Daily Sources 8/12

CHINA BUYING YEN

Tim Duy at Tim Duy's Fed Watch reports that the renminbi, dollar and yen are on a collision course. China is buying yen at a time where the yen is hitting record highs. If Japan responds by buying dollars, then China has managed to get Japan to help maintain the value of their dollar holdings as well as their ability to sell them. Well worth reading in full.

CHINESE STRATEGISTS SEE EXERCISES IN YELLOW SEA AS PART OF EFFORT TO ENCIRCLE CHINA WITH AN ASIAN NATO

Dai Xu at China.org.cn argues that the US is trying to build an Asian NATO to encircle China.


JAPANESE CONSIDER OPTIONS AFTER ATTACK ON TANKER

Takeo Kumagai and Pradeep Rajan at Platts report that the Japanese are considering how to increase security at the Straits of Hormuz after the bomb attack on the M Star VLCC. One option being considered is to only send tankers through the strait during the day time. However restricting passage to daytime hours would add to the congestion in traffic through the strait. Japan is stuck with importing oil through the Strait of Hormuz--80% of their oil supplies pass through it.

GREEK ECONOMY SHRINKS BY 1.5% IN THE SECOND QUARTER

The BBC reports that the Greek economy shrank by 1.5% in the second quarter from the first. The economy shrank by 3.5% from this time last year.

"That adds to 0.8% decline in GDP recorded for the first three months of the year, suggesting that the decline in the economy is speeding up."

INDUSTRIAL PRODUCTION IN INDIA RISES 7.1%

Kartik Goyal and Unni Krishnan at Bloomberg report that industrial production in India increased 7.1% in June from a year earlier. 7.1% is the slowest rate in 13 months and some see it as evidence that the economies in Asia are cooling.

TURKEY USED CHEMICAL WEAPONS AGAINST PKK

Daniel Steinvorth and Yassin Musharbash at Der Spiegel report that photos have been taken of dead PKK members which seem to demonstrate that Turkey used chemical weapons to kill them. German politicians are demanding an explanation from Ankara.

TOP IRAQI MILITARY COMMANDER SAYS US EXIT IS COMING TOO SOON

BBC reports that the top Iraqi military commander has indicated that the US plan to remove all its troops by 2011 is too soon. He said that the army will only be ready to take control of the situation in 2020.

IRAQ WILLING TO ACCOMMODATE IRANIAN PIPELINE TO SYRIA

Deutsche Presse-Agentur reports that the Iraqi oil ministry has published a press release stating that the government has no objection to a gas pipeline from Iran crossing Iraqi territory to Syria.

"'Iraq does not mind facilitating the extension of the Iranian gas pipeline through its territory to Syria and the Mediterranean Sea,' Iraqi oil minister Hussein al-Sharistani said in the statement"

CHINA AND IRAN AGREE TO BROADER OIL AND GAS COOPERATION; LUKOIL RESUMES GASOLINE EXPORTS TO IRAN; IRAN CANCELS TWO LNG PROJECTS

The Tehran Times reports that Iran's oil minister and China's vice premier met and agreed to broaden their cooperation in the oil and gas sector. Meanwhile, Reuters reports that Lukoil has resumed exports of gasoline to Iran.

"In July, Russia’s energy minister Sergei Shmatko said Russian companies would be ready to supply fuel to Iran if there were commercial interest and attractive terms."

However, the sanctions appear to be having an effect on Iran's natural gas plans, canceling two LNG projects Spencer Swartz reports in the Wall Street Journal. LNG technology is mostly held by Western firms.

EUROPEAN COMMISSION LAUNCHES INVESTIGATION INTO US BIODIESEL DUMPING

Isis Almeida at Platts reports that the European Commission is investigating whether US biodiesel exporters are avoiding anti-dumping duties by sending the product through a third country like Canada or exporting B19--19% biodiesel, 81% diesel--which is not subject to the anti-dumping tax.

US biodiesel receives a subsidy of $1/gal ($300/mt) if blended with diesel, which the European Union says represents unfair competition.

This led the European Commission to slap provisional anti-subsidy and antidumping duties on imports of US biodiesel in March 2009. The measure was extended for five years last July, with definitive antidumping duties on US biodiesel of Eur200-400/mt ($274-$548/mt).

CONGRESSMEN SEEK TO KILL $100 MILLION IN AID TO LEBANESE ARMY ON HEZBOLLAH FEARS

Daniel W. Drezner at Foreign Policy reports that members of the US Congress are seeking to stop $100 million in aid to the Lebanese Army.

"Now, I understand the Congressional impulse to do something here -- I really do. What I don't understand is how Congress thinks that withholding aid from the Lebanese military will weaken Hezbollah. Congress seems to think that anything that aids the Lebanese Armed Forces (LAF) will concomitantly aid Hezbollah. The latter group, however, has independent sources of financial, political and military support. It's better to think of the LAF as a competing power base than as a conduit to Hezbollah. Anything that weakens national institutions in Lebanon empowers the groups that can survive in a more anarchical environment -- and gee, whaddaya know, that would include Hezbollah."

INITIAL JOBLESS CLAIMS UP

Courtney Schlisserman and Tim Homan at Bloomberg report that initial jobless claims for the week ended August 7th rose by 2,000 to 484,000, the highest level since February.

"The number of people receiving unemployment benefits dropped, while those getting supplemental benefits surged by 1.34 million reflecting the government’s extension of eligibility."

HUD TO OFFER $1 BILLION IN INTEREST FREE LOANS TO FOLKS FACING FORECLOSURE

Lorraine Woellert and Kathleen M. Howley at Bloomberg report that HUD is to offer $1 billion in interest-free loans to help out folks who have lost income and are facing foreclosure on their homes.

"The Department of Housing and Urban Development plans to make loans of as much as $50,000 for borrowers “in hard hit local areas” to make mortgage, tax and insurance payments for as long as two years, according to a statement released today. The Treasury Department will also provide as much as $2 billion in aid under an existing program for 17 states and the District of Columbia, according to the statement."

Daily Sources 7/20

1. BUNDESBANK SAYS CURRENT-ACCOUNT DEFICITS OF IRELAND, SPAIN, GREECE AND PORTUGAL THREATEN EUROZONE

Thomas Molloy at the Independent reports that the economic policies of Ireland, Spain, Greece, and Portugal represent a threat to the Eurozone as a whole and the entire Euro project.

"'These macro-economically erroneous trends' are 'a source of danger for other member countries and the currency region as a whole,' the Bundesbank wrote in its monthly bulletin. Deficit countries damage the eurozone's stability and 'it is urgently necessary to correct maldevelopments and avoid a repetition in the future'."

2. EUROPEAN COMMISSION TO BAN COAL SUBSIDIES BY 2014

James Kanter at Green reports that the European Commission has tentatively banned subsidies for coal mining starting 2014.

3. PEW SAYS THE DEVELOPED WORLD UNHAPPY WITH CHINA'S RISE

Free Exchange notes that concerns about China's economic might are high in the developed world. Much of the developing world ain't so keen on its rising military prowess either.



4. CHINA NOW THE WORLD'S LARGEST ENERGY USER

Grant Smith at Bloomberg reports that according to the IEA China is now the largest user of energy consuming 2,252 million metric tons of oil equivalent in 2009 versus the 2,170 million tons used by the US. Somewhat oddly, Shai Oster at China Real Time reports that the Chinese leadership has rushed to deny that it is now the largest energy user, saying that by their calculations the US remains top dog in that department.

5. JAPAN AND CHINA TO NEGOTIATE HOW TO DEVELOP UP EAST CHINA SEA GAS

Takeo Kumagai at Platts reports that Japan and China are seeking to schedule negotiations on how best to jointly develop the East China Sea gas fields which have been the source of some friction between the two governments.

6. US AND SOUTH KOREA TO CONDUCT NAVAL DRILLS NEXT WEEK

After a delay which caused some to speculate that the US was worried about upsetting China, Elisabeth Bumiller and Edward Wong at the New York Times report that the US and South Korea have agreed to hold naval exercises in the Sea of Japan and Yellow Sea next week. The exercises are in part a response to the sinking of a South Korean ship by a North Korean submarine four months ago. Beijing has strongly objected to the US holding naval drills in the Yellow Sea.

7. JAPAN TO CONSIDER ENERGY HUB AMBITIONS

Takeo Kumagai at Platts reports that Japan is considering using its spare storage capacity to act as an energy hub in the region. Japanese oil consumption is on a downward trend leaving considerable spare capacity. Some are considering using that spare capacity to export out into regional markets extra petroleum products, becoming the third trading hub in the region after Singapore and South Korea.

8. RUSSIA SENDS MISSION TO CLARIFY BORDER ON ARCTIC SHELF

Elena Kovachich at the Voice of Russia reports that

"The flagship of Russia’s polar fleet “Academician Fyodorov” has left for the Arctic on an expedition to clarify the outer border of the country’s continental shelf."

9. NABUCCO COMPLETES PUBLIC HEARINGS IN TURKEY

Alex Froley at Platts reports that the Nabucco pipeline project has completed the first round of public hearings in Turkey.

"Erdal Tuzunoglu, managing director for Nabucco Turkey, said: 'The completion of the public hearings is an important step towards the realization of the Nabucco project. The communities are very interested in the project and we feel that their concerns were addressed and discussed.'"

10. JUNE UNEMPLOYMENT BY STATE SHOWS IMPROVEMENT

Phil Izzo at Real Time Economics reports that the Bureau of Labor Statistics announced that most states--37--saw unemployment fall in June, while five saw an increase and in six there was no change. 27 saw a decrease in payroll employment while 21 saw an increase. Click on the link for neat interactive map and chart.

11. THE WHITE HOUSE ANNOUNCES FORMATION OF NATIONAL OCEAN COUNCIL

John M. Broder at Green reports that the White House yesterday announced the creation of a National Ocean Council. The new body will not have the power to create new regulations, but will attempt to coordinate the policy of overlapping institutions regulating ocean policy. Worth reading in full.

Daily Sources 7/15

1. PETROCHINA'S REFINING PROFITS AT RECORD ON PRICE LIBERALIZATIONS

Wang Ying at Bloomberg reports that PetroChina increased its refining profits in the first half of 2009 on the back of the revised pricing system which allows refiners to pass on the cost of production to consumers. Gasoline and diesel are, as a result, considerably more expensive in China than they are, say, in the US. I suspect it will go some ways to dampen demand. Meanwhile, Beijing made an example of the former ex-Chairman of Sinopec, Winnie Lee at Platts reports that Chen Tonghai was sentenced to death for bribery, but given a two-year reprieve.

"The court said Chen abused his authority ... to pursue material gains for third parties in areas related to business operation, transfer of land, and contract procurement, according to the Xinhua report.

The two-year reprieve means that Chen's sentence will be commuted to life imprisonment if he commits no further crime while in jail.

Chen resigned from his posts as the head of China Petrochemical Corporation Group and Sinopec Corporation in June 2007."

2. SOUTH KOREAN COURT HEARS PROPERTY RIGHTS CLAIM BY NORTH KOREAN CITIZENS

Su-Hyun Lee at the New York Times reports that a South Korean court has for the first time decided to hear a case brought by North Korean citizens attempting to establish property rights in the south.

"Four North Korean brothers and sisters have sued their late father’s second wife and that couple’s four children in South Korea for a share of an inheritance from the estate of the father, a successful doctor.

The suit claims at least a quarter of the father’s land and other property, worth about $8 million. He left North Korea for the South with his eldest daughter during the 1950-53 Korean War and never returned. In 1959, he reported that his first wife had died and married a South Korean woman, with whom he had four more children. He died in 1987.

Family members in the south, including the sister who came there with the father, asked that only the family name, Yoon, be used, to protect the relatives in the North and the privacy of those in the south."

Although this is the first suit by North Korean citizens to be accepted by a South Korean court, the right of North Koreans to sue in South Korean courts has already been established by rulings of "the Supreme Court and the Constitution"--though I am left unsure as to exactly what kind of complaint was addressed by the courts establishing this in the absence of a North Korean plaintiff. In any case, the smooth handling of the case may well reassure some of the anxieties of both Northerners and Southerners.

3. EUROPEAN CASH FOR CLUNKERS PLAN MAY BE REVERSING DIESELIZATION

Tim Worledge at the Barrel makes the especially interesting observation that Europe's "cash for clunkers" program--designed to slow the steep fall in auto sales--has pushed sales of gasoline-driven cars up above diesel-driven ones.

"According to the European Automobile Manufacturers' Association, ACEA, diesel comprised around 53% of all new car sales in 2007 and 2008, before the scrappage schemes were introduced.

For the first five months of this year, diesel sales fell to 46.3% of the total, apparently marking a reversal in the 20-year 'dieselization' of Europe."

"This threat to diesel's dominance represents a seismic shift.

Bolstered by favorable tax regimes, the growing use of diesel in Europe has done more than any other trend to spur refining investment and shape global trading patterns in the oil market. It has been clear in recent years that Europe is very long gasoline, with the surplus largely shipped to the US, and is short diesel, which it takes from anywhere it can get it.

Within Europe, and further afield, this has spawned massive investment programs as refinery kit designed to meet gasoline demand is re-aligned, augmented and upgraded to produce ever greater volumes of diesel."

"It's the same story in France, regarded as the bastion of diesel and birthplace of the engine's inventor Rudolf. In 2008, diesel sales peaked at a whacking 77.3% of all new cars, but this has now fallen to 71.6%.

Whether this is a blip, a temporary stumble along the road to full European dieselization, remains to be seen, although it's worth noting that even those diesel cars that are being purchased are burning up to 48% less of what is an increasingly bio-blended road fuel."

However, if it does represent a long-term reverse in trend, the window for diesel arbitrage to Europe will mostly be closed, meaning that there will be no outlet for excess diesel supply in the US, which would likely result in another retooling of US capacity back to full gasoline maximization.

4. EUROZONE INDUSTRIAL PRODUCTION UP 0.6% IN MAY MOM, DOWN 17% YOY

Gerrit Wiesmann at the Financial Times reports that eurozone industrial production rose by 0.6% in May from April, though it was still down 17% from May 2008.

"Strong monthly increases reported by Germany, France and Italy in recent days had led economists to expect a bounce of 1% in May. However, these hopes were dashed by output decreases in Spain and some smaller countries."

5. RUSSIAN RAILWAYS RECEIVES $500 MILLION LOAN FROM THE EBRD, LARGEST LOAN IN THE BANK'S HISTORY

Paul Abelsky and Denis Maternovsky at Bloomberg report that OAO Russian Railways has borrowed from the European Bank for Reconstruction and Development $500 million over 10 years in what is the largest loan ever provided by the bank.

"The deal is the London-based development bank’s largest single investment since it was founded in 1991 to fund infrastructure in former communist nations in Europe and central Asia, the EBRD said in a statement today. Moscow-based Russian Railways sold 90 billion rubles ($2.8 billion) of domestic bonds this year, more than any other company in the country, to finance its investment program."

"Russian Railways, the country’s biggest commercial employer, is seeking fresh funds after posting a loss of 17.1 billion rubles ($534 million) in the first quarter. Rail cargo shipments fell an annual 23% in the first half and may drop 19% in the year, Vladimir Yakunin, the company’s chief executive officer, said July 6.

Russian Railways cut annual spending by more than 34%, to 252 billion rubles, this year after the government reduced financial support for the company and domestic demand for its services waned, Yakunin said in an interview published today in the Vedomosti newspaper. Railroads account for about 85% of Russia’s total cargo transport capacity, according to VTB Capital data.

EBRD aims to invest a minimum of $3 billion in Russia this year, President Thomas Mirow said last month at an economic forum in St. Petersburg."

6. BULGARIA TO GET SPUR FROM THE ITGI PIPELINE

Kerin Hope and Theodor Troev at the Financial Times reports that Greek, Bulgarian, and Turkish companies signed an agreement to build a spur from the ITGI pipeline carrying natural gas from Azerbaijan to Turkey and Greece and which is to be extended to Italy. The spur would have a 3-5 bcm/year capacity and is scheduled to be completed by 2012 at a cost of €120 million (~ $167 million).

"The project highlights the new spirit of co-operation between Athens and Sofia. The Balkan neighbors have a history of bilateral disputes, from arguments over sharing water resources to stake-holdings in a proposed cross-border oil pipeline.

Both countries are keen to become regional transit hubs for gas pipelines from central Asia and the Middle East.

Bulgaria signed up on Monday to join Nabucco and, like Greece, is also a partner in the proposed South Stream pipeline to bring Russian gas to the EU under the Black Sea."

Sofia has secured about €45 million in EU grants to fund the project. According to a 2007 Edison press release, ITGI as it stands has a capacity of 11.5 bcm/year of which Italy had been slated to receive, following the completion of the final section also in 2012, 8 bcm/year. According to a story featured on the Azerbaijan Business Center, Gian Luigi Mascia, the Italian Ambassador to Azerbaijan, said in Baku today that

"The gas pipeline is designed only for Azeri gas. Its overall capacity will be up to 14 bcm a year, including 1 bcm to be delivered to Greece, 10 bcm to Italy and 1-3 bcm to Bulgaria."

Bulgaria responded to the Russo-Ukrainian gas transit dispute in January by re-starting a nuclear reactor despite it violating the terms for its accession to the EU--see Daily Sources 1/15 #1.

7. ISRAEL HAVING TOUGHER TIME IN EUROPE, ISREALI WARSHIPS PASS THROUGH SUEZ

Juan Cole has an interesting analysis suggesting that Israel is more on the outs with Europe than usual. He notes that Javier Solana called for the recognition of a "Pelstinian state by the world community by a date certain, regardless of the Israeli position" suggesting that he is more or less Europe's foreign minister. (Much much less, actually, though important, and certainly an interesting development. The analysis contains a goodly share of wishful thinking, on Prof. Cole's part, but it is still interesting and what he records may well be a sign of a sharper move in the European capitals.) Meanwhile, Michael Collins Dunn at the MEI's Editor's Blog notes that two Israeli corvettes (warships slightly smaller than frigates) have been allowed, by Cairo, to pass through the Suez. He notes:

"Warship transits, while guaranteed under the Israeli-Egyptian peace treaty, are rare, given the fact that Israel is concerned about security. As anyone who has seen the canal knows, it is narrow, and warships passing are easily viewed by civilians and others along its banks."

8. MEND ANNOUNCES CEASEFIRE, QUICKLY THREATENS TO END IT

Platts reports that MEND earlier Wednesday announced a ceasefire following the release of its leader--Henry Okah--yesterday, but has since threatened to call it off, accusing the government of using it as an opportunity to ramp up its military presence in the region.

9. VENEZUELAN OIL MINISTER SAYS ALL PDVSA EMPLOYEES MUST JOIN "SOCIALIST COMMITTEES"

Marianna Parraga at Reuters reports that Venezuelan oil minister Rafael Ramirez yesterday told a rally of workers who had been employed by PdVSA following the nationalization of oil services firms operating in the country that

"By now, there should not be a single counter-revolutionary in the heart of our company, our industry. There cannot be a single PdVSA installation where socialist committees do not exist. Whoever is not in a committee will be suspected of conspiring against the revolution."

"Socialist committees are loosely defined political groups often organized by Chávez's Socialist Party."

10. US COMMERCIAL CRUDE STOCKS DOWN, GASOLINE & DISTILLATE STOCKS UP, REFINERY UTILIZATION UP, BUT US INDUSTRIAL PRODUCTION DOWN 0.4% IN JUNE FROM MAY, 13.6% YOY, CONSUMER PRICES UP 0.7% NEARLY ALL ON ENERGY COSTS, WHILE US WAGES, ADJUSTED FOR INFLATION, FALL 1.2%

The EIA today reported that commercial crude stockpiles fell by 2.8 million barrels to 344.5 million barrels in the week ended July 10. The amount is storage is still above the five year historical range for this time of year, but the draw was for more than the 2.1 million barrel draw expected by Wall Street analysts, per a survey by Bloomberg. Gasoline stocks grew by 1.5 million barrels versus analyst expectations of a 875 kb build and are now near the top of the five year historical range for this time of year. Distillate stocks grew by 600 kb versus analyst expectations for a 2 mb build and are still at extremely elevated levels, about 28% more than what was in storage in the comparable week of last year. Overall US refining capacity went up in the week ended July 10 to 87.87% of total operable capacity from 86.8%. However, industrial production in June was down 0.4% from May and 13.6% from June 2008 according to the Fed's index. From the report:

"For the second quarter as a whole, output fell at an annual rate of 11.6%, a more moderate contraction than in the first quarter, when output fell 19.1%. Manufacturing output moved down 0.6% in June, with declines at both durable and nondurable goods producers. Outside of manufacturing, the output of mines fell 0.5% in June, and the output of utilities increased 0.8%. The rate of capacity utilization for total industry declined in June to 68.0%, a level 12.9% points below its average for 1972-2008. Prior to the current recession, the low over the history of this series, which begins in 1967, was 70.9% in December 1982."

Meanwhile, Gerry Shih at the New York Times reports that the Labor Department announced that its consumer price index climbed 0.7% in June from May. The "core" index, which excludes food and energy prices, rose by 2%.

"Compared with a year ago, the Consumer Price Index has fallen 1.4%, the steepest plunge since 1950, as the prolonged downturn takes its toll on demand in the economy. ...

A separate Labor Department report released Wednesday said that American wages, adjusted for inflation, fell by 1.2% in June."

Daily Sources 4/7

1. Gráinne Gilmore at the London Times reports that new forecasts from the IMF will suggest that bad debts held by banks and insurers are likely in the neighborhood of $4 trillion.

"The IMF said in January that it expected the deterioration in US-originated assets to reach $2.2 trillion by the end of next year, but it is understood to be looking at raising that to $3.1 trillion in its next assessment of the global economy, due to be published on April 21. In addition, it is likely to boost that total by $900 billion for toxic assets originated in Europe and Asia."

In the meantime, Nina Koeppen at Real Time Economics reports that the German business daily Handelsblatt quoted Jürgen Stark, a key member of the European Central Bank Executive Board, as saying that the decision to increase the resources of the IMF to lend to developing economies by $500 billion and to allow them an issue of $250 billion in special drawing rights amounts to "pure money creation." As an occasional reader remarked to me privately: the Germans probably are most worried by the specter of inflation under the Weimar Republic, where in 1923 consumer prices were doubling every two days.

2. Anna Shiryaevskaya and Robert Perkins at Platts report that Gazprom has reached a deal to purchase Eni's 20% stake in Gazprom Neft (an asset purchased in the April 2007 bankruptcy sale of Yukos) for an estimated $4.2 billion.

"Eni also signed several other cooperation agreements for projects in Russia and abroad with the main Russian energy companies, including electricity company Inter Rao UES, state oil producer Rosneft, oil pipeline operator Transneft and engineering company Stroytransgaz.

Eni plans to "start a wide program of strategic cooperation involving different activities in the energy field" with these companies."

In a statement, Eni said:

"These agreements will further foster ties between Italy and the Russian Federation and will significantly strengthen security of gas supplies to Italy and Europe."

3. Julia Kollewe at the Guardian UK reports that British industrial production fell by an annual rate of 12.5% in February. Output was down 1% from the month earlier, which may be somewhat encouraging given that February is about 10% shorter than January.

4. Manfred Ertel at Der Spiegel reports that with Greek government debt at 94% of GDP, facing disciplinary action by the EU for exceeding the euro zone budget deficit limit of 3% for the third time, and its financial sector hoarding cash after being burnt by financing in eastern Europe and the Balkans, the country is facing a brutal credit crunch which is beginning to bring sectors of the economy to a halt. Worth reading.

5. The Associated Press carried the full text of President Obama's speech in Ankara yesterday. It is long, and worth reading in full, but I thought the most important paragraphs were these:

Make no mistake, though: Iraq, Turkey and the United States face a common threat from terrorism. That includes the al-Qaida terrorists who have sought to drive Iraqis apart and destroy their country. That includes the PKK. There is no excuse for terror against any nation.

As president, and as a NATO ally, I pledge that you will have our support against the terrorist activities of the PKK or anyone else. These efforts will be strengthened by the continued work to build ties of cooperation between Turkey, the Iraqi government, and Iraq's Kurdish leaders, and by your continued efforts to promote education and opportunity and democracy for the Kurdish population here inside Turkey.

This preceded much of the talk of "engaging with the Muslim world," which, evidently, many Turks find offensive anyways, as in, who speaks of the Netherlands, for example, as a "moderate Christian nation." That said, Marc Lynch at Foreign Policy remarked that several Arab commentators were especially impressed that Obama chose to visit a Muslim nation before having visited Israel:

"Several Arab columnists noted with amazement that Obama visited a Muslim country before he visited Israel--which they are taking as a potentially politically costly, and therefore more credible, signal of the importance he places on reaching out to the Muslim world. And not just any Muslim country--as a number of Arab commentators note, Turkey is particularly popular right now because of Erdogan's outburst against Shimon Peres in Davos and his outspoken support for Gaza, along with Turkey's good relations with Syria, Hamas, and others across the great Arab political divide. If there is another speech to come, as I believe there is, it will be interesting to see how that choice balances the Turkey gambit."

That said, Turkey is an ally of Israel. Meantime, Der Spiegel reports on the annoyance mooted by various European politicians at Obama's support for Turkish membership in the EU.

"'It is a meddling in the internal affairs of Europe,' Bernd Posselt, a member of the European Parliament from Bavarian's conservative Christian Social Union (CSU), blustered in an interview with SPIEGEL ONLINE. 'The EU is not Obama's plaything. ... He should accept Turkey as America's 51st state instead,' he continued.

Markus Ferber, the CSU's lead candidate in European Parliament elections set for early June, echoed his party colleague. 'There is no question that the US has a voice in NATO. But when it comes to membership in its own club, the EU decides by itself,' he said. 'We don't need any tutoring from abroad.'

Party head Horst Seehofer said that Europe's 'internal harmony' is dependent on 'common cultural and spiritual roots.' He went on to say that 'Turkey, as self-proclaimed representative of the Muslim world, clearly doesn't fit in.'"

Sarkozy and Merkel also indicated opposition to the notion at this stage:

"Sarkozy was quick to reject Obama's support for Turkish EU membership. Speaking after the US president said in Prague on Sunday that membership for Turkey would 'ensure we continue to anchor Turkey firmly in Europe,' Sarkozy said: 'I have been working hand in hand with President Obama, but when it comes to the European Union it is up to member states … to decide.'

German Chancellor Angela Merkel, whose own conservative Christian Democratic Union is likewise skeptical of Turkish membership--preferring a 'privileged partnership' for the country--spoke of 'differing opinions' when it came to Turkey's EU ambitions."

Worth reading in full. Of course, it costs the US nothing to support Turkish membership in the EU, and it gives the Obama Administration capital in Ankara, much as German and French bashing of "American capitalism" costs them nothing, and gives them political capital at home.

6. Ernesto Londoño, Michael D. Shear and William Branigin at the Washington Post report that in his surprise visit to Iraq today, President Obama said it is time for the Iraqi's to "take responsibility for their country." The statement was greeted with "wild cheers" by the troops.

7. Reuters reports that Russia and China, in the UN Security Council, with the support of three other council members, have indicated that they oppose a resolution which would punish North Korea for its recent satellite launch. The Security Council held a three hour meeting to discuss the issue on Sunday, but agreed to no action outside of agreeing to take up the issue again soon.

"The five permanent members of the Security Council--the United States, Britain, France, China and Russia--plus Japan met at UN headquarters on Monday to explore a possible compromise, but Japan and the three Western powers failed to persuade Russia and China that strong condemnation was needed."

8. Jane Perlez at the New York Times reported yesterday that the recently reinstated Chief Justice of the Pakistani Supreme Court, Iftikhar Muhammad Chaudhry, has asserted the court's jurisdictional supremacy in Swat Province by hauling in the Attorney General and other officials before the court to be castigated for failing to put a stop to the public flogging of a woman by the Taliban.

"From the volley of exchanges between the judges and the officials, and an impassioned account by a prominent lawyer before the court of the terror in Swat, it became clear that the Taliban ran the area with impunity.

Chand was singled out for the punishment after she declined a Taliban fighter’s proposal for marriage, the head of the Peshawar Bar Association, Abdul Latif Afridi, said after the hearing.

After her refusal to marry, an electrician visited the family home, and, according to Mr. Afridi’s account, the scorned Taliban suitor saw her leave the house with the workman. She was flogged on March 7, accused of consorting with the electrician as an unmarried woman, the lawyer said.

Since the video was first shown on Pakistani television stations last Thursday, it has set off an emotional national debate."

The government struck a deal recently with the Taliban in Swat to allow for the imposition of sharia law, but with the proviso that the federal courts would remain the courts of appeal.

9. Patrick Harrington at Bloomberg reports that President Hugo Chávez's press office released a statement upon his leaving Japan for China today that he secured $33.5 billion in Japanese investments in Venezuela.

"Investments ... include $10 billion within five years in liquefied natural gas, $8 billion in petrochemicals, $1.5 billion in refining and $4 billion in a joint-project finance fund ... according to an e-mailed statement sent by his press office. Chávez didn’t specify where the remaining $10 billion would be invested ...."

Harrington also reports that "today said the first African-American US president was 'blacker' than former US Secretary of State Colin Powell." However, after a pretty long search of Venezuelan online (and Spanish-language) news, I could find no confirmation that this remark was made or any sense of the context. On the other hand, I did find a story that Chávez quite positively responded to Obama's decision to work on a new nuclear disarmament efforts with Moscow, saying that he would "extend a hand" to the US in the pursuit of peace in the upcoming Americas Summit in Trinidad and Tobago. Chávez also responded to the question of whether it was contradictory to enter into large oil financing agreements with Tokyo if Caracas wished to pursue an "alternative to the US" strategy, saying,

"La alianza que hemos comenzado a tejer Venezuela y Japón es el reflejo de un mundo de países independientes, de gobiernos libres para decidir su propia política exterior sin depender de ningún centro de poder mundial."

or, more or less

"The alliance initiated between Venezuela and Japan is a reflection of a multipolar world of independent nations, of governments free to decide upon an appropriate foreign policy without relying on a single center of global power."

Meanwhile, Rebecca Wilder at News N Economics reports that it is beginning to look as if the Bank of Japan has begun a policy of "quantitative easing:"



Worth reading.

10. Jacob Greber at Bloomberg reports that the Reserve Bank of Australia cut its benchmark rate by 0.25% today to 3%. The rate is the lowest seen in 49 years and is the latest in 4.25 percentage points worth of cuts since September of last year.

11. Upstream online reports that Baker Hughes reported that the global rig count fell by 440 nearly 16% in March from February to 2753 actively exploring or drilling for oil or gas. The US rig count fell by 215 or 19% to 1105 in March from February.

12. Justin Fox at the Curious Capitalist has another go at plotting the fall in employment in the current crisis against that of the Great Depression:



This is for non-farm payrolls, which represents a much larger share of the total population today than it did in 1929. That is, of a 121,767,000 total population in 1929, 10.5 million, or 8.6% were employed in "agriculture," of 305 million or so total population today, about 3.5 million are employed in "agriculture," or 1.2%.

13. Darrell A. Hughes at Real Time Economics reports that the quarterly survey of CEOs by the Business Roundtable was published today and showed that 67% expect their sales to fall. Nearly 75% expect to lay people off.

"The Washington-based Business Roundtable is an association of CEOs for 160 top US companies. The quarterly survey, completed between March 16 and March 27, aims to provide the executives’ outlook on sales, capital spending, employment and U.S. economic growth for the subsequent six months."

Daily Sources 3/6

1. Eurointelligence reports that credit default swaps for Austria traded yesterday at 264 basis points (2.64%), "meaning it costs €264,000 to insure €10m worth of Austrian bonds."

"Austria’s CDS are trading higher than Italy’s CDS. This has not yet translated into actual bonds spreads, which Austrian bond yields trading at 4.2%, while Greek bonds are at 5.8%. But sharp movements in the CDS are often an early warning of a change in bond rates. This is one to watch out for."

Meanwhile, Simon Johnson at Baseline Scenario points out that credit default swaps for major American banks have spiked again to levels not seen since mid-October.



American Express CDSs traded yesterday at 652.2. Johnson, a credible interpreter of markets being the former chief economist of the IMF and a professor at MIT, comments:

"The events of mid-September 2008 were traumatic and awful to behold. I saw that trailer and I don’t want to see the movie. But it is exactly into that scary future that we now head."

Worth reading in full. Rebecca Wilder at News N Economics points out that a recent OECD study shows that the fall in house prices in Europe has not passed through to construction as of yet.



European household consumption does not account for as large a share of GDP as it does in the US, and thus the cascade effects of rising debt to equity ratios on consumption and thus GDP should be less pronounced, if I understand correctly. However, construction will still get hit--and Ms. Wilder reports that German construction is already less than 6% of GDP, a historic low. Worth a look.

2. Charles Hawley at Der Spiegel reports that most observers in Germany believe that Chancellor Merkel's "grand coalition" is beginning to fray as the parties head into campaign mode. Not particularly good news given that international cooperation will thus be complicated.

3. Brad Setser at Follow the Money has a graph of Russian estimated treasuries and agencies holdings on the news yesterday that Moscow banned its wealth funds from investing in foreign government agencies--see Daily Sources 3/5 #4.



Setser comments:

"Russia’s sovereign fund was always quite conservative. Or at least its external portfolio was always managed fairly conservatively. It was primarily a fiscal stabilization fund, not an endowment fund — so this made some sense. Its existing guidelines implied that it couldn’t buy much of anything other than Agencies and Treasuries. Before the current crisis, Russia was planning to lift those restrictions so that its 'future' fund could take on a bit more risk to try to eke out higher returns. But the world has changed. And now even government-backed Agencies are too risky."

Emma O’Brien at Bloomberg reports that the ruble has not lost much value since Moscow gave notice to its banks that it would take a dim view of banks using bailout money to speculate against the ruble--see Daily Sources 2/9 #8.

"[Bank Rossii] purchased a net $862 million and €99 million (~ $125 million) in February, after selling a net $178 billion and €24 billion in the previous six months, it said yesterday. Bank Rossii’s Ulyukayev said last month the central bank will confine the ruble to a 39 to 41 trading range versus the basket in the first quarter, in an interview with Reuters."

Glenn Kessler at the Washington Post reports that Secretary Clinton will meet with Russian Foreign Minister Sergey Lavrov in Geneva today.

"In [an] NPR interview today, Clinton cast the overtures to Russian as part of a larger effort to engage antagonists such as Syria and Iran. 'We have a sense of urgency in the Obama administration,' Clinton said. 'We believe that there are a lot of challenges and threats that we have inherited that we have to address. But there are also opportunities. We are being extremely vigorous in our outreach because we are testing the waters, we are determining what is possible, we're turning new pages and resetting buttons. We are doing all kinds of efforts to try to create more partners and few adversaries.'"

Mark Landler at the New York Times reports that at a town hall meeting at the European Parliament today Secretary Clinton described Europe as "an essential partner" for the US in fighting climate change, terrorism, and the financial crisis.

"In her session at the European Parliament, the assembly’s president, Hans-Gerd Pöttinger, praised Mrs. Clinton, saying she sounded 'like a European.' The election of Mr. Obama, he predicted, would allow the administration to 'restore your country’s influence and its standing around the world.'"

Meanwhile, Secretary Clinton may have gone a bit overboard while declaiming that in regards to climate change, "we are long overdue in stepping up" and that "the United States has been negligent in facing up to its responsibilities." While I agree that climate change is a critical and pressing issue, the EU has passed quite a lot of laws to address the change, but its net carbon output isn't falling--and it is not clear that the current crisis will permit particularly strong actions in this arena.

4. Winnie Lee at Platts reports that in January, Chinese crude imports fell by 10.8% from December as imports from Angola and Iran grew by 50%.



Historically, there have often been large changes in suppliers share of China's crude import market. However, it is possibly significant that Sudan's exports to China fell by 56.2% from December as the ICC was heading for a decision--though I think it is unlikely. It is very notable that Brazil's crude exports have gone from basically nothing to 88 kb/d--almost 3% of total Chinese imports. NICOMEX reports that Petrobras concluded a deal with Beijing today to supply 100-160 kb/d. It is in the process of negotiating a $10 billion loan with China. It was earlier reported that the $10 billion loan had already been agreed to--see Daily Sources 2/19 #1.) It is also interesting that Venezuela is not even among the top 10 exporters to China in January.

The large number from Iran indicates that the country is likely cheating on its OPEC quota, which is more or less what everyone pretty much thought in the first place. Xinhua reports that the primary reason behind China's drop in imports is that most of the available storage is full, thus complicating its effort to purchase as much crude and products as it can in the current low price environment.

5. Stephanie McCrummen and Colum Lynch at the Washington Post report that president Omar Hassan al-Bashir has responded to the ICC warrant by expelling foreign aid groups from Sudan. Meanwhile, Bashir has moved to consolidate his political position domestically, framing himself as an anti-colonialist, saying, "We have refused to kneel to colonialism, that is why Sudan has been targeted." Ironically, Bashir was a major player in Chinese colonialism in Sudan, helping to bring its oil corporations in. Crowds yelled "Down, Down USA!" even though the US is not a party to the ICC.

6. Juan Cole at Informed Comment reports that former Iranian president, Ayatollah Akbar Hashemi-Rafsanjani met yesterday with Grand Ayatollah Ali Sistani in Najaf. "Sistani is said to have expressed concern about violence by extremists from both the Sunni and the Shiite side. Sistani declined Rafsanjani's invitation to visit Iran."

7. Samuel Cisnuk at UPI reports that Iraqi Prime Minister al-Maliki has put his support behind a two-pronged oil development strategy, which envisions rather incredible production increases:

"A plan has been drafted to boost Iraq's 2.4 mb/d crude-production capacity by 500 kb.d within six months, to 4 million bpd in two years and 6 million to 8 mb/d by 2013, relying in the first two phases mainly on domestic competencies and a recreated Iraqi National Oil Co. and a Supreme Petroleum Council.

The two-pronged plan means that development will be launched immediately on some of the fields that are simultaneously being tendered to IOCs in the ongoing licensing rounds, muddying the waters considerably. The plan has been launched to weaken the Oil Ministry, and the creation of an SPC will take much of the ministry's political steering power away and hand it to Iraq's political factions."

The Oil Ministry is regarded by many as a catspaw of the US government. The government's production plan is extremely optimistic, perhaps even manic. (h/t Jim Lobe's Iraq Oil Report.)

8. Robert Mackey at the Lede reports that Mullah Omar, leader of the Taliban, recently issued a letter calling upon the organization's members to halt attacks in Pakistan itself:

"Attacks on the Pakistani security forces and killing of fellow Muslims by the militants in the tribal areas and elsewhere in Pakistan is bringing a bad name to mujahedeen and harming the war against the US and NATO forces in Afghanistan."

Well worth reading in full.

9. John F. Burns at the New York Times reported yesterday the UK was to reestablish direct contact with Hezbollah in Lebanon.

"'It’s an interesting and positive development,' Paul Salem, the director of the Carnegie Middle East Center in Beirut, said of Britain’s move. 'Once the US starts talking with Syria and Iran, Hezbollah will be a difficult issue, and Britain’s opening up a direct channel with Hezbollah now could help defuse that.'"

10. Nariman Gizitdinov at Bloomberg reports that Kazakh President Nursultan Nazarbayev in his annual address at Astana promised to spend 600 billion tenge ($4 billion) in oil revenues to stimulate the economy. Nominal 2008 Kazakh GDP was about $141.2 billion, and the government has already announced it plans a 2.2 trillion tenge (~ $14.6 billion) plan (a little more than 10% of GDP). Oil revenues are thus expected to account for about 27% of the total stimulus budget.

11. Matthew Walter and Daniel Cancel at Bloomberg have a summary of recent moves by Chávez to nationalize basic foodstuff manufacturers, like Cargill earlier this week and Polar.

"National Guard troops occupied a rice mill owned by Mendoza’s company, Empresas Polar SA, last week, and Chávez directly warned Mendoza, 43, whose family has a net worth of $5 billion according to Forbes magazine, that he is now in the government’s cross hairs.

'You can’t work beyond the law, Mendoza,' Chávez said during a televised March 4 cabinet meeting, where he alleged the company was evading rules that require it to produce food at government-set prices. 'We could expropriate all of Polar’s plants.'"

If the government decides to expropriate Polar's assets, it will not offer cash as it has in past nationalizations, but rather bonds.

"In his latest crackdown, the president sent troops into rice mills to verify whether they’re complying with government regulations on production of price-controlled foods. The government began the process this week of seizing a rice plant owned by Cargill Inc., the biggest US agricultural company.

'We can’t allow monopolies like Polar,” Chávez said yesterday. 'That’s why we’ve ordered the intervention and possible expropriation of the plants, just like Cargill.'"

Well worth reading in full.

12. Sudeep Reddy at Real Time Economics reports that the Bureau of Labor Statistics announced that the official employment rate climbed to 8.1% in February, up from 7.6% in January. The broader employment category--U6--rose to 14.8%.

"We’ve already blown through the prior high point of the data series, which the Bureau of Labor Statistics started in 1994. An even broader (since discontinued) series hit 15% in late 1982, and we’re likely to fly right through that one next month."

Justin Fox at the Curious Capitalist posts a graph of the unemployment rate in the current slowdown versus previous recessions:

"What I get from the chart ... is that job losses from this recession are now worse than in 1981-1982, which is generally considered to have been the most severe economic downturn in the US since the Great Depression. Barring a more or less unimaginable turnaround in the month or two, they will be much worse. Just look at how steep that brown line is!"

Daily Sources 1/15

1. Keith Johnson at Environmental Capital argues that nuclear power is the big winner in the Russo-Ukrainian gas dispute. Both Slovakia and Bulgaria are planning to restart nuclear reactors in order to provide electricity and heat, even though doing so violates the conditions for entering the European Union. Italian government officials are calling for additional nuclear power as a security measure and reportedly even the German green party might rethink their no nuke policy. Erik Kirschbaum at Reuters reports that the CEO of Vattenfall--a Swedish energy company whose portfolio is 35% nuclear and operates as the electric utility for a number of German states--told him that he expected the debate over nuclear power to re-open in Germany. Nuclear supplies about 30% of Germany's power needs and so far the Merkel Administration has hewn to the 2001 law which would phase out nuclear reactors by 2021. CEO Lars Jossefson said,

"The discussion in Germany will continue. There are two important components of the discussion: the climate change problem and, secondly, energy security. These two issues will push the discussion forward in Germany."

Worth reading in full. Meanwhile, Maher Chmaytelli reports that Greece has purchased two LNG cargoes on the spot market to replace volumes lost in the Russo-Ukrainian dispute.

David Jolly at the New York Times reports that the Ukrainian prime minister, Yulia V. Tymoshenko, spoke with prime minister Putin by phone today and has agreed to meet in Moscow this Saturday to negotiate. It may be that European Commission President José Manuel Barroso's threat to encourage litigation by European energy companies may have more bite than one might expect, simply because such legislation could bring the actual contracts for the gas into public scrutiny. As it stands we have flat dollar prices per thousand cubic meters--$450/tcm being the Russian proposition, which is allegedly similar to the price European companies have paid, and $201/tcm being the Ukrainian counteroffer. But natural gas contracts are usually tied, by some formula, to front month futures contracts on some exchange--and often have a floor or ceiling provision. If it turns out the numbers quoted to the press are divorced from the commercial reality, it would prove politically problematic--perhaps extremely so. Meanwhile, Jonathan Gleave at Reuters reported that IEA chief economist Fatih Birol told a conference in Madrid that Russia is no longer considered by European policy makers to be a reliable source or supply.

2. Just after having spent $7 billion defending the ruble in a single day, Emma O’Brien at Bloomberg reports that Bank Rossi has allowed the currency to depreciate against the dollar and euro again today. "The currency dropped to as low as 32.4668 per dollar, the weakest since Russia redenominated the ruble at the start of 1998, before the government’s default in August that year."

3. Doug Merrill at Fistful of Euros reports that a senior German defense official said in remarks at a meeting of his counterparts in Tblisi on Tuesday that Georgia was likely to be a NATO member this year. Apparently the German ambassador's jaw dropped. Would definitely be interesting if there was more support for Tblisi's entry following the gas dispute.

4. The European Central Bank cut its benchmark interest rate by 0.5% to 2% today. Real Time Economics carries the full text of ECB President Jean-Claude Trichet's introductory statement. Key excerpt regarding stimulus efforts in member countries:

"Regarding fiscal policies, the Governing Council welcomes the European Council’s reconfirmation of its full commitment to sustainable public finances. In this respect, the current economic situation calls for particular prudence with regard to the adoption of extensive fiscal stimulus measures, taking into account the particular fiscal situation in each country. The operation of automatic stabilisers will provide a relatively large and powerful fiscal impulse to the weakening economy, in addition to already announced expansionary fiscal policy measures and the government support for the banking sector. Taken together, the additional measures decided so far put a considerable burden on public finances in a large number of euro area countries. If not reversed in due time, this will negatively affect in particular the younger and future generations. It is therefore essential to return to a credible commitment to medium-term budgetary objectives as soon as possible."

Worth reading in full.

5. Eurointelligence reports that Greece's debt was downgraded by S&P and that Ireland made an effort to deny that it requires IMF assistance.

6. Ambrose Evans-Pritchard at the UK Telegraph reports that the OECD's gauge of leading indicators has the economic situation in China, Russia, and Germany deteriorating at the fastest speed among the developed economies. Asia and commodities exporting nations are facing the worst difficulties. "The index for Russia has seen the sharpest slide, falling 4.3 in November, China fell 3.1 and Germany was down 2.0, the worst performer in the G5 bloc for the third month in a row."

7. Dan Harris at the China Law Blog reports that China's foreign direct investment policy for 2009 will "highly restrict" any investments in projects that have large energy requirements. "The current response from the PRC regulators suggests that there will be a qualified return to the export led growth model." (h/t Carlos Tejeda at China Journal)

8. David Barboza at the New York Times reports that Beijing announced plans to roll out new media organizations internationally in the South China Morning Post on Monday. "The plan ... includes the creation of a 24-hour news channel modeled on Al Jazeera, the Arabic-language news network, with correspondents around the world." As I wrote on Monday in response to Beijing's internet black lists, China will not willingly abandon control of the flow (or spin) of information.

9. Margaret McQuaile and Robert Perkins at Platts report that OPEC expects global oil demand to fall in 2009 by 180 kb/d, as per their Monthly Oil Market Report published today.

"OPEC expects demand for its own crude this year to average 29.48 mb/d, 1.4 mb/d lower than 2008 demand and partly reflecting Indonesia's exit from the cartel at the end of 2008."

OECD oil demand is expected to fall by 980 kb/d in 2009 to 46.73 mb/d. Asia and the Middle East are expected by the organization to grow by 600 kb/d, with the rest evidently coming from Africa and South America. The OPEC report itself can be found here.

10. Brad Setser at Follow the Money has a post where he and Rachel Ziemba of RGE Monitor argue that the sovereign wealth funds of the Gulf--the Abu Dhabi Investment Authority/ Abu Dhabi Investment Council, the Kuwait Investment Authority, the Qatar Investment Authority and the Saudi Arabian Monetary Agency--suffered capital losses in 2008 that "overwhelmed" gains from high oil prices. They also concluded that the Abu Dhabi Investment Authority (ADIA) was never as wealthy as people suspected, estimating that it had about a $330 billion portfolio at the end of 2008. They think that the Saudi Arabian Monetary Agency took a much more conservative approach than the other sovereign wealth funds from the region, benefited the most from oil price, and is now holds the largest portfolio of the set. They also make the common sense conclusion that the Gulf states care more about the performance of these funds when the price of oil is $40/b than when the price is $140/b, because their budgets were established with oil price assumptions which were higher than $40/b. They published a much longer analysis, which I haven't had time to read yet but should prove very interesting and can be found here.

11. Jay Solomon at the Wall Street Journal reports that the Bush Administration is planning to sign a nuclear power cooperation agreement with the United Arab Emirates today. The pact could help the UAE become the first Arab nuclear power nation by 2017.

"Rep. Ileana Ros-Lehtinen of Florida, the ranking Republican on the House Foreign Affairs Committee, has introduced legislation seeking to hold up the nuclear-cooperation accord until the UAE provides guarantees that it is assisting US efforts to combat Iran. The UAE is among Iran's closest trading partners, and the Emirates have served in the past as a major conduit for military technologies entering into Iran, according to US officials."

Either way, the decision gives the lie to the argument that an oil rich nation would have no economic justification for nuclear power. Stanley Reed at BusinessWeek reports that an Abu Dhabi official told him that the UAE hopes to generate at least 25% of its power requirement from nuclear. That could mean more than six nuclear power plants. The UAE currently generates 60% of its power from natural gas, and gets the bulk of its supplies from Qatar. However, Qatar has already sold the bulk of expected new gas capacity additions for at least a decade out and may not be able to accommodate expected incremental demand increases of 9% in the UAE. Reed's piece is worth reading in full.

12. Upstream online carries a wire story which reports that Iranian president Mahmoud Ahmadinejad told a news conference that an oil embargo in response to Gaza was a good idea, but not in the works yet. To wit:

"I think it is a good proposal if Arab countries co-operate. It can't be that nations give oil and it is turned into a bullet, a missile or a bomb on the heads of the people of Gaza. This is not a fair equation."

13. Simon Romero has the interesting story in the New York Times that PdVSA is soliciting bids from Western companies on Orinoco Belt projects. This comes after the decision to nationalize projects that Western companies had stakes in--sparking law suits just last year. (see my very first blog piece: Venezuela vs ExxonMobil)

“If re-engaging with foreign oil companies is necessary to his political survival, then Chávez will do it,” said Roger Tissot, an authority on Venezuela’s oil industry at Gas Energy, a Brazilian consulting company focusing on Latin America. “He is a military man who understands losing a battle to win the war.”

Perhaps, but what sort of guarantees could Chavez credibly extend to the majors at this stage? I suppose it's possible, if not especially likely, that he could reverse his nationalization of Exxon and Conoco's projects. Chavez could bet that the majors will bet that they will outlast him. That would be thinking like them. That said, he is seeking a change in the constitution which would let him run for president indefinitely.

14. Alex Emery and Karla Palomo at Bloomberg report that Peru's finance minister told them he is in talks with the Fed and the People's Bank of China to set up dollar swaps for the sol. "The country may tap another $9 billion in loans from multilateral lenders to help finance about $35 billion in mining, energy and other development projects." Lima plans a $3 billion stimulus package for 2009 and had enjoyed five years of 7% annual growth prior to the financial crisis.

15. Choe Sang-Hun at the New York Times reports that North Korea has said that normalization of relations with the United States was a prerequisite for Pyongyang to abandon their nuclear program.

16. Shobhana Shandra and Bob Willis at Bloomberg report that the Labor Department announced that initial jobless claims were at 524,000 for the week ended January 10.

17. Dan Levy at Bloomberg reports that US foreclosures rose 81% last year, according to RealtyTrac, Inc. "More than 2.3 million properties got a default or auction notice, or were seized by lenders ... ."

18. Justin Hyde at the Free Press reports that Obama's pick to lead the EPA has promised to quickly revisit the waiver request California has made in order to pursue stricter vehicle emissions standards than federally mandated. 17 other states are in line to follow California's example, but the EPA under the Bush Administration last year denied the waiver request.

19. Ucilia Wang at Greentech media reported yesterday that several states under budgetary pressure are considering cutting solar energy subsidies, including Maryland, Connecticut, and New Jersey.

Daily Sources 10/30

1. Daniel Gros and Stefano Micossi argue that until the European Union introduces bonds denominated in euros backed by all euro-member states, the

"US will continue to dictate the agenda in international monetary affairs .... To add insult to injury the US government is now paying 2-3 percentage points less on its short term debt than even the most virtuous EU member states."

2. Phil Izzo at Real Time Economics reports that the majority of economic analysts think that the economy will begin to recover in the second half of 2009, assuming further stimulus and citing Abiel Reinhart at JP Morgan Chase, Macroeconomic Advisors, Richard Moody at Mission Residential, and David Greenlaw at Morgan Stanley.

3. Shobhana Chandra of Bloomberg reports that GDP contracted by 0.3% year over year in the third quarter.

"GDP was forecast to drop at a 0.5 percent pace in the third quarter, according to the median forecast of 75 economists surveyed by Bloomberg News. Estimates ranged from a 1.2 percent rate of expansion to a contraction of 1.9 percent."

4. Yesterday the Federal Market Open Committee decided to reduce the federal funds rate by 50 basis points (0.5%) to 1%: "the Committee expects inflation to moderate in coming quarters to levels consistent with price stability." The Fed also opened dollar swap lines with the the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore. The decision was made in order to allow dollar purchases outside of the international currency markets, " to mitigate the spread of difficulties in obtaining U.S. dollar funding in fundamentally sound and well managed economies," and which had been part of the reason behind the huge rise in the dollar. The move affords for some emerging markets the same mitigation abilities it had extended to the developed markets and for which it had therefore been criticized. The swap lines were extended earlier to the Reserve Bank of Australia, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Reserve Bank of New Zealand, the Norges Bank, the Sveriges Riksbank, and the Swiss National Bank. In a coordinated move reported by Mark Landler at the New York Times, the IMF has anounced it will lend as much as $100 billion to emerging markets with healthy economies stressed by current credit crisis. Landler suggests that the countries that qualify include the countries which just received the new swap lines from the Fed.

5. Grant Smith at Bloomberg reports that consultants Petrologistics released preliminary data suggesting that OPEC supply increased in October by 0.5% to 31.85 mb/d from 31.7 mb/d. Evidently, Angola and Iraq, both of which until the October 24 meeting had no production quotas--now Angola does--increased production during the month. Angola's shipments crept up to 1.995 mb/d from 1.805 mb/d. Iraq's crude shipments were up to 2.315 mb/d in October from 2.145 mb/d.

6. Edward Cody at the Washington Post reports that Sarkozy has submitted a budget which increases the military budget of that country by an average of $1.8 billion per annum through 2014. The bill would provide the French military $230 billion for the period.

"Defense Minister Hervé Morin said the decision illustrated Sarkozy's determination, even amid financial turmoil, to conduct activist policies in Afghanistan, Africa and other trouble spots around the globe.
...
Morin said the expenditures also will permit France's defense industries to remain competitive. 'France is among the three or four biggest countries when it comes to the arms industry,' he said. 'I did everything so that we can maintain those industrial icons and the 350,000 jobs they generate in France.'"

7. Blaine Harden at the Washington Post reports that Japan has announced a new stimulus package for the economy of $275 billion. The stimulus package mostly comes in the form of tax breaks, though $20 billion will be send directly to families. A familiy of four will receive a check for $600.

8. David Osler at Lloyd's List reports that British shipping employers and employees have agreed to designate the Gulf of Aden a "warlike operations area," a move which will have the effect of doubling the pay of ships operated out of the UK near Somalia. This does not seem likely to help the British industry at a time when shpping rates are tanking.

9. Ambrose Evans-Pritchard at the UK Telegraph reports that trouble in the shipping industry is beginning to have an effect upon the finances of the country.

"It is also beginning to cause strains in Greece, where the yield spread between Greek 10-year bonds and German Bunds rocketed to a post-EMU record of 123 basis points yesterday.
...
[T]his is the first time its debt has broken its tight linkage with Italian bonds – which traded at spreads of 100 yesterday. The markets are now clearly singling out the country as the most vulnerable of the EMU members.
...
'Shipping has overtaken tourism to become the country's biggest industry. They get their finance from other countries, so I think there are going to be a lot of worried bankers in London,' [Chris Pryce, a director of Fitch Ratings,] said.
...
Greek shipping families control a third of the global freight market for bulk goods, with operations split between London and Pireaus.

Mr Pryce said Greek banks had expanded rapidly in the Balkan region and Turkey, with heavy exposure to Serbia and Macedonia. "They saw this as a growth region, but they may be thinking differently about it now," he said."

The article is well-worth reading in its entirety. (h/t Yves Smith at naked capitalism)

10. The EIA yesterday released This Week in Petroleum reporting the stocks of crude ending October 24 were up 0.5 million barrels and a little bit above the historical range. Gasoline stocks fell 1.5 million barrels putting them back at the very bottom of the historical range.

11. The AFP reports that UK Prime Minister Gordon Brown has embarked on a mini-tour of the Gulf States to encourage them to participate more fully in the IMF and its financial stabilization efforts.

12. Venezuelan Oil Minister Rafael Ramirez reportedly said that OPEC would need to cut its production quota again at the next meeting. Chavez said he would support a second cut in Ecuador on Tuesday.

Daily Sources 10/6

1. Germany decided on Sunday to guarantee all retail deposits in its banks, following on the decision in Ireland to guarantee six domestic banks and Greece's to do the same for the total amounts of all deposits. Britain has now decided to increase its guarantee on deposits from £35,000 to £50,000. Iceland's efforts to bail out its own financial system appear to have been overwhelmed by the size of the problem. This has led to more than one editorial calling for cooperation addressing the financial crisis in Europe, for example from The Economist, Wolfgang Münchau in the Financial Times, Daniel Gros and Stefano Micossi in the Wall Street Journal Europe as well as an editorial by the Wall Street Journal editorial board themselves. In an interesting counterpoint to all these calls for cooperation, former Fed Chairman Paul Volcker does not appear to think that increased international regulatory cooperation would necessarily be in our best interests.

2. Scott Lanman and Craig Torres at Bloomberg report that the Federal Reserve will double its auctions of cash to banks to as much as $900 billion.

To finance the Treasury's new plans, officials are considering changes to federal government debt sales, including a reintroduction of three-year notes. ... The Treasury also said that some of its cash-management bills may be ``longer-dated.'' ... In addition to the cash banks must hold at the Fed, lenders also sometimes place excess reserves. The central bank said today it will pay interest on those funds at the lowest targeted federal funds rate for each period less 75 basis points. That will put a floor under the actual fed funds rate each day and let the Fed `expand its balance sheet as necessary to provide the liquidity necessary to support financial stability.''

Michael M. Grymbaum of the New York Times reports that the DOW closed below 10,000 in response to all these efforts.

3. Freeexchange, a blog hosted by The Economist, has a very interesting piece noting that the past economic crisis which our current one most resembles might be that of 1873 and not 1929, according to financial historian Scott Reynolds Nelson. It began with a housing bubble which were complicated by investors relying on complex financial instruments and touched the globe. The blog piece suggests that what's in store for us now may be what was faced after the 1870s: robber barons and religious fundamentalism. (Watch out Bill Maher.)

4. Del Quentin Wilber at the Washington Post reported on Sunday that Xuighur Islamic separatists from China being in Guantanamo were being released to the United States, as sending them to China would likely result in their torture. The difficulties with the notion of an undifferentiated "war on terror," from the perspective of diplomacy, law, and just plain common sense, thus continue to wend their way through our lives.

5. Andrew Batson at Real Time Economics has a translation of the official statement of the People's Bank of China strongly endorsing the emergency financial rescue plan passed last Friday. It makes plain that the leadership in China believe their economic interests are closely entwined with the United States. It also has the following:

The People’s Bank of China will make financial and economic policies more predictable, targeted and flexible in order to maintain financial market stability and the sound and rapid development of the economy. The People’s Bank of China and relevant regulatory authorities have already drawn up plans to avoid and reduce the impact of the U.S. financial crisis on China.

An interesting sentence pair. You gotta wonder if it is good for the popular opinion of the plan in the US that the Communist government of China endorsed it.

6. Jose Llangari at Reuters reports that the Ecuadorian Oil Minister said that OPEC will analyze the effects of the financial crisis on the oil market and set production levels accordingly. Also today Ahmed Rouaba at Reuters reported that OPEC President Chakib Khelil said that he thought that oil prices would continue to fall next year. This is after several statements suggesting that OPEC was comfortable with $100/b, and then $90/b oil. This suggests to me that OPEC is slightly behind the ball here. Obviously, the real "decider" in OPEC is Saudi Arabia, and they have been worried about the high price environment for some time ... and it may well have been one of the precipitating factors in the current crisis. But I suspect that Riyadh is not likely to decide to put a high bottom on the price of oil in a climate where their two largest existing clients: the US and Europe (which together account for 45% of world oil demand) are broke and India and China (which have accounted for nearly all of the incremental demand growth in the last four or five years) have also lost their primary customers and, thus, the primary engines of economic growth in both.

7. Bracewell & Giuliani and Business News Americas' have released their Energy Outlook 2008, which includes the assessment that peak oil is likely 10 or fewer years away in Latin and South America and that most energy sector investors do not think that renewables will take up the slack. I did not purchase the report, but these two statements on their own are fairly significant. Given the new finds off Brazil's coast and the seemingly excessive mismanagement of Venezuelan oil production, I am somewhat surprised that the majority think that South and Latin America peak oil is so near. If so, they are likely right that renewables will not be able to meet the gap on its own ... and that nuclear will be one of the options South and Latin American leaders will be looking at. Which, in certain cases, will prove problematic.

8. Michael Evans at the London Times reports that two modern Russian capital ships, including a missile cruiser, sailed through the Strait of Gibraltar today on their way to Venezuela. (The ships being sent from the Russian naval base Severomorsk are evidently not of the same quality as these. It is also only the second time Russian naval vessels have passed through the Strait since the end of the Cold War.) In the meantime, Ellen Barry at the New York Times reports that Russia has begun to withdraw from its positions inside Georgia proper, five days before the agreed upon deadline. Nonetheless, hackles continue to be raised by the Russo-Venezuelan dalliance. Mary O'Grady, at the Wall Street Journal, who can always be counted upon for the most alarmist take-no-prisoners approach, noted, in contrast to most everyone else, that Venezuela announced last week that it was in talks with Russia to build nuclear power plants. Given the $/BTU cost of uranium versus oil or gas, this may make a lot of sense. But it obviously could provoke a more meaningful response in the US than what is taking place in Iran.

9. Tim Webb at the UK Guardian reports that Unilever, the gigantic food and consumer goods company, has come out against the biofuel mandates in the EU. Obviously, the are concerned about the increases to their input costs and have now publicly identified biofuel mandates as a significant cause.

Daily Sources 10/3

1. Lori Montgomery, Paul Kane and Shailagh Murray at the Washington Post report that the House passed the $700 billion financial stabilization package. The bill passed 263-171 with 91 Republicans voting for. Although it seems clear that something needed to be done, I am unclear on why so much pork (200 pages-worth) was necessary to do it.

2. Marc Lifsher and Evan Halper at the Los Angeles Times have the story that yesterday Governor Schwarzenegger sent a letter to Treasury Secretary Paulson informing him that California would likely require a $7 billion loan from the federal government within weeks given the current credit situation. California is the state with the largest economy of the states in the US and with one of the largest state government budgets. The most recently data has it as the 10th largest economy in the world. The US Bureau of Labor Statistics released data showing that employment declined by 159,000 in September. Unemployment at 6.1%. Why, given the situation, hasn't the dollar tanked versus other world currencies? This is the explanation I've heard most recently, though I cannot vouch for it:

Since mortgage bonds held by European banks were issued in dollars, the European banks need to have capital reserved in US Dollars (for regulatory reasons). Usually the banks use LIBOR for this funding, but since LIBOR has gone through the roof, the European banks have turned to the euro/dollar swap market. This is why the dollar hasn't tanked. But if the bailout package passes, and unlocks the credit crunch, LIBOR should go back to normal, which would then precipitate a sell-off of the dollar.

3. Patrick Hosking at The Times reports that Greece responded to widespread depositor withdrawals in that country by guaranteeing all deposits at all Greek banks whatever their size. Although it was previously reported that Germany had more or less doomed Sarkozy's pan European €300 ($414) billion financial stabilization fund, it is now being reported that Greece put the final nail in its coffin. Evidently the Irish decision last week to guarantee 6 banks operating there made them especially attractive to asset holders and money quickly started migrating there--putting further strain upon the banking systems of the other EU nations. The story has a pretty good recap of the events to date in Europe. Edward Cody and Kevin Sullivan at the Washington Post have a similar story on the difficulties European leaders are facing in terms of putting a unified response on the table. Nicolas Véron, a research fellow at Bruegel, has an op ed at the Wall Street Journal calling for centralized regulation of the markets in Europe. Another potential outcome to the current difficulties in the European financial sector. In this context, Andrew E. Kramer at the New York Times reports that Russian President Medvedev told a forum held at St. Petersburg State University that the era of US economic hegemony is over. “The times when one economy and one country dominated are gone for good.” He argued that the world does not want America as a "mega-regulator." German Chancellor Angel Merkel was at the forum, which was the 8th annual Petersburger Dialog, an effort to create stronger Russo-German ties, and responded that Germany, too, would “always support a multilateral approach” to market regulation. It does not seem to me that it is in Berlin's interests to realign away from Brussels and Washington towards Moscow, but plainly a message is being sent here.

4. Philip P. Pan at the Washington Post has the important story that one of the most important opposition parties in Russia, the Union of Right Forces, has decided to disband and establish a new party under Kremlin control. Anatoly Chubais, one of Russia's more prominent reformers, was one of the founders of the party and was involved in the talks that led to this move. How this would work in practice I have no idea.

5. Ellen Barry at the New York Times reports that a car bomb exploded at a Russian peacekeeping base in South Ossetia, killing 9 Russian soldiers. This comes 6 days before the agreed upon deadline for Russian troops to withdraw from Georgia proper altogether.

6. Karen DeYoung and Walter Pincus at the Washington Post report that the Defense Department will spend as much as $300 million over the next three years on private entities contracted to produce print and broadcast media in Iraq with the aim of winning hearts and minds. "The four companies that will share in the new contract are SOSi, the Washington-based Lincoln Group, Alexandria-based MPRI and Leonie Industries, a Los Angeles contractor."

7. Alex Lawler reports on the Reuters survey of oil firms, OPEC officials and analysts which has OPEC supply reducing by 310 kb/d in September (32.39 mb/d down from 32.70 mb/d). Most of the expected supply reduction comes from disruptions in Nigeria and Angola. Attacks in Nigeria took 60 kb/d off the market and the shut in of the Plutonio field (which has a capacity of 200 kb/d). Iran reportedly exported 50 kb/d less; Saudi Arabia 100 kb/d less (9.55 mb/d down from 9.65 mb/d.) (You'll note that taken altogether that equals 410 kb/d.)

8. Platts has the story that the Nigerian oil workers union Nupen has decided to put it plans to strike on hold as talks progress with Chevron. Chevron's current production in Nigeria is about 350 kb/d, down from capacity of about 450 kb/d due to unrest in the Delta State.

9. The Business Standard reports that Reliance Industry's new 580 kb/d capacity refinery in Jamnagar, India, is set to do test runs in the next couple of days and should be officially commissioned within a month. This refinery is sophisticated and meant to produce gasoline and diesel for the European and US markets. It will be able to process heavy crudes and thus should theoretically at least reduce demand for light crudes, ie the price you hear about in the papers. It will be one of the largest refineries in the world.

10. David Biello at Scientific American has the story that scientists at the Energy & Environmental Research Center (EERC) at the University of North Dakota have arrived at a process to refine canola (rapeseed), coconuts and soybeans into jetfuel indistinguishable from the crude oil derived process. This project is part of the U.S. Department of Defense's Defense Advanced Research Projects Agency (DARPA) and the jet fuel produced has a freezepoint of –47º C (–52.6º F) and a similar density and energy content as jet fuel refined from crude oil. Scientific American gave no details on the cost of the process, but the fact of it is very important as it presents a perfect substitution to kerosene. Department of Defense involvement also probably means that potentially high initial industrial production costs will not kill the project. (Air domination, of course, is central to American military strategy generally.) Furthermore, jet fuel is the only petroleum product which truly has a global market, as there are only two real commercial jet fuel specifications and in practical terms they are basically interchangeable.

11. Gerry Karey at The Barrel has a (kind of funny) report on Palin's strange understanding of the size of the Alaskan National Wildlife Refuge, as demonstrated in her ongoing interview with Katie Couric over the last week. I personally find it somewhat annoying that the candidate refers to energy as her "area of expertise."