have the authority to dissolve it and form a new one," he warned.

He said the door was still open to dialogue. A delegation of Shi'ite Arab politicians from the movement of cleric Moqtada al-Sadr is mediating, but have yet to produce results."

7. NIGERIA, NIGER, AND ALGERIA SIGN TRANS-SAHARAN PIPELINE AGREEMENT

The Wall Street Journal reports that the Nigerian national oil company signed an agreement with Algeria and Niger to create a $10 billion trans-Saharan pipeline to ship natural gas to Europe. On September 8, 2008, the European Commission and African Union Commission established an "African-EU energy partnership" and created an informal joint experts group on energy which was to first meet in October of that year--see Daily Sources 9/22 #5. In late February, Total SA indicated that it was interested in participating in any such project--see Daily Sources 2/26 #5. Gazprom announced late last month that it would begin construction of the pipeline late next year after having established a 50-50 JV with the Nigerian national oil company to handle oil, gas, gas processing and transportation projects--see Daily Sources 6/25 #10.



8. GAO REPORT DETERMINES THAT VENEZUELAN STATE SUPPORT FOR FARC MAKING VENEZUELA KEY HUB IN COCAINE TRAFFICKING

Juan Forero at the Washington Post reports that a GAO report commissioned by Sen. Richard Lugar (R-IN) in February 2008 concludes that state aid from Venezuela to FARC has turned Venezuela into a key source of cocaine being trafficked into the United States.

"Since 1996, successive US administrations have considered Venezuela a key drug-trafficking hub, the Government Accountability Office report says. But now, it says, the amount of cocaine flowing into Venezuela from Colombia, Venezuela's neighbor and the world's top producer of the drug, has skyrocketed, going from an estimated 60 metric tons in 2004 to 260 metric tons in 2007. That amounted to 17% of all the cocaine produced in the Andes in 2007."

9. ORTEGA CALLS FOR END TO TERM LIMITS

Reuters reports that Nicaraguan President Daniel Ortega--who accepted the results of elections after serving as the Communist leader of the country from 1979-1990--has called for a change in the law which now prevents presidents from serving two consecutive terms. In a speech yesterday he said,

"Congressman are re-elected all the time. Mayors are not allowed to be re-elected. If we are going to be just and fair, re-election should be allowed for all (public officials)."

Ortega was elected president in 2006--beginning his term in 2007; the next elections are scheduled to be held in late 2011.

10. WSJ STUDY SHOWS COMMERCIAL MORTGAGES BEING CHARGED OFF AT FASTEST RATE IN NEARLY 20 YEARS

Lingling Wei and Maurice Tamman at the Wall Street Journal report that commercial banks have been charging off commercial mortgages at the fastest rate in close to 20 years.

"At that rate, losses on loans used to finance offices, shopping malls, hotels, apartments and other commercial property could reach about $30 billion by the end of 2009.

The losses by regional banks on their commercial real-estate loans will be among the most watched details as thousands of banks report second-quarter results over the next two weeks. Many of the most troubled banks have heavy exposure to commercial real estate. So far, 57 banks have failed this year.

The $30 billion estimate is based on financial reports filed by more than 8,000 banks for the first quarter. The trend continued as a handful of major banks reported second-quarter results, including Goldman Sachs Group Inc, JP Morgan Chase & Co. and Bank of America Corp. Regional banks tend to have higher exposure to commercial real estate than these big financial institutions."

The commercial real estate market represents about 13% of US GDP.

11. PETROLEUM IMPORTS NOW REPRESENT LARGEST SHARE OF THE TRADE DEFICIT

Brad Setser notes that as of May the largest share of the trade deficit is due to petroleum imports.



And comments:

"Discussions about the policies that gave rise to imbalances typically focus on macroeconomic policy choices. That increasingly strikes me as incomplete. Energy policy should enter the calculus too. The US isn’t going to start exporting petrol--not on a net basis--anytime soon. But it certainly could do more to reduce its demand for imported energy."

Daily Sources 4/9

1. Hiroko Tabuchi at the New York Times reports that Prime Minister Taro Aso has submitted a ¥15.4 trillion (~$154.4 billion) stimulus plan to the Parliament for approval. ¥15.4 trillion represents about 3% of Japanese GDP. Mr. Aso introduced the plan by saying:

"The world is at a turning point, where only countries that can turn adversity into opportunity will thrive. Japan is at its most crucial crossroads in 100 years."

2. Jason Dean at China Journal reports that Beijing has announced--via the China Daily--that it is sending a purchasing junket to France. Ties between the two countries had been frayed by rhetorical support for Tibet from France. The purchasing junket comes a week after the joint communique hosted by the Chinese Foreign Ministry's website affirming that "... France refuses to support any kind of 'Tibet independence'"--see Daily Sources 4/1 #5.

3. David Jolly at the New York Times reports that the Bank of England left its benchmark interest rate at 0.5%. In its previous meeting, the bank's Monetary Policy Committee had committed to buy £75 billion (~$110 billion) of government and company bonds, or engage in "quantitative easing." In its statement today the bank pledged to complete the expenditure within two months' time.

"The committee noted that since its previous meeting a total of just over £26 billion of asset purchases had been made and that it would take a further two months to complete that program."

4. Shell published a press release on its website yesterday which announced that in a meeting with Gazprom CEO Alexei Miller in Moscow, Shell CEO Jeroen Van der Veer signed an agreement to import Russian LNG from Sakhalin on the Russian Pacific coast.

"Deliveries to Gazprom and Shell begin in 2009 and will last until 2028, totaling 1 mtpa each to Gazprom and Shell at plateau. The agreements also include a new pipeline gas agreement for the delivery of an equivalent volume of gas to Shell in Europe. Through this 20-year agreement Shell will be able to strengthen the diversification and flexibility of its supply portfolio and its marketing position in the European gas market."

Jonty Rushforth at Platts reports that Asian spot LNG cargoes are hovering below $4.50/MMBtu as the number of takers remains slim.

"Sellers were offering cargoes throughout the region, but the only national buyers left were from China and India, with the former said to be looking for a single May cargo after earlier taking an April cargo, industry sources said."

Generally UK National Balancing Point futures were selling at a premium to Platt's May Japan Korea marker of between $0.10 and $0.50/MMBtu. Eric Watkins at the Oil & Gas Journal reports that Indonesia has sold only 3 cargoes of 18 originally bound for Japan, Taiwan, and South Korea.

"PT Pertamina vice-president Hari Yulianto said the global financial crisis had resulted in falling demand for gas in the three countries and that they hoped to sell their LNG to buyers in Europe and other Asian countries.

Hari said if the three countries failed to sell the LNG, Indonesia's domestic market could have the opportunity for a larger supply of gas—a point agreed on by other officials."

Indeed, Indonesia's contract with Japan for LNG deliveries signed February significantly reduced the supply made available on the back of the policy decision to divert the gas to domestic industry--see Daily Sources 2/13 #10.

5. Matt Robinson and Margarita Antidze at Reuters report that at least 60,000 Georgians rallied in Tblisi today to call for the resignation of Mikhail Saakashvili. Opposition leaders have pledged to rally every day from now on until the President resigns. "The West ... is watching for a possible repeat of a November 2007 crackdown, when police firing teargas and rubber bullets dispersed the last major demonstrations against Saakashvili." Clifford Levy at the New York Times reports that Saakashvili has said in response to the protests:

"No matter how our positions and views may differ, we have one motherland, we need unity for the sake of this motherland. We need to accomplish our struggle for eventual liberation of Georgia and for eventual establishment of a democratic, free, European state."

Last night Stratfor sent out an email "red alert" which pointed out that all 17 opposition parties have agreed to join in on the protests, noting,

"If the movement does inspire such a large turnout [as many as 100,000], it would be equivalent to the number of protesters that hit the streets at the height of the Rose Revolution, which toppled the previous government and brought Saakashvili into power in the first place.
...
The April 9 protests are the point at which all sides will try to gain--and maintain--momentum. The 2003 Rose Revolution took months to build up to, but the upcoming protests are the starting point for both the opposition and Russia--and opposition movements in Georgia have not seen this much support and organization since the 2003 revolution. April 9 will reveal whether or not things are about to get shaken up, if not completely transformed, in Georgia."

Though Stratfor's analysis somehow ignores the rather pertinent fact that what many Georgians are upset about is that Saakashvili apparently decided to risk the independence of his nation by launching an attack on secessionist regions on the bet that Moscow would lose the ensuing public relations battle and thus the regions because of the incipient US elections (and suspiciously timed in such a way as they could be construed to be in support of a particular candidate who happened to lose, perhaps losing the amicable feeling of the new POTUS and his party), I agree that the protests are worth watching as is the response of Saakashvili.

6. Ladane Nasseri and Jonathan Tirone at Bloomberg report that President Ahmadinejad formally opened Iran's first nuclear fuel plant in the Isfahan province today.

"The formal opening of the Isfahan plant indicates that the country is pushing ahead with its nuclear research reactor in Arak, which the United Nations Security Council has demanded stopped. Uranium pellets like the ones produced in Isfahan will feed the Arak reactor after its completion, producing plutonium as a by-product."

Meanwhile, Paul Richter at the Los Angeles Times reports that the United States has decided for the first time to become party to the group negotiations with Iran over their nuclear program. The other negotiating parties, known as the P-5, are Germany, China, Russia, Britain, and France.

"Some European officials have been advocating an approach called 'freeze for freeze,' under which the Iranians would agree to not expand their uranium enrichment, and the West would agree to not add additional diplomatic and economic sanctions, while the parties weighed broader negotiations."

Gregor Peter Schmitz at Der Spiegel conducted an interview of the former US Undersecretary of State for Political Affairs, Nicholas Burns, who was the Bush Administration's top Iran negotiator. Key excerpts:

SPIEGEL ONLINE: The Obama administration has begun to reach out to the regime in Tehran. Are they making progress?

Burns: We will have to wait and see how that develops. So far, not much has happened. The Iranians have not yet really responded to the American overtures and it does not surprise me. They have very many viewpoints competing within the government in Teheran and they have their presidential elections coming up in June. But I fully support what the Obama administration has done so far: Obama's video message to the Iranian people that went above the heads of the Ayatollahs, the very public invitation to the Iranian leadership to the Afghanistan conference in The Hague. Those are the right things to be doing. The President is communicating to Tehran: We are open to talks.

SPIEGEL ONLINE: ... Was it a mistake of the Bush administration not to start a similar outreach effort earlier?

Burns: ... [I]n hindsight I wish we had challenged Iran more in the past by doing more of the things that Obama is doing now. I am impressed by Obama's diplomatic dexterity.
...

SPIEGEL ONLINE: European nations -- including Germany -- are also reluctant to support even tougher sanctions. Our trade relations with Iran are significant.

Burns: The European nations need to make the same sacrifices we Americans have made by cutting our trade relationship with Iran. We need to have a unified approach."

Worth reading in full. Meanwhile, Joanna Lillis at EurasiaNet reports that Astana has offered a potential solution to the question of Tehran having access to the full nuclear fuel cycle--Kazakhstan would host a global nuclear fuel bank.

"Media reports say Kazakhstani leaders have been promoting their plan behind closed doors in Washington in recent weeks, and that US officials are seriously mulling the possibility. To advance the process, Kazakhstani Senate Speaker Kasymzhomart Tokayev on April 7 invited US President Barack Obama to visit Astana. The two met briefly on the sidelines of the Alliance of Civilizations forum in Istanbul. 'The speaker underlined that Kazakhstan remains committed to the policy of the non-proliferation of nuclear weapons and related material, as the results of recent talks in Astana with Iranian President Mahmoud Ahmadinejad testify in particular,' the Senate press service said.

Astana is set to assume the chairmanship of the Organization for Security and Cooperation in Europe in 2010. Developing the nuclear fuel bank initiative would reinforce Astana’s aim to position itself as an honest broker that serves as a bridge between East and West."

7. Haris Zamir at Platts reports that the Pakistani cabinet has approved the import of 750,000-1,000,000 Mcf/d of Iranian natural gas via the proposed Iran-Pakistan-India pipeline, but has yet to agree upon a price for the gas. President Zadari indicated that Islamabad was ready to move ahead without a firm commitment from New Delhi, saying:

"Transferring Iranian gas to Pakistan is very important for us and Islamabad will exert every effort to obtain gas from Iran without paying attention to any obstacles."

That said, the primary obstacle all along has been ... the price of the gas. However, Tehran just now might be feeling a bit more anxious to offer an attractive deal to Islamabad, given the speed with which the US and Moscow appear to be aligning some interests.

8. Maher Chmaytelli at Bloomberg reports that Algerian Oil Minister Chakib Khelil told Algerie Presse Service that:

"If prices stay where they are, at about $50, or even drop a little, it will be a good thing because we should not forget that the global economy is shrinking."

9. Andres Oppenheimer at the Miami Herald reports that US officials indicated Tuesday that there will be no one on one meeting between Presidents Obama and Chávez at the Americas Summit in Trinidad and Tobago next week. The POTUS is not expected to meet one on one with any counterpart at the summit, but only in group meetings.

"Obama's planned group meetings outside the summit's agenda in Trinidad's capital of Port of Spain are likely to be with Caribbean leaders, Central American leaders and a third group made up of heads of state of South America and Mexico, including Chávez."

10. Julie Cart at the Los Angeles Times reports that Australia is experiencing such dramatic climatic changes that some are touting it as a harbinger of what global warming promises the rest of the world.

"Like scenes from a modern Dust Bowl, mile after mile of desiccated fields lie fallow, rows of shriveled trees that once bore peaches and pears are now abandoned orchards, and small businesses are shuttered, fronted by for-sale signs. The dingy brown of the landscape rearranges in a cloud of dust with every hot wind that blows.

Farmers who once grew 60% of the nation's produce are walking off their land or selling their water rights to the state and federal government. With rainfall in the region at lower than 50% of average for more than a decade, Australia is witnessing the collapse of its agricultural sector and the nation's ability to feed itself."

Well worth reading in full. Obviously, the issue has particular resonance in California, where most of the agriculture is based on irrigation farming. (h/t Keith Johnson at Environmental Capital.)

11. The Associated Press reports that the Labor Department announced today that "new jobless claims fell to a seasonally adjusted 654,000, down from a revised 674,000 the previous week."

"But the total number of laid-off Americans receiving unemployment rose to 5.84 million, from 5.75 million. That was the most on records dating from 1967 and higher than analysts expected."

12. Stephanie Rosenbloom at the New York Times reports that US retailers reported a decline in sales for March, with sales for the overall retailing industry falling 1.8% from February. "Industry analysts estimated that for the overall retail industry, March sales will be down 0.4 to 1% compared with the period a year ago." Phil Izzo at Real Time Economics has posted a chart of individual retailer results which more or less indicate that discount retailers did relatively well in March while everyone else suffered badly.

Daily Sources 2/5

1. Julia Werdigier at the New York Times reports that the Bank of England cut the benchmark lending rate by 0.5% to 1% today. The European Central Bank decided to leave its benchmark lending rate unchanged at 2%.

2. Shai Oster at the China Journal reports that power demand in China is down--the China Electricity Council (CEC) announced yesterday that power consumption grew by 5.23% in 2008, down from 14.8% rate of growth seen in 2007. The CEC expects the growth rate of power consumption to continue to fall in 2009. The electricity grid has been under extreme stress over the last several years, often resulting in brownouts--the let up in demand growth probably signals a tapering off of such difficulties.

"[Beijing] plans to spend just under $85 billion on power projects this year, part of government economic stimulus plans. That is a little bit more than was spent last year.

Spending is likely to focus more on upgrading the national power grid, building an electricity superhighway of high voltage lines to bypass a lot of the aging infrastructure that has bottlenecked power supplies in the past."

Meanwhile, Xinhua Economic News reported today that China will begin the construction of eight more strategic petroleum reserves this year, after the four constructed in 2008 start operations. 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.

3. Keith Johnson at Environmental Capital reports that Sweden has decided to overturn it's old ban on nuclear power, announcing a slew of new nuclear power plant construction plans.

"That’s a big change, because Sweden was an early and ardent opponent of nuclear power, banning new reactors in 1980 even though nuclear power provides about half the country’s electricity. Sweden’s center-right government, which like the rest of the country had been long divided on the nuclear question, just announced an end to the official policy of phasing out nuclear power when the country’s ten reactors reach the end of their life. Most importantly, the government reversed its 2006 campaign pledge not to build any new reactors and ended a ban on nuclear-power research."

4. The IMF announced on Monday that it will seek to boost its capital available for lending to governments to $500 billion from $250 billion.

5. Arijit Ghosh and Shanthy Nambiar at Bloomberg report that Bank Indonesia is seeking to expand its currency swap arrangement with Japan given a fall in its currency reserves of $10 billion since July. This comes as Jakarta negotiates with Tokyo regarding on-going natural gas contracts. (see Daily Sources 2/4 #8.) Indonesia has similar agreements with China and South Korea for $3 billion each under the Chiang Mai Initiative and may well seek further assistance from another, unnamed, country.

"Finance ministers from Japan, China, South Korea and 10 Southeast Asian nations plan to meet on Feb. 22 this month to expand a deal under the Chiang Mai Initiative to boost the pool of foreign-exchange reserves to $120 billion to help defend their currencies."

(see Daily Sources 1/30 #4.)

6. Elisabeth Bumiller and Ellen Barry at the New York Times report that Kyrgyz president, Kurmanbek Bakiyev, announced in Moscow Tuesday that he will ask Parliament to close the US base at Manas.

"About 15,000 personnel and 500 tons of cargo pass through Manas each month. The base is also the home of large tanker aircraft that are used for in-air refueling of fighter planes on combat missions over Afghanistan."

Ms. Bumiller and Barry report that the Kyrgyz Parliament is set to consider the measure next week. However, the State Department's told the media yesterday that no official communication regard the base has been received.

"QUESTION: ... Have the Kyrgyz told you that you have to leave?

MR. WOOD: Look, we have not received any formal communication from the Kyrgyz authorities of any decision to close the base. But as I initially said, we’re having discussions with the Kyrgyz about this, and we’ll continue to do so."

On Tuesday Bakiyev announced that he had secured $150 million in aid from Moscow, the forgiveness of $180 million in debt, and $2 billion in loans. That is a tremendous amount of money for a country with an estimated GDP of $5.05 billion in 2008 (at nominal exchange rates.) The US reportedly provides Bishkek about $150 million in "assistance and compensation" annually, but only "a portion" of that money goes to the government. An anonymous State Department official interviewed by Ms. Bumiller and Barry said that, "fundamentally it comes to money, and the Russians are trying to buy us out."

7. Ijaz Kakakhel at the Pakistan Daily Times reports that an unnamed energy analyst forecast that the shortfall in natural gas would increase to 0.507 billion cubic feet/day (bcf/d) in 2010 as indigenous production is expected to be 4.309 bcf/d over expected demand of 4.816 bcf/d. Kakakhel quotes analysts as suggesting that the natural gas situation means that plans for the Iran-Pakistan-India pipeline ought to be finalized as quickly as possible. However, Tehran contract offers so far have not seemed reasonable to Islamabad or New Delhi. (see Daily Sources 1/19 #12.)

8. Marianne Stigset and Diana Kinch at Bloomberg report that Petrobras CEO Jose Gabrielli told journalists that the company had made no decision as to whether it would tap the equity markets as it seeks financing for its five year plan. Valor Economico had issued a note to investors that Petrobras might sell as much as 45 billion reals ($19.5 billion) of stock. Yesterday Petrobas sold $1.5 billion in 10 year bonds, a week after saying that debt was too expensive. (see Daily Sources 2/4 #12.) Meanwhile, Phaedra Friend at Rigzone reports that Petrobras confirmed it will begin the first phase of the development of the Tupi field in March--long term testing. The field is thought to hold between 5 and 8 billion barrels of recoverable oil equivalent. "Tupi is Brazil’s largest discovery to date, located in block BM-S-11 in the Santos Basin, 155 miles (250 kilometers) from the southern coast of Rio de Janeiro."



Peak production is expected to be about 200 kb/d of oil equivalent, sometime in the next 10 to 15 years. The Brazilian government indicated today that it had approved the five year plan.

9. Eric Watkins at the Oil & Gas Journal reports that in a visit to Lima by Algerian oil minister Chakib Khelil said that Sonatrach will join Petroperu in hydrocarbon exploration and production activities.

10. Courtney Schlisserman and Timothy R. Homan at Bloomberg report that first time unemployment claims rose to 626,000 for the week ended January 31. The total number of people collecting unemployment now stands at 4.788 million. The Bureau of Labor Statistics will announce the official unemployment totals tomorrow. The Associated Press reported that the Commerce Department announced today that factory orders fell by 3.9% in December. For the year of 2008 factory orders increased at a rate of 0.4%.

Daily Sources 1/22

1. Joel Martinsen at Danwei posted Tuesday that certain Chinese apparatchiks are pushing consumption as "patriotic" in local media outlets, and as a necessary means out of the current economic mess. The idea has roots in Marxist ideology, apparently, which the post outlines. There has been "push back," however in the Chinese media, including remarks in the Shanghai Daily, to wit:

"'Buy an apartment, and you are patriotic,' says a local Chinese official in her bizarre call to beggar the poor to bail out housing speculators.

Wang Aihua shocked the nation with her bold statement last Monday, delivered live on a local TV station in Hefei, capital of Anhui Province. Wang is the director of the city's urban planning bureau."

Well well well, all I can say is that reminds me of a certain someone's exhortation to go "shopping" in the face of another crisis, not so long ago. (h/t Carlos Tejeda, China Journal) But the screw hasn't finished turning, not by a long shot. Menzie Chinn reports at Econbrowser that the Bush Administration's take on the cause of the current financial crisis is that there has been a "Global Savings Glut," the actual subtitle of the section entitled "Origins of the Crisis" of the Economic Report of the President. An excerpt from the paper's executive summary itself:

"# The roots of the current global financial crisis began in the late 1990s. A rapid increase in saving by developing countries (sometimes called the "global saving glut") resulted in a large influx of capital to the United States and other industrialized countries, driving down the return on safe assets. The relatively low yield on safe assets likely encouraged investors to look for higher yields from riskier assets, whose yields also went down. What turned out to be an underpricing of risk across a number of markets (housing, commercial real estate, and leveraged buyouts, among others) in the United States and abroad, and an uncertainty about how this risk was distributed throughout the global financial system, set the stage for subsequent financial distress.
# The influx of inexpensive capital helped finance a housing boom. House prices appreciated rapidly earlier in this decade, and building increased to well-above historic levels. Eventually, house prices began to decline with this glut in housing supply."

My personal, non-economist, take is that the central banks of the developing world did finance US debt beyond what was credible, and that that did have the effect of lengthening an unsustainable boom in credit, and so there is some merit in the Administration's view. But, as I noted above, perhaps this had something to do with following the Administration's own prescription for a different crisis, altogether. Minzie, who is an economist, goes straight for the jugular:

"So, while I won't say that the idea of saving flows coming from East Asia had some role in the financial crisis we're now undergoing, I'd say one has to think about how those flows came about, as much as how big they are. We don't usually think of the rest-of-the-world driving macroeconomic events in the US ... and I still don't think it's time to start."

Well worth reading in full. Meanwhile, Yves Smith at Naked Capitalism pours cold water on the official Chinese GDP data for the fourth quarter, which show growth of 6.8%. Smith points out that power consumption in China was down 9.6% in November, after falling 4% in October, which is not consistent, usually, with pretty strong economic growth figures. She is waiting for the December power consumption numbers, before officially giving the statistics bureau a raspberry. (Chinn's piece came to my attention via Yves Smith as well, h/t.) Meanwhile, JR Wu at Real Time Economics has a piece on what recession looks like in China, examining the principle of "bao ba" or "protect the 8," the 8% GDP growth which conventional wisdom holds is the number below which you begin to see significant social unrest. The notion of "bao ba" apparently dates back to the Asian Financial Crisis. In 1989, the year of Tiananmen Square, GDP grew by 4.1%. Richard Herd, head China economist at the OECD, thinks that every percentage point decline in GDP equates to about 2 million job losses.

"According to Citigroup, China’s real GDP contracted 0.3% on an annualized basis in the fourth quarter from the third quarter — the first fall in at least 16 years. Morgan Stanley estimates China’s GDP fell 0.5% for the same period on a seasonally adjusted, annualized basis.

Goldman Sachs estimates that China’s economy grew 2.6% in the October-December period from the July-September quarter. The OECD puts the quarter-on-quarter growth for the same period at 0.3%."

Meanwhile, Paul Cavey, head of China economics at Macquarie Research has an opinion piece in Wall Street Journal Asia where he argues that the banking sector in China may, by instituting counter-cyclical policies, be setting the stage for a gigantic credit bubble.

"Whatever the dangers of a market-based system during a boom, it does have benefits on the way down. The caution of typical banks in downturns arises not just because they suffer capital shortages, but because economic risks increase. Having been tied in a knot of prudential and monetary restrictions, China's banks have had little opportunity to develop the skills needed to navigate this trickier environment.

In particular, there are worrying signs that, having avoided a credit bubble and bust during the boom, Beijing is now setting itself up for that cycle during the downturn. With a monetary expansion target of 17% in 2009 and the economy likely to expand 8% or less, the government is paving the way for exactly the sort of credit excesses that have already proved so damaging elsewhere. It is too early to be worried about this yet, but the result could be a future increase in nonperforming loans, and perhaps the need for a banking bailout with Chinese characteristics down the road.

So the rest of the world may be looking enviously at China right now. But as governments everywhere contemplate restructuring their own banking sectors, it is far too soon to conclude China offers the best model to follow."

This is particularly interesting to me because for a long time in foreign affairs circles the financial sector in China was regarded as especially vulnerable, only to watch Bank of America et. al. take huge stakes in partially privatized state-owned banks. Clearly a paradigm-shift has taken place if their public nature is to be envied. But it does give the gimlet eye to the notion of consumerism as the way forward and savings as hopelessly reactionary, does it not? Meanwhile, Rebecca Christie and Mark Drajem at Bloomberg report that Timothy Geithner, whose appointment as Treasury Secretary was cleared for a full vote by the Senate Finance Committee today, said that the new Administration believes that Beijing is "manipulating" the yuan.

"'President Obama -- backed by the conclusions of a broad range of economists -- believes that China is manipulating its currency,' Geithner said in the remarks posted on the committee’s Web site today. 'The new economic team will forge an integrated strategy on how best to achieve currency realignment in the current economic environment.'"

Senator Linsey Graham (R-SC) called the remarks "music to [his] ears". Graham sponsored legislation in 2007 which would punish imports from countries which have been found to "misalign" their currencies.

2. Chris Oliver at MarketWatch yesterday reported that Japanese exports were down 35% in December, following a 26.7% decline in November. "Exports to the US fell a record 36.9% in December on year, after declining 33.8% in November, the previous record. Exports to Asia were down 36.4%." Barclays Capital predicted that Japanese GDP would contract by 10.3% on an annual basis on the back of this and the news that industrial power consumption fell by 13% in December. In a follow-up story, Oliver reports that the Bank of Japan voted to keep benchmark interest rates unchanged at 0.1% today, and forecast that consumer price inflation would decline by 1.1% in fiscal 2010 and 0.4% in fiscal 2011.

"The board noted that conditions had "shifted significantly downward" from its outlook report published in October. Instead of expanding, the economy is likely to contract in the two years to fiscal 2010 before an expansion takes hold. Gross domestic product is expected to contract 1.8% in fiscal 2009 and 2% the following year."

3. Ian King and Patrick Hosking at the London Times report that the UK may be blocked from bailing out Barclays, because as a provision of the Abu Dhabi royal family's earlier infusion of capital, later dilution would be compensated for with additional shares.

"But the small print in the deal, in which Barclays raised £7.3 billion from Abu Dhabi and Qatar, means that if the bank raises fresh capital before the end of June, the Middle Eastern investors would receive a greater number of shares for their original investment without paying more. If Barclays were to raise fresh capital at last night’s closing price, for example, it would automatically hand almost 50 per cent of the bank to the Middle Eastern investors. The only way to get around the anti-dilution clause, should Barclays need more money before the end of June, would be if new capital was raised at more than the 153p-a-share at which paper issued to Abu Dhabi and Qatar is due to convert into Barclays stock.

This would mean that if the Government wanted to take a meaningful stake in the bank, it would have to do so by paying more than 153p for Barclays shares — which were trading at just 66.1p yesterday. The Treasury would face accusations of wasting taxpayers’ money were it to do this."

The clause was insisted upon by a certain Amanda Staveley, chief executive of PCP Capital a private equity firm which advised the Emirate on the deal. Worth reading in full.

4. Gabriel Gatehouse at BBC points out that the details of the gas contract between Russia and Ukraine have still not been made public.

5. Galrahn at Information Dissemination has an interesting translation of Russian military thinking on how it should change its approach in order to profit from soft power initiatives in the United States. As perhaps our analysis appears to Moscow, it does seem to demonstrate a large level of misunderstanding of how things work over here, but here is some of Galrahn's translation:

"The situation in American society favors the implementation of these plans. In many ways the United States today is reminiscent of the Soviet Union period of stagnation under Brezhnev. Militarism, foreign adventures, attacks on freedom of speech and human rights, censorship, the presence of the official ideology are evident. Multinational and multiracial American society does not have a common history and defines itself in terms of ideology, which is a more fragile foundation of national unity, rather than a common culture and history that binds cultures. If you choose to continue the comparison, the US, as in the Soviet Union, should be a peaceful ideological and cultural revolution. The challenge for Russia is to give impetus and direction to the process."

Some in Moscow apparently anticipate a color revolution in the US ... or its complete dissolution. Worth a look.

6. Dexter Filkins reports that NATO forces have effectively ceded much of southern Afghanistan to the Taliban. This is the NYT's map of unsecured areas, apparently:



7. Juan Cole at Informed Comment has a useful round up on the aftermath of the Israeli operation in Gaza. The Israeli Defense Force has issued a travel advisory to officers regarding travel to Europe, where several courts assert universal jurisdiction and where war crimes cases have been, or are in the process of being, filed.

This is not an idle concern, General Pinochet was prevented from leaving England due to an injunction filed by a Spanish judge on crimes against humanity charges. (Indeed, depending on how "activist" the various judiciaries in Europe are, this issue may trouble senior US government officials as well. It is important to remember in cases this charged with emotion the general view of what is just has the propensity to prevail over the written law and bilateral and multilateral treaties. As Chief Justice Oliver Wendell Holmes, Jr. once said, "The law is the will of he who the sheriff will obey." And, just now, Israel has a serious public relations problem on its hands.)

Cole points to Arab media sources reporting that Hamas is carrying out reprisals against "collaborators" in Gaza following the IDF's withdrawal. Evidently, Hamas is using the crisis to consolidate their power in the strip. Meanwhile, UN Secretary-General Ban ki-Moon visited Gaza and "demanded that nothing like the Gaza campaign ever be undertaken again ... and he said he would do what he could to establish accountability." Cole is not sympathetic to Israeli concerns, nonetheless, the post is worth reading in its entirety.

And, the dictator of Libya, Muammar Gaddafi has an op ed in the New York Times reiterating his call for a one state solution to the Israeli-Palestinian stand off. Key excerpts:

"The basis for the modern State of Israel is the persecution of the Jewish people, which is undeniable. The Jews have been held captive, massacred, disadvantaged in every possible fashion by the Egyptians, the Romans, the English, the Russians, the Babylonians, the Canaanites and, most recently, the Germans under Hitler. The Jewish people want and deserve their homeland.

But the Palestinians too have a history of persecution, and they view the coastal towns of Haifa, Acre, Jaffa and others as the land of their forefathers, passed from generation to generation, until only a short time ago.

Thus the Palestinians believe that what is now called Israel forms part of their nation, even were they to secure the West Bank and Gaza. And the Jews believe that the West Bank is Samaria and Judea, part of their homeland, even if a Palestinian state were established there. Now, as Gaza still smolders, calls for a two-state solution or partition persist. But neither will work."

"A key prerequisite for peace is the right of return for Palestinian refugees to the homes their families left behind in 1948. It is an injustice that Jews who were not originally inhabitants of Palestine, nor were their ancestors, can move in from abroad while Palestinians who were displaced only a relatively short time ago should not be so permitted.

It is a fact that Palestinians inhabited the land and owned farms and homes there until recently, fleeing in fear of violence at the hands of Jews after 1948 — violence that did not occur, but rumors of which led to a mass exodus. It is important to note that the Jews did not forcibly expel Palestinians. They were never “un-welcomed.” Yet only the full territories of Isratine can accommodate all the refugees and bring about the justice that is key to peace."

Worth reading in full. However, a key sticking point is that the raison d'etre of Israel is to provide a state which is majority Jewish, because the Jewish people have a history of being persecuted when they live in states which are not. Return is at direct odds with that purpose, as that would quickly lead to the Jewish population being a minority one in Israel--or, as Qaddafi would have it, Isratine. Meanwhile, Sue Pleming at Reuters reports that Gaddafi told students at Georgetown University via satellite link that:

"Oil exporting countries may move toward nationalization because of the rapidly declining prices. This is put on the table and is being discussed seriously,. Oil maybe should be owned by national companies or the public sector at this point, in order to control the oil prices, the oil production or maybe to stop it."

If Libya were to re-nationalize concessions recently parceled out, I imagine that might darken the legacy of what was considered one of the Bush Administration's more important foreign policy successes. That said, it wouldn't make much of a difference in terms of the global supply situation.

8. In a strange story, Maher Chmaytelli at Bloomberg reports that the oil minister of Algeria, Chakib Khelil, has said that Saudi Arabia will cut its production by 300 kb/d below its current OPEC quota.

9. Dulue Mbachu at Bloomberg reports that a draft bill sent to the parliament at Abuja would end all discretionary awarding of oil and gas contracts, mandating that all concessions be awarded via open bidding.

"A new national oil company [would] also be created to prospect for oil worldwide and raise funds from global financial markets. The country will set up a Nigerian Petroleum Directorate to develop policies and strategies for fossil energy and a National Petroleum Inspectorate to enforce policies and regulate technical and commercial aspects."

Open bidding could do much to restrain the wildly corrupt nature of doing business with the Nigerian government.

10. Eric Watkins at the Oil & Gas Journal reports that Petrobras will publish its new five year plan come January 26th--next Monday. Petrobras has moved back the date for the plan's publication several times in the last few months as it considered the changing oil price environment, likely critical to determining EROI on its new deepwater finds. (See Daily Sources 12/31 #13.)

11. The Calgary Herald reports that Daniel Yergin, head of Cambridge Energy Research Associates, said,

"Just on supply-demand, putting aside geopolitics, this surplus is going to last for a couple of years and that will have a dampening impact on oil prices. Right now, predicting oil prices is really predicting [GDP]."

12. In a bit of good news, the Baltic Dry Index, an indicator of global shipping levels and thus international trade, appears to be recovering somewhat, though it is still more than 80% below its height in 2008.



13. Samantha Young at the Associated Press reports that California Governor Arnold Schwarzennegar has sent a letter to President Obama, directly asking him to waive federal restrictions on new Californian vehicle emissions regulations. The EPA had refused to provide a waiver which would allow California to implement the new regulations despite the fact that they are stricter than the emissions requirements stipulated in federal law. (see Daily Sources 1/15 #18.)

14. Jack Healy at the New York Times reports that new home construction in the US fell 15.5% in December from November. The nation-wide unemployment rate has risen to 7.2%.

15. Damian Paletta and David Enrich at the Wall Street Journal write on alleged political interference in the distribution of TARP funds.

"Nonetheless, in December OneUnited got a $12 million injection from the Treasury's Troubled Asset Relief Program, or TARP. One apparent factor: the intercession of Rep. Barney Frank, the powerful head of the House Financial Services Committee.

Mr. Frank, by his own account, wrote into the TARP bill a provision specifically aimed at helping this particular home-state bank. And later, he acknowledges, he spoke to regulators urging that OneUnited be considered for a cash injection."

The Journal includes a map showing which states got the bulk of funds disbursed so far, which seems to correlate more or less to where the financial industry is located.



Still, it does seem to me that if our legislators really believe that we are in a crisis of such magnitude that over a trillion dollars in taxpayers funds are required for the safety of the entire economy that, perhaps, just perhaps, they should put aside pork and special interests in the interest of the nation as a whole. Is that really too much to ask? Is this view really naivete?

16. The EIA reports that US crude stocks jumped by a whopping 6.1 million barrels to 332.7 million barrels, well above the historical five year average for this time of year. That said, they are still below the highest stock levels seen in the last five years. According to a Bloomberg survey, analysts were expecting a 1.4 million barrel build. Gasoline stocks also rocketed up by 6.5 million barrels and now are a the top of the historical range. Analysts had expected a 1.8 million barrel build. Distillates stocks, by which the EIA mainly means stocks of diesel and heating oil, grew by 800,000 barrels, a bit more than Wall Street expectations of 500,000 barrels, and are well above the historical range. Taken in isolation, this should put considerable downward pressure on crude prices, but at the time of this writing, prices have recovered after falling a few dollars per barrel on the news.

Daily Sources 1/19

1. David Jolly at the New York Times reports that the Brown Administration announced a new bailout for British banks today. The new plan would increase controls over lenders, offer banks insurance on troubled assets as well as other steps to restore the offering of credit. The government is also revising its assistance to the Royal Bank of Scotland, now taking 70% of the company's shares, up from 58%.

"The British Treasury said the latest steps would cost taxpayers another £100 billion, or $147 billion, on top of the £37 billion plan announced in October and a £20 billion stimulus plan announced in November."

Pan Pylas at the Associated Press reports that European stock markets have responded to the news by falling and with financial stocks in "free fall."

2. Eurointelligence reports that the Der Spiegel ran the story this morning that German banks have about €300 billion ($398.4 billion) in toxic assets, which is much worse than previously estimated. The FD Deutschland has the story that the EU is pushing ahead with regulation which would force all credit default swaps to be traded through a central clearing system.

3. Platts reports that the German Parliament is set to have a final vote on legislation proposed by the Merkel Administration which would ban the importation of biofuels derived from soybeans or palm oil that benefit from foreign tax relief. Even though this is consistent with WTO regulations, I believe you will see more aggressive attempts to prevent dumping generally.

4. Chris Bryant at the Financial Times reports that the conservative coalition of the Christian Democratic Union (Chancellor Angela Merkel's party) and the Free Democratic party won big in the election in the western German state of Hesse. It is interesting that the German voter would reward the party of free markets over the Social Democratic party, given the current situation. Apparently the election being regarded as a bellwether of German politics going forward in the European press generally.

5. Edward Hugh at Fistful of Euros reports that S&P cut the rating for Spanish long term sovereign debt to AA+ from AAA.

6. Platts reported yesterday that Gazprom and Naftogaz began drafting documents for the resumption of supplies to Ukraine and via Ukraine to the rest of Europe. Kiev has apparently agreed to the European pricing formula for the gas. In 2009, "Russia will grant Ukraine a 20% discount on gas imports as long as Ukraine keeps its tariffs for the transit of Russian gas to Europe at the 2008 level." In 2010, Ukraine will switch to the full European price. Andrew E. Kramer in the New York Times reports that European gas prices are tied to oil prices, but on a six month delay. NYMEX sweet light was trading at $134.60 on July 16, which on a Btu basis roughly translates to $23.20/MMBtu or $819.20/tcm. European customers were reportedly paying an average of $450/tcm at the beginning of the year, so we still don't have enough to suss out the terms.

"Gazprom ... has projected the average price in Europe next year to be between $260 and $300 for 1,000 cubic meters of natural gas. The prices are pegged to oil prices with a delay of six months. Thus Ukraine would pay between $208 and $240."

Daryna Krasnolutska and Stephen Bierman at Bloomberg report that the contract signed today is a contract for 10 years of supply. Mathew Carr and Kateryna Choursina at Bloomberg reported that in an official statement the European Union expressed some skepticism as to whether the deal is really done, and that no more fireworks were forthcoming. The statement read in part: "We have seen many false dawns in this dispute. The ‘test’ in this case is whether or not the gas flows to Europe’s customers. Until that point, the wait goes on." Laura Cochrane at Bloomberg reports that the gap in yields between Ukraine's bonds and treasuries tripled to 25.1%, signaling that the market now expects default. The long bonds now yield 9.6% more than comparable debt sold by Argentina. Meanwhile, Emma O’Brien at Bloomberg reports that Russia has allowed the ruble to devalue against a currency basket of dollars and euros (55% dollar, 45% euro) for the sixth time this year. Toni Vorobyova at Reuters reports that Vladimir Putin has advised the cabinet that the 2009 budget should be reviewed with the assumption that oil will average $41/b this year. $41/b is roughly $7.06/MMBtu on a Btu basis or about $249.53/tcm. Edward Hugh--yes the same Catalan economist who writes at Fistful of Euros--at Russia Economy Watch writes that Russia's GDP contracted by a full percentage point in December.



7. Brad Setser at Follow the Money argues that, in terms of China, what we should be worrying about is them importing less, not purchasing less US treasuries. As imports slow, China's trade surplus will grow, which will likely draw the People's Bank of China to sell yuan in order to prevent a rise against the dollar. But, even if dollar demand inside China grows to the point that the government does not need to defend against a rise in the yuan, then at least a portion of that dollar demand will likely translate into purchases of US treasuries. Meaning that they will be purchased willy-nilly, even if by the private sector instead of the public. Thus:

"A big fall in [economic] activity [in China] also means less Chinese demand for the world’s products — as well as less Chinese demand for China’s products, which frees up capacity to export. That adds to the deflationary forces in the world economy.

And right now, the risk of a shortfall in global demand strikes me as the bigger risk than a shortfall in demand for Treasuries. The last thing the US should want is a larger Chinese current account surplus, even if a larger surplus would increase China’s capacity to finance the US deficit."

Setser's proposes to Beijing stimulus spending. (But I have to wonder if private Chinese demand for US treasuries would really make up for a lack of demand from the People's Bank of China due to a need to finance a social net. As Setser has pointed out in the past, the vast majority of treasuries purchases in 2007 appear to be by central banks.)

8. Winnie Lee at Platts reports that CNOOC plans to bring its greenfield 240 kb/d capacity Huizhou refinery in Guangdong province online in March.

"The Huizhou refinery is designed to process high-acid heavy crude from CNOOC's offshore blocks in China's Bohai Bay. The plant is capable of producing 7.3 million mt/year of gasoline, gasoil and kerosene meeting Euro III and Euro IV standards, 1.5 million mt/year of ethylene and 800,000 mt/year of paraxylene."

9. Platts reported yesterday that on Saturday Algerian oil minister Chekib Khelil told journalists that OPEC might cut production again in March if prices continue to fall. He went on to say,

"I think that prices will stabilize around current levels of $45-$46/barrel before rising again during the third quarter of this year as a result of adherence by OPEC members with agreed output cuts."

Platts reports that Venezuelan oil minister Rafael Ramirez also indicated on Saturday that Caracas would back further cuts in the March meeting.Meanwhile, Alexander Kwiatkowski at Bloomberg reports that Angola announced it will increase crude shipments by 1.8% in March. Angola is the current holder of the presidency of OPEC. Xinhua yesterday reported that in a meeting in Luanda, the Chinese Minister of Commerce Chen Deming told the prime minister that China would provide assistance in reviving the Angolan agricultural sector. (China is a net importer of basic foodstuffs.)

10. Shashank Shekhar at Emirates Business 24/7 reported yesterday that Gustavo Soares, a senior commodity strategist with Merrill Lynch, thinks that given current oil prices plans to switch to cleaner fuels for power generation by the Gulf countries may face roadblocks. However,

"'Nuclear power is more of a policy-driven market,' Soares said and added the Gulf states can sustain their nuclear energy projects if the governments so decide it as a policy."

Arif Sharif at Bloomberg reports that the Saudi Arabian Monetary Authority cut its benchmark rate to 2% and that the UAE will cut its benchmark lending rate to 1%.

11. Reuters reports that Iranian oil Minister Gholamhossein Nozari told the state media that "In the opinion of the Oil Ministry, taking into account predictions by various international institutes, the anticipated oil price in the year 2009 will be around $40." He also said that non-OPEC countries were not cooperating with the cuts so far, in a reference to Russia, which had suggested it might cut in cooperation with OPEC if it decided that the organization was making good on its quota reductions. Most analysis that I have seen so far suggests that Iran is supplying much more than it promised.

12. The Oil & Gas Journal reports that the Pakistani government has decided that it cannot afford to import gas from Iran, which would cost $500 million per month. That, I take it, puts the kibosh on the proposed Iran-Pakistan-India pipeline, which has been stalled for some time as New Delhi has been uncomfortable with the contract terms Tehran has proposed.



13. Ibrahim Barzak and Christopher Torchia at the Associated Press report that Israel began withdrawing from Gaza Sunday.

"Hamas Prime Minister Ismail Haniyeh claimed "a heavenly victory" in remarks broadcast on Al-Jazeera Arabic news channel."

"The Israeli military warned that the next few days were critical and that any Hamas attacks would be met with harsh retaliation.

'Right now the operation hasn't ended,' Maj. Gen. Amir Eshel said. "It has just transitioned to a new phase, to hold fire. To give a chance to a cease-fire to take over and end this operation.'"

14. James Taranto suggests in the Wall Street Journal that a way to disambiguate radical Islamists in a way which might have the effect of making them pariahs would be to introduce the term "Islamic Supremacists." There is a need to disambiguate Islam generally from Islamists, but I suspect the effect Taranto is looking for will take place more in the Western world than in the Islamic one.

15. Jorge Silva at Reuters reports that on Saturday Venezuelan president Hugo Chavez said,

"If Obama as president of the United States does not obey the orders of the empire, they will kill him, like they killed Kennedy, like they killed Martin Luther King, or Lincoln, who freed the blacks and paid with his life."

Rhetorical repositioning to be sure, for Chavez needs the US as an enemy. But, depending on the Obama Administration's approach, it may become more and more difficult to sustain.

Daily Sources 1/12

1. Gabi Thesing and Jana Randow at Bloomberg report that European Central Bank president Jean-Claude Trichet said, "Globally we have the sentiment that 2010 will be the year of pickup, of significant pickup." Trichet made the remark in Basel, Switzerland, where he was chairing the Global Economy Meeting of bankers today. The US Federal Reserve chairman Ben Bernanke and People's Bank of China governor Zhou Xiaochuan attended the conference. The ECB will have a rate-setting meeting this Thursday in Frankfurt. Eurointelligence reports that according to the FT Deutschland nearly all German banks expect the ECB to cut its rate by 0.5% to 2%.

2. Jody Corcoran at the Irish Independent reports that in a survey 55% of Irish respondents were in favor of the Lisbon Treaty--which would create a tighter political union out of the EU--up 16% since the last survey was conducted in December.

3. David Jolly and Judy Dempsey at the New York Times report that a deal has been signed by Russia and Ukraine which should resolve the gas conflict. The EU will monitor the flow through Ukraine's pipeline system to be sure that no gas is being siphoned off by Naftgaz and in return Gazprom will restart supply. It could take as long as three days for flow to resume to Europe even after Gazprom reopens the spigot. It was not clear from the article whether EU observers were in place as of yet.

4. Ambrose Evans-Pritchard at the UK Telegraph writes that bond investors are betting that China and Japan will continue to purchase US Treasuries because Beijing and Tokyo must be sure that their currencies do not appreciate.

"This mercantilist ploy is no longer necessary, since the currency is weakening. Beijing needs the money at home in any case to prop up the Chinese economy – now in trouble. Even Japan has slipped into trade deficit.

Clearly, the US and European governments cannot rely on Asia to plug the $3,500bn hole in their budgets this year. "

Pritchard reports that James Montier at Société Générale has shown that going back to 1798 the only time that yields on US bonds has been this low was when they were set by the government during WWII.

"Of course, we may already be so deep into debt deflation that bonds will rally regardless. Fresh data suggest that Japan's economy contracted at a 12pc annual rate in the fourth quarter of 2008; the US, Germany, and France shrank at a 6pc rate, and Britain shrank at 5pc."

These numbers seem extraordinary to me, but Pritchard argues that the monetary multiplier has fallen below zero, meaning that the US economy has fallen into a liquidity trap. He thinks the Fed will be successful in eventually reflating the economy, but that that will bring on the next crisis. Well worth reading in full, but, as "NDK" points out, it will be difficult for the US to unilaterally inflateL

"Unless the US miraculously becomes more efficient and productive, to avoid this scenario, the US must have a weakening real exchange rate (REER). Because currency pegs prevent revaluation, that means China and Japan must run higher inflation rates than the US. Twisting it around, in current conditions, the US cannot run a higher sustained inflation rate than China, Japan, and others.

The US must either:

i) Persuade China, Japan, and others to allow their currencies to appreciate dramatically so the US can abruptly default on some of its debt to them, and reduce their exports considerably;
ii) Persuade China, Japan, and others to allow high domestic inflation. If the US wanted 12% inflation domestically, it might ask for 16% or 17% inflation in China, if not a bit more;
iii) Do something crazy, like enact Smoot-Hawley Mark II and beat each other up at the WTO;
iv) Suffer through deflation."

Monetary economics is beyond my ken, but I would wonder how long Beijing could maintain a peg given especially inflationary policies in the US? Isn't the performance of the US dollar relative to the yen and the RMB now mostly just half a sort of faith in the US versus the rest of the world in terms of its commitment to capitalism and resilience and half the least horrible option?

5. Brad Setser at Follow the Money provides some analysis, plus graphs, of the trade slowdown in South Korea, Taiwan, and China. (He credits Paul Swartz at the CFR for help in drawing up the following, rather stark, graph:)



Key excerpt:

"The trajectory of this downturn looks much worse than the trajectory of the 2000 recession. That isn’t news. But it is still worth noting. Korea and Taiwan export a lot of electronics, so they were among the hardest hit by the tech bust.
...
It is striking that neither Taiwan nor Korean exports seem to have been impacted by the (modest) slowdown in US imports that started in 2006. They made up for slower export growth to the US – counting both their direct exports to the US and their indirect exports through China – with strong growth in their exports to Europe, China and the Gulf. ... No more ...."

Setser points out that China is facing a similar trade situation, except for that imports are falling far faster than exports. That would suggest a rather speedy collapse in demand from China which would be contributing to global contraction in trade. Brian Schwarz at Seeking Alpha reports that Mastercard Advisors recently published the results of a survey they conducted which show that of the Asian nations, Chinese consumers were actually the most willing to spend their earnings. You might be suspicious of the source of this news, of course, and the savings rates for all the Asian economies, according to the report, was still north of 50%.

Meanwhile, Li Yanping and Philip Lagerkranser at Bloomberg report that the chairman of the China Banking Regulatory Commission, Liu Mingkang, in Beijing and central bank governor Zhou Xiaochuan in Basel indicated that China may not meet its goal of 8% GDP growth in 2009. 8% is the official government goal as well as the number bandied about by analysts as the minimum growth achievable without significant civil unrest. Anything below 8% would mean that significantly fewer new jobs are being created than new entrants to the labor market. Tao Wang at UBS, however, has argued that China can absorb larger unemployment than the conventional wisdom would suggest. (see Daily Sources 1/8 #7) Meanwhile, Choe Sang-Hun at the New York Times reports that South Korean President Lee Myung-bak and Japanese Prime Minister Taro Aso have vowed to put aside their historical enmities in order to focus on cooperation in the face of the financial crisis.

6. Sophia Rodrigues at Platts reports that Citigroup has predicted that 1.3 mb/d of refining capacity will be added in the Asia Pacific in 2009. The largest of this has already come online in Jamnagar, India, or 580 kb/d, but four new refineries will also be added in China.

"Sinopec's 160 kb/d Fujian refinery; Sinopec's 140 kb/d Tianjin refinery; CNOOC Corp.'s 240 kb/d Huizhou refinery and PetroChina's 200 kb/d Dushanzi refinery."

Citigroup therefore predicts that Singapore refiners will see their margins be cut in half.

"All five projects are basically complete, said Citigroup, but full commercial start-ups are generally being delayed due to weak demand for oil products amid the broader global economic recession.

The new refining capacity is sophisticated, capable of handling sour and heavier crude streams, which should therefore reduce the differentials between more difficult crudes and sweet lights.

7. Reuters reports that the Abu Dhabi owned International Petroleum Investment Company (IPIC) has delayed plans for a 250 kb/d $5 billion refinery in Khalifa Point, Pakistan, and a 500 kb/d $6-7 billion refinery in Fujairah.

8. Peg Mackey and Simon Webb at Reuters reports that "industry sources" have told the journalists that Saudi Arabia has already cut oil production to 8 mb/d and that it plans to cut output by another 300 kb/d to 7.7 mb/d. In a separate Reuters story, Algerian oil minister Chakib Khelil indicated that Algiers has cut its output to 1.2 mb/d, their production allocation as per the December 17 meeting. Kate Dourian at Platts reports that Emmanuel Egbogah, special adviser to the Nigerian president on petroleum matters, told the media that Abuja has cut production by 160 kb/d, its share of the December cut, and is now producing 1.88 mb/d. However, Platts suspects that the Nigerian output target is closer to 1.704 mb/d.

9. In a very interesting story by Matthew Walter at Bloomberg, the Chavez Administration appears to be pursuing a de facto depreciation of the bolivar by limiting official dollar sales, thus forcing overseas travelers to buy on the black market. "Venezuelans need government authorization to get dollars at the official rate."

10. Fiona MacDonald at Bloomberg reports that Sheikh Mohammed Sabah Al-Salem Al-Sabah has been appointed the acting oil minister as the opposition party forced the Kuwaiti Prime Minister to resign. Sheikh Mohammed will also serve as Kuwait's foreign minister.

11. Hossein Jaseb and Parisa Hafezi at Reuters report that Ayatollah Mohammad Khatami, the Iranian reformist who won the presidency in 1997 and 2001, has said he might run for president again this year. He might prove slightly less difficult to deal with, and certainly he would be less likely to use nationalist fervor to garner political support than Ahmadinejad, but his election would not represent an about face by the theocracy. Khatami is a potential candidate because his Islamist credentials are nearly impeccable and supports Khomeini's theocratic notion of the "rule of the supreme jurisprudent." These forces are more conservative than the Western pundits usually makes them out to be. To wit, Ali Akbar Dareini at the Associated Press reported on Friday that the Supreme Leader (or, literally, the Leader of the Revolution) Ayatollah Ali Khamenei banned on Thursday volunteers who wanted to go to the Gaza strip to fight Isreal from leaving the country.

12. Griff Witte at the Washington Post reports that Tony Blair has told reporters that "the elements of an agreement" for a cease-fire are in place after negotiations he led in which both Hamas and Tel Eviv have taken part.

13. Sky Canaves at the China Journal reports that as of Friday Beijing had published a list of 33 web pages that had failed to remove "vulgar" content in a fashion deemed timely. One of the companies that has failed to do so is Google, and Ms. Canaves includes the text of Google's promise to abide by Beijing's dictates. It seems to me that Beijing may be willing to loosen controls on the flow of money, or even the flow of people and goods, but is unlikely to ever be comfortable with a free flow of ideas.

14. Nadia Rodova at Platts reports that a finance ministry official told the journalist that Moscow would likely cut the oil export tariff to $100/mt ($13.60/b) down from $119.10/mt ($16.30/b) starting February 1. Russia has begun resetting oil tariffs on a monthly basis as opposed to the old bi-monthly basis in response to the wild price swings of late. (The government likely does not trust the self-reporting required to charge a percentage of price.)

15. Simon Sebag Montefiore--the author of a biography of Stalin--has an op-ed in the New York Times today which argues that Russia is hobbled by the absence of a real functioning system for succession. The question of succession is key for stability, and is the key argument in favor of democracy, in the sense that a rule of law democracy has firmly established rules and procedures for selecting and installing successors to the current holders of political power. Montefiore argues that Russia has only had firm rules in place for 121 years of its entire history, as if that was a short period of time relative to the rest of the world's adoption of firm rules-based (mostly Salic Law it would seem) successions!

There are so many things that are suspicious about this piece that it is almost funny. To begin with, it holds up Chinese succession system as "shamelessly undemocratic and secretive--but firm and orderly"--and thus superior to a system enshrined in a Constitution publicly available to all and, as far as I can tell, abided by in every Russian Presidential election from 1996-2004. Sure, the Communists would likely have won in 1996 without the oligarchs' decision to put their money behind Yeltsin in the final hour and pervasive US election and marketing campaign consultants, but it does appear, that more or less, the results were honestly reported. The fact that the Medvedev Administration is seeking to change the Constitution by the rules for amendment iterated in that Constitution is used as evidence for Moscow flouting the rule of law!

I am not especially fond of the secretiveness of the political power process in Russia (or elsewhere) but the notion that the Kremlin, by appealing to the political process that has been iterated in black and white and at length, is demonstrating its perennial process of palace coups without recourse to any law but divine mandate is pure and utter nonsense.

I would also point out that Byzantium may have had a system of palace coups (divine mandate) for rule, but managed to last longer than nearly any other state in the history of the world. Our preference for ourselves is not particularly helpful for figuring out what's going on, even if you put it in print.

16. Sudeep Reddy at Real Time Economics reports that the Conference Board forecast that the US economy could lose 2 million more jobs in 2009 on top of the 2.6 million lost in 2008. "That would be about 60% higher than the average job losses over the past five recessions (roughly 2%)."