Daily Sources 2/17

1. Hiroko Tabuchi at the New York Times reported on Monday that the Japanese government announced that GDP had shrunk by 3.3% in the fourth quarter from the third. The annualized rate is a 12.7% contraction.

2. Eurointelligence reports that Le Monde has a story on the recent four country tour of the Austrian finance minister, Josef Pröll, to Bucharest, Sofia, Kiev and Zagreb in support for a €150 billion plan to support the eastern European economies. He has been arguing that the Austrian financial sector is solvent. However, as Yves Smith at Naked Capitalism notes, Austrian banks have apparently lent as much as €230 billion, or 70% of Austrian GDP, to the ex-Soviet bloc. She quotes at length from a piece by Ambrose Evans-Pritchard at the UK Telegraph:

"Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay–-or roll over-–$400 billion this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut. …

'This is the largest run on a currency in history,' said Mr Jen.

In Poland, 60% of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.

Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74% of the entire $4.9 trillion portfolio of loans to emerging markets. …"

Ms. Smith reports that the Austrians are allegedly confident that Berlin will bail them out. Meanwhile, today Eurointelligence reports that the Narodowy Bank Polski said it was difficult to justify entering the European monetary union, pushing the zloty to its lowest level since joining the EU, and presumably exacerbating the losses of those banks invested in the country. Laura Cochrane at Bloomberg reports that emerging-market stocks today took a beating on the growing fears around the eastern European economic troubles, led by eastern European mining and financial companies.

3. Andrei Batrak, Martin Doerry, Christian Neef and Matthias Schepp of Der Spiegel conducted an interview of Russian foreign minister Sergei Lavrov recently, where he evinced optimism regarding US-Russian relations. In part his optimism is an outgrowth of the crisis; apparently in his view wealth created the luxury for certain conflicts to bloom:

"Lavrov: We can no longer afford the luxury of little geopolitical games, because we all face challenges that directly affect our citizens. So we should no longer ideologize problems, we should instead honestly express our own national interests, understand the legitimate interests of our partners, and have no more hidden agendas, where one thing is said while something else is done behind someone's back. The signals that we are receiving indicate that our Western partners are aiming for the same objectives."

He also indicated that Russia has already agreed to allow the transit of supplies to US troops in Afghanistan, though I infer that Moscow may look for some further quid pro quo for permitting the transit of munitions.

"SPIEGEL: Let's look ahead. The war in Afghanistan is the greatest foreign policy challenge that the new US administration faces. Russia must also have an interest in preventing the West from failing in the Hindu Kush. How can you help?

Lavrov: In April 2008, we signed an agreement with NATO concerning the transit of nonmilitary goods over Russian territory to Afghanistan. Up until now, such agreements have only been made with Germany and France, and recently one was concluded with Spain. In late January, the US asked us to apply the NATO agreement as the basis for supplying the American contingent. We immediately consented and have also agreed with NATO to make Russian military transporters available to the peacekeeping troops in Afghanistan. We could also work more closely together to curb drug trafficking."

Lavrov was Russia's Ambassador to the UN from 1994 until he was appointed Foreign Minister in 2004 by Vladimir Putin. Worth reading in full.

4. Pamela Constable at the Washington Post reports that Islamabad has announced it has agreed with the Taliban to introduce sharia courts into the Swat valley.

"'There was a vacuum . . . in the legal system. The people demanded this and they deserve it,' said Amir Haider Khan Hoti, chief minister of the North-West Frontier Province. The new system will include an appeals process, something the Afghan Taliban justice system did not allow for."

Jane Perlez at the New York Times reports that the new accord puts into effect agreements made by Benazir Bhutto in the early 1990s and Prime Minister Nawaz Sharif in 1999. The agreements to put in place sharia courts had never been honored. Despite the clear desire for a means of legal redress of issues, the lawyers movement appears to regard the decision as a jurisdictional challenge.

"'This means you have surrendered to a handful of extremists,' said Athar Minallah, a leader of a lawyers’ movement that has campaigned for an independent judiciary. 'The state is under attack; instead of dealing with them as aggressors, the government has abdicated.'"

That said, historically the modern nation state was been built in part via competing jurisdictions, and the general desire for rule by law is something that it is in the US interest to encourage. (see The Law in Pakistan.) That said, the Associated Press reports that NATO immediately criticized the decision, with spokesman James Appathurai saying:

"It is certainly reason for concern. We should all be concerned by a situation in which extremists would have a safe haven. Without doubting the good faith of the Pakistani government, it is clear that the region is suffering very badly from extremists and we would not want it to get worse."

5. India's Economic Times reports that today Russia and China signed a $25 billion energy deal whereby Beijing would lend $15 billion to Rosneft and $10 billion to Transneft in return for 20-years supply of 300 kb/d.

"Russian crude will be supplied through a long-delayed pipeline project agreed to late last year. The pipeline, which extends from western Siberia to the Pacific coast, is to be linked to China from the Siberian city of Skovorodino, 70 kilometers (44 miles) north of the Sino-Russian border."

The deal is very similar to the $6 billion loan CNPC provided Rosneft to purchase remaining Yukos assets in 2005. Meanwhile, Michelle Wiese Bockmann at Lloyd's List reports that Lukoil Trading and Shipping Supply chief executive Gati Al-Jebouri told journalists that the company expects to supply more crude to the international markets, given a reduction in domestic consumption.

6. Carola Hoyos at the Financial Times reports that Christophe de Margerie, Total SA CEO, told the media that he doesn't believe the world will ever be able to produce more than 89 mb/d of oil. It was not clear from the story whether Mr. Margerie included biofuels or NGLs in his definition of oil. He noted that in the current financial environment, national oil companies--which control about 70% of the world's proven reserves--will have a hard time financing new investments. He expects more than 1.5 mb/d of potential supply from the Canadian oil sands and Venezuelan Orinoco belt to have been shut in by low prices. Hoyos implies that Margerie expects prices to rebound in the medium term, which make some sense of his decision to focus on development in Venezuela as opposed to Brazil as per reports on Friday. (see Daily Sources 2/13 #9.) Meanwhile, Simon Romero at the New York Times reports that Hugo Chávez's referendum to abolish presidential term limits passed over this weekend. If the economic indicators recently published by the Center for Economic and Policy Research are facts, then it is easy to see why.

"- The current economic expansion began when the government got control over the national oil company in the first quarter of 2003. Since then, real (inflation-adjusted) GDP has nearly doubled, growing by 94.7% in 5.25 years, or 13.5% annually.
- Most of this growth has been in the non-oil sector of the economy, and the private sector has grown faster than the public sector.
- During the current economic expansion, the poverty rate has been cut by more than half, from 54% of households in the first half of 2003 to 26% at the end of 2008. Extreme poverty has fallen even more, by 72%. These poverty rates measure only cash income, and does take into account increased access to health care or education.
- Over the entire decade, the percentage of households in poverty has been reduced by 39%, and extreme poverty by more than half.
- Inequality, as measured by the Gini index, has also fallen substantially. The index has fallen to 41 in 2008, from 48.1 in 2003 and 47 in 1999. This represents a large reduction in inequality.
- Real (inflation-adjusted) social spending per person more than tripled from 1998-2006.
- From 1998-2006, infant mortality has fallen by more than one-third. The number of primary care physicians in the public sector increased 12-fold from 1999-2007, providing health care to millions of Venezuelans who previously did not have access. - There have been substantial gains in education, especially higher education, where gross enrollment rates more than doubled from 1999-2000 to 2007-2008.
- The labor market also improved substantially over the last decade, with unemployment dropping from 11.3% to 7.8%. During the current expansion it has fallen by more than half. Other labor market indicators also show substantial gains.
- Over the past decade, the number of social security beneficiaries has more than doubled.
- Over the decade, the government’s total public debt has fallen from 30.7 to 14.3% of GDP. The foreign public debt has fallen even more, from 25.6 to 9.8% of GDP.
- Inflation is about where it was 10 years ago, ending the year at 31.4%. However it has been falling over the last half year (as measured by three-month averages) and is likely to continue declining this year in the face of strong deflationary pressures worldwide."

The source primarily used in the CEPR paper is the Banco Central de Venezuela. That said, the paper argues that one shouldn't look at the time prior to the government's reorganization of PdVSA as a guide to economic performance. Perhaps, but Caracas can only loot PdVSA for so long--consumption driven growth provided by subsidies via oil revenues and nationalizations can only run as long as production remains normal and there are remaining oil companies willing to make large investments in the country. The nationalization of a national oil company's project would probably put an end to any international interest whatsoever.

Joshua Partlow at the Washington Post has an especially interesting article emphasizing the legal nature of the leftist turn in South America.

"[F]rom the Venezuelan charter in 1999 to the new constitutions in Ecuador last year and Bolivia last month, a team of Spanish legal scholars influenced the conception, drafting or implementation of the documents, which have stirred domestic class tensions and harmed relations with the US government. The leader is Roberto Viciano Pastor, an author and constitutional law professor at the University of Valencia whose technical, and some say ideological, assistance in writing the constitutions is generating new scrutiny across South America."

The effort to win political dominance via democratic appeals to revamp the legal landscape--whatever the criticisms of the protagonists and their true intentions--demonstrates an interest in legitimizing change via established rule of law, and in itself should be encouraging. Partlow quotes Brazilian president Luiz Inácio Lula da Silva who said last month:

"What we have achieved in these last years was, in truth, the result of the deaths of many people, many young people, who decided to take up arms to bring down the authoritarian regimes in Chile, in Argentina, in Uruguay, in Brazil, in almost all the countries. They died, and we are doing what they dreamed of doing--and we have won this by democratic means."

Vis-a-vis the on-going struggle with Exxon-Mobil, Platts reports that Exxon today announced it had a 103% replacement rate for oil produced in 2008. Most of those bookable barrels come from Canada's oil sands--which require expertise to exploit similar to what is found in Orinoco. But, in news consistent with Mr. Margerie's predictions, Matthew Cook at Platts reports that federal agency Statistics Canada announced over the weekend that Canadian oil production fell 3.31% to average about 2.68 mb/d in 2008.

Meanwhile, Spencer Swartz at Dow Jones reports that IEA chief Nobuo Tanaka told reporters:

"If OPEC is aiming at rapid increases by cutting supply maybe it would not be good for economic recovery. We think OPEC countries should take a closer look at the market and make a flexible decision."

And Luke Pachymuthu at Reuters reports that Iraqi Oil Minister Hussain al-Shahristani told journalists that OPEC should make further cuts should prices not recover. Such noise should be taken with more than a grain of salt, given that Iraq is not subject to OPEC supply quotas.

7. Shobhana Chandra at Bloomberg reports that the Federal Reserve Bank of New York’s general economic index fell to minus 34.7% in January from minus 22% in December. The index measures manufacturing activity in New York.

8. Phred Dvorak at Real Time Economics posts the extremely worrisome story that Littler Mendelson, a leading employment-law law firm consulted on roughly half of all layoffs in the US, is currently working on roughly an additional two million layoffs this quarter.

"Applying his admittedly unscientific methodology, Mr. Mathiason estimates the US could lose around three million jobs from January through March, or one million a month."

Worth reading in full.

Daily Sources 1/8

1. Ralph Atkins at the Financial Times reports that the European Central Bank does not look set to cut the benchmark interest rate any further.

2. The Bank of England cut its benchmark lending rate by 0.5% to 1.5%. Real Time Economics carries the full text of the bank's statement. Excerpts:

"The world economy appears to be undergoing an unusually sharp and synchronised downturn. Measures of business and consumer confidence have fallen markedly. World trade growth this year is likely to be the weakest for some considerable time.
...
CPI inflation fell to 4.1% in November. Inflation is expected to fall further, reflecting waning contributions from retail energy and food prices and the direct impact of the temporary reduction in Value Added Tax.
...
[T]he Committee judged that, looking through the volatility in inflation associated with the movements in Value Added Tax, there remained a significant risk of undershooting the 2% CPI inflation target in the medium term at the existing level of Bank Rate."

3. Kevin Rudd, the Prime Minister of Australia, has an opinion piece in the Financial Times which argues that the need to coordinate monetary policy and fiscal stimulus internationally is unprecedented.

"The development of a global response to this crisis is a complex task. The good news is that the Group of 20 summits in Washington last November and in London this April will have created a mechanism for effective, co-ordinated action – bringing together for the first time the main developed and developing economies, which represent between them 85 per cent of gross domestic product, 80 per cent of world trade and two-thirds of the world’s population.

In the immediate period ahead, G20 governments will need to work out the quantum of stimulus necessary for 2009 to offset the anticipated contraction in the private economy and the consequential impact on unemployment; to agree on the optimal content of stimulus policies to balance short and long-term economic needs; to co-ordinate the implementation of these measures; and to develop a medium-term exit strategy to ensure that surviving this crisis does not shackle us with long-term inflation."

Well worth reading in full.

4. Jann Bettinga and Oliver Suess at Bloomberg report that Commerzbank will receive a second bailout from Berlin, less than three months after the first. The bank, Germany's second-largest, will receive €10 billion (~$13.7 billion) from the government in return for 25% of its shares, plus one. It received €8.2 billion last November (~$10.4 billion at that time.)

"The capital injection will boost the combined Commerzbank- Dresdner Bank’s core capital ratio, a key measure of solvency, to about 10 percent, Commerzbank said. Germany’s bank-rescue fund, called Soffin, will buy 1.8 billion euros of Commerzbank shares and provide the rest of the money as a loan."

5. Edward Hugh at Fistful of Euros reports that German exports in November fell "12% year on year, while imports fell 5.6% on the month and 0.9% from a year earlier."

"And problems with indutrial output, emplyment and exports are not the only difficulty facing Germany, since a sale of 10-year bunds yesterday lured the least demand in six months as investors began to show increasing nervousness in the face of the coming flood of government securities, raising the prospect of increased borrowing costs across the European economies.

Investors bid a total of 5.2 billion euros for the bonds on offer, illustrating a reluctance to purchase which prompted the Bundesbank to retain some 32 percent of the securities."

The problem of selling sovereign debt will not be unique to Germany, and likely more critical for emerging markets selling US dollar denominated debt. (see Daily Sources 12/31 #9) Hugh's analysis is helpful, as usual.

6. David Yong at Bloomberg reports that Pacific Investment Management Co. (PIMCO) managing director and co-head of emerging-market investment, Curtis Mewbourne, wrote in a note on the company's website that "Default probabilities for countries like Brazil, Korea, Mexico and Singapore remain very low." Yong summarizes the analysis thus:

"Debt sold by countries with large enough financial reserves to stimulate economic growth and access to support from the Federal Reserve’s $120 billion of currency swap lines will outperform ....
...
Pimco is most bullish on countries that have the resources or can borrow to stimulate their economies as exports slump, according to Mewbourne. He highlighted China’s $585 billion stimulus package and Russia’s $186 billion program."

Meanwhile, Lilian Karunungan and Kim Kyoungwha at Bloomberg report that Asian currencies are falling in the face of dropping US demand.

"'The export numbers were shockingly weak,' said Mitul Kotecha, Hong Kong-based head of global currency strategy at Calyon, the investment-banking unit of French bank Credit Agricole SA. 'In an environment where exports are under significant pressure, the authorities will be content to see some depreciation, as long as it’s not a rapid fall.'"

7. Brad Setser at Follow the Money believes that Chinese appetite for US debt has not disappeared but has shifted from a basket of Agencies and US Treasuries to just US Treasuries.

"Looking ahead, China’s official purchases of Treasuries will be function of three things:

1) The pace of China’s reserve growth. That will be determined by the evolution of China’s trade surplus, FDI flows and hot money flows. The World Bank expects China’s current account surplus to rise in dollar terms in 2009; I tend to agree. Oil will not average close to $100 a barrel in 09. The fall in commodity import prices will help to offset a (probably large) fall in exports. The fall in exports implies fewer imported components, and China’s domestic slowdown implies fewer imports too. But FDI inflows will slow and hot money flows clearly have reversed, so overall reserve growth (counting the increase in China’s hidden reserves) should slow.

2) The share of China’s reserves that are held in dollars. That is currently close to 70% best I can tell. I have no idea if China will want to continue to maintain that dollar share even as the US runs huge fiscal deficits. But now that China is pegging tightly to the dollar, I would guess that Europe would put a lot of pressure on China not to sell dollars for euros in a way that drives up the euro. That would be tantamount to driving the RMB down v the euro to support China’s exports to Europe. I consequently don’t expect a big change in the dollar share, but that is a huge assumption.

3) The share of China’s dollar reserves that are invested in Treasuries. That share is currently rising, big time. At some point though China will have brought its Agency portfolio down to an acceptable level and start to worry about the size of its Treasury holdings. So I wouldn’t expect it to rise forever.

Sum it all up and the pace of China’s Treasury purchases should fall from their recent monthly highs in 2009. But that is only because they currently are at such a high level. Even SAFE cannot sustain a close to $70b a month pace of Treasury purchases for all that long. Not unless it really plans to run its Agency portfolio down to zero."

Well worth reading in full. Meanwhile, Tao Wang of UBS argues that the unemployment situation facing China is unlikely to cause civil unrest, suggesting that it is hardly unprecedented.



Wang argues that these job losses are cyclical and not structural as they were in 1998 and that actual unemployment in the early 2000s was in excess of 10% in addition to an estimated 20 million migrant workers returning to the agricultural sector between 1998 and 2002, for lack of jobs elsewhere. He also thinks Beijing is more prepared to face the problem head on now.

Shanghai Stakes reports that vacancy levels for A-level commercial buildings in Shanghai have risen from 5% at the beginning of 2008 to 15.4% now.

"In Pudong, the percentage is as high as 25.6%, up to even 50% in some high-end commercial buildings. The vacancy ratio of commercial office space in Shanghai has been higher than 50% only once before, during the ‘97-‘98 Asian financial crisis.
...
Morgan Stanley has also sought to sell property in Shanghai over the last several months, but has yet to find a buyer."

Meanwhile, Nisha Gopalan at the Deal Journal reports that Hong Kong billionaire Li Ka-shing's charitable foundation sold 2/5s of its entire stake in the Bank of China Wednesday. This is just a few days after UBS sold its stake in the company and as the Royal Bank of Scotland looks set to sell its 4.3% holding. (h/t Sky Canaves at China Journal for these last three items.)

Meanwhile, Li Yanping at Bloomberg reports that Chinese exports probably fell by the most in a decade in December, dropping by 5.3% from a year earlier using the median prediction of a survey of economists carried out by the wire service.

8. Winnie Lee at Platts reports that China's Ministry and Land and Resources said that the country's dependence on oil imports is likely to rise to 60% by 2020. Currently imports account for about 50% of China's oil requirement. The ministry expects the country to consume about 500 million metric tonnes of oil annually by 2020, or 10 mb/d. Of that 300 million metric tonnes will need to be imported, or 6 mb/d.

"To enhance supply security, the country has set a goal of discovering about six oil fields with reserves of 100 million mt and between six and eight gas fields with reserves of 100 Bcm.
During the 2011-2015 period, China is targeting a discovery of another 10 oil fields with reserves of 100 million mt and eight to 10 gas fields with reserves of 100 Bcm, the ministry said in the forecast document."

The story also reports that the Ministry suggests the establishment of strategic oil reserves, by which it is likely meant that the Ministry suggests the establishment of more strategic oil reserves.

9. Shiva Lingam at Platts reports that the strike by India's Oil Sector Officers Association, a union of mid-level oil industry employees, is in its second day and having a significant effect upon petroleum product supply in the country, creating fuel shortages in southern India and for the airlines. Indian Oil Corp. has been forced to shut four out of its seven refineries and military personnel have been sent to "man major oil installations." Production is down 30% at IOC and 50% at Bharat Petroleum Corp. Ltd.--state-owned refiners. This is extremely interesting because India's energy supply security strategy is now fundamentally based on importing more crude than required to produce the domestic petroleum product requirement and then exporting the surplus product. India consumes about 2.5 mb/d of oil, and this strike, if it continues, could have a considerable effect upon global oil prices.

10. Tim Johnston at the Washington Post reports that Kaing Khek Iev, aka Duch--the head of the Khmer Rouge's Tuol Sleng torture center in Phnom Penh, will likely go on trial starting March. Other Khmer Rouge leaders are unlikely to be tried until 2010.

11. Graham Bowley at the New York Times reports that the UN has suspended food shipments to the Gaza strip after a delivery driver was killed in an Israeli attack. Also rockets were fired into northern Israel from Lebanon in response to the Gaza offensive. The UN Security Council is reportedly close to a resolution calling for a cease fire in the strip.

"The break-through was reached after a delegation of high-ranking Arab ministers overcame the reluctance of the United States, Britain and France in calling for the cease-fire, the diplomats said."

Israel welcomed international efforts to secure a "durable" cease fire.

12. The BBC reports that the president of the Vatican Council for Justice and Peace, Cardinal Renato Martino, "accused both sides [in the Gaza conflict] of only thinking of their own interests while innocent people paid the price." In remarks made online, the Cardinal said:

"Defenseless populations are always the ones who pay. ... Look at the conditions in Gaza: more and more, it resembles a big concentration camp."

Relations between the Vatican and Israel have reportedly been strained recently as the Pope has made clear that he wants to beatify Pope Pius XXII. Pius XXII was Pope during WWII and is widely accused of having turned a blind eye to the holocaust. Meanwhile, Sameer N. Yacoub at the Associated Press reports that Muqtada al-Sadr has called for reprisals on US forces in Iraq in response to the Israeli offensive in Gaza. Al-Sadr is a Shi'a Islamist populist which some link to Iran, though the cleric has explicitly rejected the Khomeini vision of "the guardianship of the Islamic jurist." I regard him as a real threat to the legitimacy of the Iranian government, as I have explained in Law and Revolution in Iran. (h/t Informed Comment for both of these stories)

Former US President Jimmy Carter has an opinion piece in the Washington Post entitled, "An Unnecessary War."An important excerpt:

"[In April 2008, w]e knew that the 1.5 million inhabitants of Gaza were being starved, as the U.N. special rapporteur on the right to food had found that acute malnutrition in Gaza was on the same scale as in the poorest nations in the southern Sahara, with more than half of all Palestinian families eating only one meal a day.
...
Palestinian leaders from Gaza were noncommittal on all issues, claiming that rockets were the only way to respond to their imprisonment and to dramatize their humanitarian plight.
...
We were unable to confirm [that a truce had been agreed upon in June] in Jerusalem because of Israel's unwillingness to admit to any negotiations with Hamas, but rocket firing was soon stopped and there was an increase in supplies of food, water, medicine and fuel. Yet the increase was to an average of about 20 percent of normal levels."

Well-worth reading in full.

13. Pamela Constable and Candace Rondeaux at the Washington Post report that Mahmud Ali Durrani, the Pakistani National Security Adviser, was fired by Islamabad after admitting in a CNN interview that the evidence provided seemed to show that all 10 gunmen in the Mumbai attacks had roots in Pakistan. Meanwhile, in an interview with Der Speigel,

"[Foreign Minister Shah Mahmood] Qureshi and Pakistan's intelligence chief, Lt. Gen. Ahmed Shuja Pasha, said Wednesday that the country's security forces are subservient to civilian authority and committed to supporting democratic rule. 'It is completely clear to the army chief and I that this government must succeed,' Pasha said of Zardari's administration. 'I report regularly to the president and take orders from him.'"

The intelligence chief had also said that Pakistan has no desire to fight a war with India, wants cooperation with New Delhi, and views terrorism as the real enemy of both. In Afghanistan, Pakistan's foreign minister unequivocally denied that Pakistani government agencies had been involved in the attacks on Mumbai. Well worth reading in full.

14. David Osler at Lloyd's List reports that the US Navy plans to dedicate a task force--to be known as Combined Task Force 151--to anti-piracy duty in the Gulf of Aden. Initially this should mean that some of the ships in Combined Task Force 150, which is part of "Operation Enduring Freedom" or the invasion of Afghanistan and later anti-terror efforts, will be redeployed to CTF 151. Osler quotes a CTF 150 spokesman as saying,

"The primary role of CTF 150 was not to chase pirates, in a nutshell... There are nations who would prefer to stick with CTF 150 and not step outside those paramaters, and there are other nations who would be happy to step outside those parameters, but cannot."

Keith Wallis, also at Lloyd's List, reports that the Aso Administration is working on legislation to change the Japanese Constitution so as to allow it's armed forces to join the anti-piracy effort off the Somalian littoral. The government plans to submit the language to Parliament by March. (Sadly, you need a subscription to read the entire article, but the big news is linked, or so I imagine, given that I have not subscribed.)

15. David Jolly at the New York Times reports that a tentative solution may have been found to the Russo-Ukrainian gas dispute. Alexei Miller, CEO of Gazprom, has agreed to a proposal whereby the company would begin supplying natural gas via the Ukrainian pipeline infrastructure once EU monitors were in place to independently verify the volumes so as to ensure that Ukraine would not siphon off supply. Naftogaz CEO Oleh Dubyna told Reuters, "Naftogaz guarantees it will pump in full the volumes received, on the condition that Gazprom will guarantee and supply technological gas for Ukraine’s gas transit system to function." A certain amount of gas is required to keep the pipeline compressors functioning. Jolly reports that EU monitors could be in place by Friday. José Manuel Barroso, the president of the European Commission, has said that both Prime Ministers Putin and Tymoshenko have agreed "in principle" to the deal and

"If both Russia and Ukraine behave as they say they are behaving, there should be no problem. So we hope that the Russians put the gas into the Ukrainian network and that the Ukrainians do not interrupt the gas from Russia to the EU."

16. Marianne Stigset at Bloomberg reports that Norway's Petroleum Directorate expects crude output to fall to 110.8 million cubic meters, or 1.9 mb/d, in 2009 from 122.7 million cubic meters, or 2.11 mb/d in 2008. Production is expected to fall to 94.4 million cubic meters in 2013, or roughly 1.63 mb/d.

"Norwegian fields 'have a robust economy at $50 to $70 a barrel of oil,” [Bente] Nyland, [head of the Directorate,] said in an interview. 'Should prices fall below $50, without production costs going down, projects may be postponed.'"

17. Ian James at the Associated Press reports that Citgo announced it would continue its program of donating heating oil to the poor in American urban centers Wednesday, after it was announced that the program would be suspended. (see Daily Sources 1/5 #8) I am certainly pleased to hear that Chavez has decided to use Venezuela's oil wealth to continue his aid program to the American poor, but have to wonder how the Venezuelan poor are taking the news.

18. Alexander Kwiatkowski and Alaric Nightingale at Bloomberg report that Citigroup's Phibro LLC has hired a one million barrel capacity tanker to sit off Scotland as storage in order to capture profits from the current giant contango in the oil futures markets.

19. Paula Dittrick at the Oil & Gas Journal reports that ExxonMobil's recent annual Outlook for Energy: A View to 2030 forecast global energy demand to increase at an annual rate of 1.2% through 2030. Two key findings include:

a) "Transportation, currently responsible for more than half of total oil demand, is expected to expand substantially globally. From 2005-30, demand in developed countries is expected to be relatively stable because efficiency improvements will offset demand from an increasing number of vehicles. In contrast, demand for transportation fuels in developing countries will likely more than double." and
b) Oil, natural gas, and coal will continue to provide about 80% of the world's energy needs through 2030 because of their abundance, affordability, and availability."

I must get myself a copy.

20. In other foreboding news about the global economy, Janet Porter at Lloyd's List reports that the shipping industry is still being bogged down by inability to secure letters of credit.

"A great deal of cargo is stuck on the quayside unable to move, according to Inchcape Shipping Services chief executive Claus Hyldager."

Worth reading in full, though the article isn't entirely convincing as to why banks would be so leery of something as fundamental as a letter of credit.

21. Jon Kamp and Jessica Hodgson at Real Time Economics have another gloomy indicator for the prospects of the global economy, Intel's second warning this quarter that it will have received $8.2 billion in the fourth quarter, a 20% drop from the third.

"'If you’re an individual or a corporation, chances are you’re an Intel customer,' BMO Capital Markets analyst Brian Piccioni said. 'The fact that they’re not doing well is a good indicator of broader economic weakness.' ... The fact that a company with the size and reach of Intel has been unable to predict the scale of its problems or to swerve the worst of the downturn, has prompted broader concern about the rest of the economy."

22. Stephanie Rosenbloom at the New York Times reports that December sales in stores that have been open for at least a year--known in the retail industry as "same-store sales"--were down at an annual rate of 0.9% according to Ken Perkins, president of Retail Metrics. (The story does not make explicit whether this is year over year or from the month previous percentage changes.) Retail chains experienced a 2.7% year over year decline in sales in November.

"Sales in November and December are closely watched because they account for 25 to 40 percent of many retailers’ annual sales, according to the National Retail Federation, an industry group."

23. The AP reported that the Labor Department announced that initial jobless claims fell by 24,000 to the seasonally-adjusted number of 467,000 for the week ended January 3. This was less than most economists had expected. However, the number of people who continued to claim jobless benefits grew 101,000, to 4.61 million--the highest number seen since 1982.

24. Nancy Trejos at the Washington Post writes that the American Bankers Association reported yesterday that delinquencies on auto loans and home equity lines of credit rose to 3.25% and 1.15%, respectively, in the third quarter.

"James Chessen, ABA chief economist, said. 'With one million jobs lost in the first three quarters and 2 1/2 million expected for the year, delinquencies of all types of consumer loans will likely increase in the coming quarters.'"

The Association also found that delinquencies on credit card debt dropped 0.34% to 4.2%, which might be because the credit card companies increased the amount of debt they have simply written off. (see Daily Sources 1/7 #17)

25. Andrew Taylor at the Associated Press reports that the Congressional Budget Office estimates the deficit for the 2009 budget will reach $1.2 trillion.

"The $1.19 trillion 2009 figure shatters the previous record of $455 billion, set only last year. It also represents more than 8 percent of the size of the economy, which is higher than the deficits of the 1980s. The 2009 budget year began last Oct. 1."

The CBO estimate does not price in Obama's stimulus proposals.

Daily Sources 10/14

1. Clifford Kraus at the New York Times reports that wheat and corn prices have dropped 40% and aluminum, copper, and nickel have dropped by a third or more.

"Big increases in world wheat production because of increased acreage in the United States, Canada, Russia and much of Europe have brought wheat prices to less than $6 a bushel today from nearly $13 in March."

It is in that context that Dealbreaker reports that shortages are beginning to show up in the supermarkets in Iceland, where the stock exchange fell by 75% in a single day. Anecdotal evidence perhaps, but gives some more credence to John Greenwood's story published October 8 in the (Toronto) Financial Post that grain is piling up in ports because people cannot get letters of credit. Though they're both all about calories, energy security is one thing and food security another. A truly nominal crisis if Tony Gray's at Lloyd's List report is to be believed. That is that shippers are receiving calls from their bankers asking if they would redeem their loans and offering 25-30% discounts. This would be due to a "liquidity at any cost" policy at some banks. The Baltic Dry Index gives you a sense of how much demand there is for shipping, more or less:



2. Xinhua reports that the decline in the oil price has forced the Nigerian Administration to delay the presentation of a 2009 budget to the National Assembly. The budget originally had a projected oil price for 2009 of $62.50/b, which now seems iffy. There are budgets likely to be hit worse assuming overly optimistic price scenarios--ie, Iran and Venezuela. Given ambitious financial restructuring by both Chavez and Ahmadinejad we might see some local political fireworks over it in both countries going forward. That said, just now I do not think that oil is likely to remain below $70/b for a very long time. I doubt it would for longer than 6 months, but that may be enough given upcoming Iranian elections to put in a less revanchist President there.

3. AKI reports that New Delhi is starting its new nuclear program with plans for 21 new nuclear power plants.

These include the setting up of six French reactors of 1,600 MW, four Russian reactors of 1,000 MW and four American reactors of 1,500 MW within the next five years.
Apart from the 10 LWRs envisaged under the Indo-US nuclear cooperation deal, the Nuclear Power Corporation of India, Ltd (NPCL) is also planning to set up eight reactors of 700 MW, three fast breeder reactors and one advanced heavy water reactor of 300 MW.

4. Swissinfo reports that scientists predict that nuclear fusion will be a practical reality within 30 years.\

5. Anna Shiryaevskaya at Platts reports that Moscow has decided to give $9 billion in aid to Rosneft, Lukoil, TNK-BP, and Gazprom.

6. Charles Lee at Platts reports that the Korea National Oil Company has failed to find private South Korean corporate partners in its $2.1 million oil-for-infrastructure deal with Iraq. I believe it is fairly unusual for major Korean corporations to buck the goals of Seoul. However,

"Indications to this effect came from the country's energy ministry as a group of South Korean construction firms Monday decided to withdraw from a separate $10.8 billion project to provide infrastructure in Iraq in return for stakes in oil fields in the Kurdistan region due to a funding squeeze."

7. Lucian Kim and Tony Hopfinger at Bloomberg report that Gazprom sent eight senior executives to Anchorage to discuss possible partnerships in gas projects in that state with Alaska's Department of Natural Resources and ConocoPhilip's CEO Jim Mulva. C'mon, you gotta admit that's kinda funny. Putin rears his head and ... sees an investment opportunity ... Palin authorizes F-18s to take off and investigate this rearing.

8. Salman Abduhoo at Islamabad's The Nation reports that 1,200 MWe of power have been shut down in Pakistan following the suspension of gas imports feeding several thermal plants in and around Lahore. This would be in addition to the 4,000 MWe shortfall Pakistanis have seen as a result of the crisis. The 4,000 MWe original shortfall comes as a result of winter reducing the basic hydropower potential in the country. Natural gas imports are used to fill the shortfall.

9. Market Wire ran the story that CNPC is nearing the completion of the refinery expansion project in Fujian province backed by the provincial government, Sinopec, Saudi Aramco, and ExxonMobil. The project expanded the existing refinery's capacity from 80 kb/d to 240 kb/d and included sophisticated upgrading units to run Saudi heavy (and sour) crudes. The project includes an ethylene cracker (for plastics) and the deal allowed for participation in retail in the province.

Update: Venezuela vs. Exxon-Mobil

UPDATE: VENEZUELA

On March 13, 2008, US Representative Connie Mack (R-FL) submitted H.R. 1049 to the US Congress calling for the Bolivarian Republic of Venezuela to be designated a state sponsor of terrorism.(1) This act was basically in response to what is now known as the 2008 Andean diplomatic crisis, where Colombia troops crossed the Ecuadoran border in pursuit of a group of Revolutionary Armed Forces of Columbia (FARC) taking refuge there. The incursion led to the death of Raul Reyes, a senior leader of FARC, as well as the capture of computers which contained evidence of strong ties between Hugo Chavez and the rebel group.(2)

The incident brought into focus the geopolitical battlelines in the struggle that Chavez imagines himself in with the United States.

The President of Ecuador--Rafael Correa--is seen by many to be an ideological fellow-traveller of Chavez's, and just after his election in 2006 began moves to nationalize the petroleum industry in that country.(3) Although the industry there is nowhere near the size of Venezuela's, it is the third largest oil producer in South America, producing around 512 kb/d in 2007 band holding proven reserves of around 4.5 billion barrels.(4) As with Venezuela, the oil sector in Ecuador has ties to the Chinese petroleum industry after CNPC bought the assets of Encana--a Canadian oil producer--there in 2005.(5)

The Colombian raid over the border was quickly condemned by Ecuador, which immediately expelled the Colombian Ambassador from Quito, recalled their own from Bogota, and moved troops to the border. Hugo Chavez also closed its Embassy in Colombia, expelled the Colombian Ambassador to Venezuela, closed the border between the two countries, moved 10 battalions to the border, and threatened to nationalize Colombian assets in Venezuea. Nicaragua, which you'll recall is the beneficiary of Venezuela's special program to sell oil at below-market rates with special financing deals and which has an old border dispute with Colombia, also broke diplomatic relations with Colombia.(6) The current President of Nicaragua, Daniel Ortega, was the head of the Communist Sandanista government of Nicaragua which was brought down, in great part, due to US funding of the Contra movement there in the 1980s.

The diplomatic meltdown seems to have been put a stop to after an emergency meeting of the Rio Group on March 7th, where the presidents of Venezuela, Ecuador, Nicaragua, and Colombia publicly shook hands in a show of peace.(7)

However, allegedly the computer files captured in the raid point to strong Venezuelan support for the Colombian rebel group, FARC, with reference to a $250 million loan made to the organization by Chavez.(8) FARC has long been considered an enemy to American interests because of its connection to the cocaine trade, which it has taxed to finance its political enterprise in Colombia.(9) In the first week of May, President Bush gave a speech which pointedly made reference to FARC's connection to Venezuela and Venezuela's connection to Cuba.(10) This followed a report by the Senate Committee on Foreign Relations which argued that sanctions against Venezuela would be likely to backfire unless the region as a whole were convinced to impose them as well, something the report argued was unlikely.(11)

The Cuba connection is important to understanding the genesis of HR 1049, as Connie Mack and several of the co-sponsors, including Ileana Ros-Lehtinen and Lincoln Diaz-Balart, are luminaries of the Cuba sanctions effort dating back to the Helms-Burton Act of 1996. (The Helms-Burton Act gave Congress the right to override a decision by the Executive to void sanctions on Cuba, strengthened sanctions on that country, and prohibited recognition of any transitional goverment there headed by either Fidel or Raul Castro--currently Cuba's head of state.)(12)

Venezuelan ties to FARC are just the icing on the cake as far as this particular coterie in the Congress goes. Anything which serves their goal to isolate Cuba from the international community--or at least from any reconsideration within the United States--is welcome. Beyond that, their efforts presumably confirm Chavez's suspicion that the United States is committed to his overthrow, by military force if necessary. It is an interesting gambit, for example, to put 10 battalions on the border with Colombia, a country which possesses an army twice the size of those of Venezuela and Ecuador combined.(13) Given that Colombian troops have battle experience fighting its various rebel movements and it's outright backing by the Uniteed States, it is little wonder that Colombia did not decide to do anything as a countermeasure whatsoever. That type of conflict is not one that Chavez would be likely to come out ahead in.

On the other hand, in 2006 Chavez put together a reservist program which counts upwards of 2 million men as its members. These groups are deliberately trained in asymetrical warfare, with lessons gleaned from the Viet Cong(14)--similar to the military doctrine current in Cuba--as protection from an American attack or perhaps that of its perceived proxies, such as Colombia. Indeed, it appears that one of the troubles faced by FARC in its battle with the government of Colombia is that Colombia, aided by the US, has no ability to counteract government air superiority. Russian-made surface-to-air missiles are mentioned,(15) which brings to mind our efforts in Afghanistan twenty years ago. Whether it is just posturing for political gain or not, it does appear that Venezuela is preparing the ground regionally and inside Venezuela for a military confrontation with the United States.

Although some of the current diplomatic sympathy for Chavez in the region likely comes from stronger-than-usual antipathy to the Administration in Washington, DC, it also seems to me that he is making progress towards tying the region closer to Caracas. Ecuador, for example, has seen a drop in production of oil since Occidental was kicked out in 2006, and the sector accounts for fully one-third of the government's tax revenues and nearly half of its export earnings.(16) Ecuador is being forced to import petroleum products to meet local demand--and reportedly is racking up $billion/year in bills to do so.(17) As part of an effort to end this problem Ecuador signed an agreement with Venezuela to build a 300 kb/d refinery for $5.5 billion in February.(18) In 2007 it rejoined OPEC--the brainchild, basically, of Venezuela at its foundation. Moreover, Ecuador is in the process of considering changes to its constitution in a move reminiscent of Chavez's, shortly after coming to power, and several times since.

Nicaragua's Daniel Ortega, of course, has a long history with the United States and may well, therefore, feel strongly sympathetic to Chavez's efforts. (Iran's recent efforts to build strong ties to both Venezuela and Nicaragua--including an MOA to help finance a hydroelectric dam in the latter country(19)--are the most interesting historical irony in this story.)

If, as Franklin Foer's piece in the Atlantic Monthly suggested some time ago(20), Chavez is working to recreate the Gran Colombia that Bolivar liberated from Spain two hundred years ago, it does seem that he has made a good start.


Gran Colombia

The suggested American response of putting Venezuela on the state sponsor of terrorism list does not make much sense to me, however. Any effort at this stage to make life for the Venezuelan energy industry more difficult does not seem to be in American interests, given the current high price environment for oil and the supply concerns which are at least part of the reason for this.

UPDATE: EXXON-MOBIL

It has been reported that Venezuela has had no trouble placing the oil that it traditionally sent to the Chalmette Refinery, having found a buyer for it all in China.(21) However, I find this claim extremely suspicious, because, as I pointed out in my previous blog, there simply aren't enough complicated refineries in China to take this crude. I have heard from a private source that in fact Venezuela did offer the oil to China, which in turn offered to pay a price of WTI minus $35-40 for the crude, given the transportation costs, etc. According to my source, the Venezuelans refused the offer, and sold the oil to traders, who in turn sold the oil to ... Exxon-Mobil, at about the price they were paying the Venezuelans.

(1) House Resolution 1049
(2) "Chavez Aided Colombia Rebels, Captured Computer Files Show," Wall Street Journal, May 9, 2008, by Jose de Cordoba and Jay Solomon
(3) "Ecuador moves to take over Occidental oil operations," International Herald Tribune, May 16, 2006
(4) US Department of Energy's Energy Information Agency Country Analysis Brief on Ecuador
(5) "China oil firm buys EnCana assets in Ecuador," Reuters, September 15, 2005
(6) Wikipedia: 2008 Andean Diplomatic Crisis
(7) Wikipedia: 2008 Andean Diplomatic Crisis
(8) "Chavez Aided Colombia Rebels, Captured Computer Files Show," Wall Street Journal, May 9, 2008, by Jose de Cordoba and Jay Solomon
(9) Testimony Before the Senate Committee on the Judiciary Subcommittee on Technology, Terrorism and Government Information by Rand Beers, Assistant Secretary for International Narcotics and Law Enforcement Affairs and Francis X. Taylor, Ambassador-At-Large For Counterterrorism, March 13, 2002
(10) "Chavez Aided Colombia Rebels, Captured Computer Files Show," Wall Street Journal, May 9, 2008, by Jose de Cordoba and Jay Solomon
(11) "Senate report warns against Venezuela sanctions," by Pablo Bachelet, McClatchy Newspapers, April 28, 2008
(12) Wikipedia: Helms-Burton Act
(13) Wikipedia: 2008 Andean Diplomatic Crisis
(14) "Invasion or civil war for Venezuela?," by Sam Logan, ISN Security Watch, March 24, 2006
(15) "Chavez Aided Colombia Rebels, Captured Computer Files Show," Wall Street Journal, May 9, 2008, by Jose de Cordoba and Jay Solomon
(16) US Department of Energy's Energy Information Agency Country Analysis Brief on Ecuador
(17) "Oil Nationalization Threatens Output, Investment," Reuters, February 15, 2007
(18) "Ecuador and Venezuela will construct oil refinery for 5,5 billion dollars," Business and Financial News, February 3, 2008
(19) "Iran pledges hydro, houses, port for Nicaragua," Reuters, August 4, 2007
(20) The Atlantic Monthly, "The Talented Mr. Chavez" by Franklin Foer, May 2006
(21) "Venezuela Sends Chalmette Oil To China - Ramirez," AFX News Limited, March 31, 2008