Daily Sources 7/23

1. UNEMPLOYMENT GROWING RAPIDLY IN THE G-7, BUT BRAZILIAN UNEMPLOYMENT UNEXPECTEDLY DOWN

Rebbeca Wilder at News N Economics notes that unemployment continues to grow quickly in the G7, which should damper consumption:



However, Helder Marinho and Andre Soliani at Bloomberg reported that Brazil's June jobless rate in six main metropolitan areas fell to 8.1% from 8.8% in May.

"Policy makers cut the so-called Selic rate by a half-point to a record 8.75 percent yesterday and said that level was adequate to spur growth and bring inflation back to target.

The drop in the jobless rate 'indicates how strong the domestic market is,' Pedro Tuesta, senior economist for Latin America with 4Cast Inc., said in a telephone interview. 'It reinforces the idea the bank should stop cutting rates.'"

"Annual inflation, as measured by Brazil’s IPCA index, slowed to 4.8% in June, down from 5.2% in May and the lowest since March 2008. Policy makers last month reaffirmed that they seek to slow inflation to 4.5% by year-end."

Average wages, however, are not keeping pace with inflation.

2. ICELAND FORMALLY APPLIES FOR EU MEMBERSHIP

Karl Ritter at the Associated Press reports that Iceland formally applied for membership in the EU today.

"'To be frank with you, if we would get a rotten deal on the fisheries, the Icelandic people would get quite angry,' Foreign Minister Ossur Skarphedinsson said after presenting the EU application to his Swedish counterpart, Carl Bildt. Sweden currently holds the EU presidency.

'This is not only an issue of economics. It is also an emotional issue. It is also an issue that is related to sovereignty,' said Skarphedinsson, a former fisherman."

3. UK RETAIL SALES UP 1.2% IN JUNE FROM MAY, 2.9% YOY, GOVT ANNOUNCES £1.1 BN PLAN TO ELECTRIFY MORE OF ITS RAIL SYSTEM

Svenja O’Donnell at Bloomberg reports that UK retail sales rose 1.2% in June from May, and 2.9% from June 2008.

"Sales at food stores increased by 0.7%, while they rose 1.6% at non-food retailers, the statistics office said. Textile, clothing and footwear shops saw sales increase for the first time in three months, by 4.7%."

Meanwhile, Nicholas Winning at the Wall Street Journal reports that the UK has announced plans to spend £1.1 billion ($1.81 billion) on electrifying two rail routes.

"The works represent the first big electrification of the rail network since the 1980s and will increase the proportion of electric rail journeys in the UK to 67% from 60%, the government said."

4. RUSSIAN MINISTERS TO CONSIDER 0% TAX ON INITIAL MINERAL EXTRACTION IN THE BLACK SEA AND SEA OF OKHTOSK, BUT WARNS MOL THAT IT HAD BETTER COMPLY WITH LICENSING IN SIBERIAN FIELD

Kate Mackenzie at FT Energy Source reports that Russian ministers today will discuss setting a zero rate of taxation for mineral extraction for the initial stages of development in the Black Sea and the Sea of Okhotsk.

"The tax breaks will apply until accumulative output reaches 20 million metric tons (~ 144 million barrels) at Black Sea fields and 30 million metric tons (~210 million barrels) in the Sea of Okhotsk, off Russia’s Pacific Coast. Alternatively, the zero rate may be applicable for 10 years or 15 years for fields being developed under combined exploration and production licenses, according to the statement."

Though I feel sure that it will be tempting enough to make some majors bite, the problem is that when the price of oil rises, Moscow will likely take measures to re-nationalize production at the fields, given their view of their strategic value. Meanwhile, Stephen Bierman and Edith Balazs at Bloomberg report that Mol--Hungary's largest refiner--pledged to meet all requirements in the license terms of a Siberian oil-production venture with OAO Russneft.

"'Mol always acts in accordance with the rules of the Russian Federation and the company will do everything on its part to fulfill all the requirements described in the license agreement,' Mol said today in an e-mailed statement.

On July 2 Russia’s subsoil agency, Rosnedra, gave the Zapadno-Malobalykskoye LLC oil venture six months to correct violations relating to its drilling plan and its use of so-called associated gas, Larisa Kalacheva, a spokeswoman for Russneft, said today. 'The time allotted to correct license infractions is very tight,' she said. 'Action is needed.'

Tensions between Mol and the Russian government have increased since Moscow-based OAO Surgutneftegaz bought a 21.2% share in the Budapest-based refiner in March. Mol called the move hostile and has barred the Russian company from participating in corporate meetings."

5. BIDEN CALLS ON RUSSIA TO REMOVE TROOPS FROM GEORGIAN BREAKAWAY REGIONS, BUT ALSO INDICATES THERE IS NO MILITARY OPTION FOR THEIR REMOVAL

Philip P Pan at the Washington Post reports that in Tblisi today Vice President Joe Biden urged Russia to withdraw its troops from the breakaway regions of Georgia.

"'What we can do is make clear to the whole world, and to the Russians particularly, that we stand with you, and that if they fail to meet their commitments, that it is a problem for them,' Biden told the children, referring to a ceasefire agreement that the Georgia and the United States say Russia is violating.

'A lot of you think maybe Russia did what they did, and they paid no price,' Biden added. 'They paid a pretty big price already diplomatically. The countries that surround Russia, even those that have been very, very loyal to Russia in their freedom, are now saying very harsh things.'"

However, earlier in the day in a speech before the Georgian parliament, Biden said there was "no military option" for Georgia to regain sovereignty over the breakaway regions.

6. CHINESE DEFENSE MINISTRY TO LAUNCH CHINESE / ENGLISH WEB SITE, CENTRAL BANKS OF CHINA, JAPAN, AND SOUTH KOREA ATTEND FIRST TRIPARTITE MEETING

Tini Tran at the Associated Press reports that the Chinese defense ministry will launch an official web site in both Chinese and English on August 1.

"The Web site appears aimed at reassuring Asian and Western nations that the PLA is becoming more accessible to the outside world, experts told the China Daily.

'As more attention is being given to online information, the Chinese army has moved one step forward in its public diplomacy,' Professor Li Xiguang, dean of Tsinghua University's journalism school, was quoted as saying.

The Web site's launch 'is a major step for the PLA to open up to the outside world,' Sr Col Huang Xueping, deputy director of the ministry's information office, said in an interview with the newspaper. The office was only set up last year.

The site will 'cover a large amount of information,' featuring regular activities and background of the Chinese military."

(h/t Sky Canaves at China Journal.) Meanwhile, the first tripartite meeting of the central banks of China, Japan, and South Korea took place today in Shenzhen.

"On December 10, 2008, in order to strengthen their mutual cooperation and communication and better safeguard economic and financial stability in the region, the three central banks jointly announced the establishment of a formal Tripartite Governors’ Meeting mechanism, based on the existing dialogue, which will take place once a year."

(h/t Rebecca Wilder at News N Economics.)

7. CLINTON SAYS US PREPARED TO EXPAND COMMERCIAL RELATIONSHIP WITH MYANMAR IF THEY RELEASE POLITICAL PRISONERS

Glenn Kessler at the Washington Post reports that Secretary Clinton told the media that the US was prepared to expand its commercial and aid relationship with Myanmar if it were to release political prisoners, and specifically Nobel Peace Prize laureate Aung San Suu Kyi.

8. AHMADINEJAD APPARENTLY DEFYING LOTR CALL FOR HIM TO WITHDRAW VP NOMINATION, IRAN SAYS IT HAS FOUND 46 OIL FIELDS IN THE CASPIAN

Ali Akbar Dareini and Lee Keath at the Associated Press report that Iranian President Mahmoud Ahmadinejad has apparently chosen to defy the Leader of the Revolution, Ayatollah Khamenei, who has called upon the president to withdraw his choice for first Vice President,Ahmadinejad's son-in-law.

"Arguing for a further chance to make his case, Ahmadinejad said, 'there is a need for time and another opportunity to fully explain my real feelings and assessment about Mr Mashai.'"

Dareini and Keath observe

"Now Khamenei is facing tests to his authority on two fronts. One is from Ahmadinejad, the other is the open defiance from the reformist opposition, which has continued its campaign against Ahmadinejad despite the supreme leader's declarations that the election dispute is over."

I would put it more as tests of authority from those who see the representative elements of the Constitution in their best interests and those who see it as protecting the vested interests of the old guard, but the point is salient nonetheless. Meanwhile, Xinhua reports that Iran's Oil Minister Gholam Hossein Nozari has reportedly said that Iran has identified 46 oil fields in the Caspian Sea, of which eight are ready for exploitation immediately. (h/t Leanan at the Oil Drum.)

9. MOODY'S UPGRADES PHILLIPINE SOVEREIGN DEBT

Karl Lester M Yap at Bloomberg reports that Moody's rating on Philippine sovereign debt was raised to Ba3 from B1, the highest the country has received in more than three years.

"'The upgrade was prompted by the relatively high degree of resiliency exhibited by both the country’s financial system and external payments position in face of the global financial and economic crises,' Moody’s said. 'International reserves of the central bank are at a historical high and exceptional policy measures have not been required to shield the banking system.'

Philippine international reserves climbed to a record $39.56 billion in January, as rising remittances sent home by citizens abroad countered collapsing exports. Higher debt ratings reduce the cost of borrowing, making it easier for the Philippines to sell debt to fund government spending plans."

10. MEXICAN IMMIGRATION TO THE US HAS SLOWED MARKEDLY SINCE 2006, BUT EMIGRATION BACK TO MEXICO HOLDING STEADY

In a report released yesterday, the Pew Hispanic Center concluded that:

"The flow of immigrants from Mexico to the United States has declined sharply since mid-decade, but there is no evidence of an increase in Mexican-born migrants returning home from the US.

Survey data from the US and Mexico reveal a large flow of migrants back to Mexico, but the size of the return flow appears to be stable since 2006."

(h/t Conor Dougherty at Real Time Economics.)

11. NAR ANNOUNCES THAT EXISTING HOME SALES ROSE 3.6% IN JUNE FROM MAY, DOWN 0.2% YOY; MEDIAN PRICES DOWN 15.4% FROM JUNE 2008

Maya Jackson Randall at the Wall Street Journal writes that the National Association of Realtors announced that existing home sales in June rose 3.6% from May, but are still down 0.2% from June 2008.

"Foreclosures and short sales reflect 31% of sales in June. Distressed property sales have pushed prices lower, year over year. The median price for an existing home last month was $181,800, a 15.4% decrease from June 2008."

Meanwhile, the Department of Labor announced today that seasonally adjusted initial unemployment insurance claims for the week ended July 18 were

"554,000, an increase of 30,000 from the previous week's revised figure of 524,000. The 4-week moving average was 566,000, a decrease of 19,000 from the previous week's average of 585,000."

12. USDA REPORT CONCLUDES FARMERS SITTING ON GOLD MINE IN CARBON OFFSETS INCLUDED IN CLIMATE BILL

Keith Johnson at Environmental Capital writes that a new report from the Agricultural Department concludes that farmers stand to make a fortune from the carbon offsets included in the climate bill.

"To wit: Farmer’s incomes will take a hit in the short term, falling by 1% through 2018. Things will get worse by 2027 (a 3.5% decline) and even worse by 2048 (a 7.2% decline.) That’s because things like fuel and fertilizer will cost more under the climate bill.

But farmers’ net incomes will keep rising, because they will be literally standing on a gold mine in the form of carbon offsets, which will become increasingly valuable. The goods:

'EPA’s analysis projects annual net returns to farmers of about $1-2 billion per year from 2012-18, rising to $20 billion per year in 2050. USDA’s analysis strongly suggests that revenue from agricultural offsets (afforestation, soil carbon, methane reduction, nitrous oxide reductions) rise faster than costs to agriculture from cap and trade legislation. It appears that in the medium to long term, net revenue from offsets will likely overtake net costs from HR 2454, perhaps substantially.'

It might be even juicier; the EPA’s Ms. Jackson estimated the value of agricultural offsets at more than $3 billion in 2020.

And wait—there’s more. '[W]e believe our analysis is conservative--it’s quite possible farmers will actually do better,' Secretary Vilsack said.

That’s because farmers also stand to make a fortune off of other government energy policies, such as ambitious mandates for renewable energy and biofuels that will create lucrative, mandatory markets for crops and even agricultural waste."

Today's must read. The USDA report itself can be found here.

13. OCCIDENTAL FINDS SIZABLE NEW OIL FIELD IN CALIFORNIA

The Los Angeles Business Journal reports that Occidental has announced a significant oil and gas find in Kern County, California.

"The company said in a statement that it believes there are between 150 million and 250 million gross barrels of oil equivalent reserves within the area. Approximately two-thirds of the discovery is believed to be natural gas.

Occidental holds an approximate 80% stake in the property, with Chevron Corp. holding the remaining interest."

That represents about 1.8-3 global days of oil demand.

Daily Sources 5/6

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Worth a look.

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

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

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

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

My emphasis. Well worth reading in full.

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

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



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

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

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

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

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

5. VENEZUELA TO PASS LAW MAKING EXPROPRIATIONS EASIER

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

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

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

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

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

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

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

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

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

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

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

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

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



All farms:



The full graph and commentary can be found here.

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

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



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

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

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

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



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



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

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

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

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

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



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

Daily Sources 4/2

1. Daniel Pimlott at the Financial Times reports that the G20 agreed today to provide $1.1 trillion to fight the financial crisis. Of that, $750 billion would go to the IMF, $250 billion would go to trade finance, and $100 billion would go to multilateral development banks.

"On financial regulation, the G20 agreed to 'extend regulation and oversight to all systemically important financial institutions, instruments and markets', including for the first time big hedge funds. It also said that credit agencies would be registered and monitored for the first time, after the failing of credit ratings played a big part in exacerbating the credit crisis.

The communique said that the G20 would extend 'regulatory oversight and registration to credit rating agencies to ensure they meet the international code of good practice, particularly to prevent unacceptable conflicts of interest.'"

No globally coordinated stimulus program was agreed upon, nor was a globally coordinated method of addressing the financial sector's balance sheets. The communique did explicitly provide support for Mexico's application for a $47 billion flexible credit line. The communique itself can be found here.

2. Chris Giles, George Parker and Gillian Tett at the Financial Times report that Dominique Strauss-Khan, the managing director of the IMF, argued in an interview with the paper yesterday that the G20 was failing to recognize that in order to resolve the financial crisis, you must first resolve the issues facing the financial sector. Quote:

"[You] never recover before the cleaning up of the banking sector has been done. The US ... is rightly insisting on stimulus and the EU rightly insisting on regulation. They are not yet moving quickly enough in doing the cleaning up of the financial system."

3. Gabi Thesing at Bloomberg reports that the European Central Bank cut its benchmark interest rate by 0.25% to 1.25%, 0.25% less than what most economists had expected.

"'The latest economic data and survey information confirm that the world economy and the euro area is going through a severe downturn,' said ECB President Jean-Claude Trichet at a press conference in Frankfurt after the decision. 'Available indicators of inflation expectations remain firmly anchored.'"

4. Frank-Walter Steinmeier, the German Foreign Minister, has a piece on the future of NATO in today's Der Speigel. Reflecting on the purpose of NATO in anticipation of the organization's weekend summit marking its 60 year anniversary in Strasbourg, Steinmeier argues that the organization is still required. Regarding Afghanistan, Steinmeier says:

"We certainly welcome the new US strategy. We have to work together to ensure that Afghanistan never again becomes a safe haven for terrorists. We have to enable the Afghans to assume themselves the responsibility for security in their country. And there was a broad and common understanding at the recent conference in The Hague that we need to devote more efforts and means to civil reconstruction, and that we have to develop a regional approach that includes Pakistan."

Regarding Russia, he says:

"It's a fact that Russia is and will remain a difficult partner. But at the same time it is true that in the end we can only achieve pan-European security by working with, and not against, Russia. That's why I'm advocating an active NATO policy toward Russia. We must use the instruments we have for dialogue, such as the NATO-Russia Council. And at the same time we have to do more than just formally revive them. We must strive to develop these instruments into a platform for active security cooperation. From Afghanistan to fighting pirates, the list of relevant areas for cooperation is long."

Steinmeier also argues that the return to full-membership of France to NATO is further evidence that NATO is not a competitor of the EU, but a partner. Worth reading in full.

5. Jonathan Weisman at Real Time Economics posts that in a translation of parts of a speech that Russian President Medvedev made at the G20 summit, he suggested that a basket of currencies replace the dollar as the global financial system's reserve currency. The speech was provided to the Wall Street Journal by a Kremlin aide--and so far I have been unable to find a translation of the entire document on the web. The translation also includes the following point:

"It is not our goal to destroy existing institutions or to weaken the dollar, pound or euro. We are simply calling for a joint assessment of how the global currency system can most favorably be developed for the sake of the global economy ... ."

Meanwhile, Stephen Bierman at Bloomberg reports that Russia increased oil output as OPEC pursued cuts.

"March output advanced 0.4% a day in comparison with both the previous year and month to 9.8 mb/d, the Energy Ministry’s CDU-TEK unit said in an e-mailed statement today. It was the first increase on year-on-year production since 2007."

Platts reports that Oil Movements, a London-based consultancy, estimates that OPEC oil exports, excluding Ecuador and Angola, will fall to 22.15 million b/d in the four weeks ending April 18, down 960,000 b/d from the previous four-week period. Rachel Jones at the Associated Press reports that the EIA released data yesterday showing that Venezuela increased oil exports to the United States by about 14% in January from December. Venezuela had promised to cut its exports to the US by 16% starting January 1 to comply with the embargo. The country still sends about half of its oil exports to the US, according to EIA estimates.

6. Alex Morales and Gaurav Singh at Bloomberg reports that Indian and Chinese officials in interviews with the news wire said that global warming policies being considered by Japan and the US are being seen as protectionist measures.

"'If there’s going to be a border tax imposed, that would very much have the danger of triggering a trade war,' Su said in a telephone interview from Beijing. 'That’s not something that we would be happy to see,' he said before the start of United Nations talks running through April 8 in Bonn.
...
'We should be very careful that climate change doesn’t become a peg on which we start hanging protectionist tendencies,' Shyam Saran, India’s special envoy on climate change, said in an interview in New Delhi two days ago."

7. Keith Bradsher at the New York Times reports that Beijing has adopted a plan to become one of the leading producers of hybrid and all-electric cars within three years. I would add that all electric cars mean, in China, more coal consumption--the dirtiest carbon-based fuel of all.

8. On March 27, China and Myanmar agreed to the construction of pipelines to transport African and Middle Eastern crude oil from Myanmar's Arakan coast to Kunming. Construction is expected to commence on the pipeline soon and scheduled to be complete in 2013. The oil pipeline is expected to cost $1.5 billion and the natural gas pipeline $1 billion. The pipeline will create an alternative to the Strait of Malacca for African and Middle Eastern crude en route to China. (I've drawn a rough idea of the route on the map below--it has no relationship to the actual route, it only connects the start and end points.)



15 million barrels pass through the Strait of Malacca every day, on average--the article gives no sense of the throughput planned for the two pipelines. About 80% of Chinese crude oil imports of about 3.3 mb/d pass through the Strait.

"Over the past few years, Chinese analysts and leaders have been describing the strait, as a strategic vulnerability, drawing attention to the consequences for China if this shipping channel were to fall into the hands of 'hostile powers' or pirates or terrorists. What if the US were to block China's access to the strait in the event of a China-Taiwan conflict?

In November 2003, Chinese President Hu Jintao articulated this fear when he declared that 'certain major powers' were bent on controlling the strait. Analysts have been discussing the country's 'Malacca dilemma' since then and exploring options to overcome it. One proposal, partially undertaken, is to develop a port and pipeline terminal at Gwadar, in southwest Pakistan, from where Middle East fuel could also be pumped to western China."

Perhaps, but the project actually extends the arena which China's navy might be called upon to be able to project force to from the Malaccan Strait to the coasts of Arakan--well into the Indian Ocean. So it doesn't really obviate the possibility of a naval disruption to supply.

9. Jeff Stein at Spy Talk reports that a Uighur dissident, Rebiya Kadeer, in the US is being harassed by Chinese agents.

"Her accusations are backed up by other dissidents, the FBI and a Virginia congressman whose own files were infiltrated by Chinese hackers."

"Information management" is clearly a priority of many closed societies, but allegations of intimidation on US soil are especially serious--proof would absolutely have the effect of souring the view of the PRC by many in Congress and the Administration. Meanwhile, Dennis C. Wilder, China director and then senior director for East Asian affairs at the National Security Council from August 2004 to January 2009, has an op ed in the Washington Post which argues that we would do well to reassure our allies in the Asia Pacific that we are not seeking to partner with China in such a way as to subordinate their interests to a "G-2".Key excerpt:

"A more realistic Chinese goal may be to create a partnership with the United States in which our Asian allies, such as Japan, South Korea, Australia, Thailand and the Philippines, are relegated to a subordinate status and the United States and China would share Asian preeminence--at least for a time.

The G-2 moniker worries Asians for just this reason. From Japan to India, there are concerns that America's search for a solution to its worst economic crisis since the Great Depression may lead the Obama administration into not only expanded strategic economic and political dialogues with China but a full-blown strategic partnership. As the center of gravity of US economic interests moves from Europe to Asia, they worry, the United States could become enamored of a 'China first' approach. Notably, the career Indian diplomat MK Bhadrakumar recently lamented that 'the US-India relationship is entering a phase of lull' while Washington engages in 'Chinamania.'"

A very worthwhile read in full.

10. Blaine Harden at the Washington Post reports that Pyongyang warned via a radio broadcast yesterday that it "will relentlessly shoot down" reconnaissance aircraft of the US and allied nations seeking to monitor its satellite launch.

"Experts who have examined recent satellite photographs of the rocket said its payload is probably a satellite-like device."

BR Myers, a researcher of North Korean ideology and propaganda at Dongseo University in Busan, South Korea, has a very useful opinion piece in today's New York Times, despite it's very misleading and rather unhelpful title (decided upon by the editors, not the author) "To Beat a Dictator, Ignore Him."Instead, what the piece argues is that a regime considers its ideological self-justification and propaganda regarding its own accomplishments and stature as critical to its survival--"information management."

"This means demanding changes where they matter most, and can be immediately verified — on the propaganda front — before putting our faith in some grandiose timetable of disarmament. If Kim Jong-il will not cease referring to himself as a 'military first leader,' or stressing that America and North Korea 'can never share the same sky,' we can be certain, without letting yet another deadline elapse, that he is negotiating in bad faith. For far too long, American diplomats have treated Kim Jong-il’s political culture as his business. It is ours as well."

Well worth reading in full.

11. Muriel Boselli and Ikuko Kao at Reuters report that the CEO of Total, Christophe de Margerie, told a conference today that the investment terms offered by Iran for the development of South Pars were commercially unattractive.

"It is very important to reduce the costs of energy projects, we will see if we can get acceptable terms, but frankly today the terms offered today (in Iran) are not attractive enough. Because of the unsatisfactory conditions, Total was never able to strike a real deal for the South Pars project."

12. Nick Bunkley at the New York Times reports that at an annual rate GM's sales were down 45% in March; Chrysler’s were down 39%; Toyota's were down 9%; Nissan's were down 38%; and Honda's were down 36 percent.

"Over all, industry sales fell 37% in March from a year ago, but they rose nearly 25% from February’s 27-year low, the biggest February-to-March increase since 2005."

13. The Associated Press reports that initial claims for jobless insurance rose to a seasonally adjusted 669,000. 5.73 million are continuing to claim benefits.

Daily Sources 2/18

1. Ambrose Evans-Pritchard at the UK Telegraph reports that Germany's finance minister, Peer Steinbrück, said,

"We have a number of countries in the eurozone that are clearly getting into trouble on their payments. ... The euro-region treaties don't foresee any help for insolvent states, but in reality the others would have to rescue those running into difficulty."

Evans-Pritchard writes:

"Credit default swaps (CDS) measuring risk on Irish debt rose to 386 basis points yesterday despite Berlin's show of support, suggesting that the markets remain sceptical over hard-line German financier's change of heart.

The CDS on Austrian debt surged to 180 on fears of banking contagion from Eastern Europe, while Greece, Belgium, Italy and Spain have all seen a surge in default costs."

Edward Hugh, provides a useful, if somewhat small and blurry, graph of the sovereign bond and CDS spreads of some of the more relevant countries, courtesy of Fistful of Euros:



Meanwhile, Der Spiegel reports that Chancellor Angela Merkel's cabinet agreed today to change the bank bailout law so it can rescue Hypo Real Estate.

"The draft law would allow the federal government to initiate expropriation proceedings until June 30. 'The deadline makes it clear that the option of nationalization as a step toward stability is one which will not be available in the long term and is only conceived as a contribution to meeting the challenges presented by the financial crisis,' the bill reads."

In effect, legislators wanted to establish a levee against speculators acquiring the firm on the cheap--similar to Sarkozy's decision to use France's sovereign wealth fund to protect strategic industries (see Daily Sources 10/29 #3.) David Crossland at Der Spiegel reports on the debate in Germany over bailing out one of their carmakers, Opel.

2. Edward Harrison at Credit Writedowns posts that Switzerland is being threatened with national bankruptcy by its banking system, as per Arthur P. Schmidt interviewed by the Swiss daily Tagesanzeiger. Key excerpts:

"In countries such as Poland, Hungary and Croatia, the Swiss franc has become an important currency. Thousands of households and small firms took out loans in Swiss francs, and not in the national currency zloty, forint, or kuna because of lower interest rates. In Hungary, 31% of all loans are in Swiss currency. Amongst household loans, they are almost 60%. ... At the end of September, one had to pay 46 francs for 100 Polish zlotys. Today it is 30 francs."

"According to a report by the Bank for International Settlements worldwide franc loans equivalent to around 675 billion US$ are in circulation--which was about 150 billion directly from Switzerland, 80 billion of Great Britain and about 430 billion US$ through offshore financial centers."

Since the Swiss franc is getting stronger relative to the Eastern European nations, the terms of repayment are de facto getting much steeper, meaning that a good portion of those loans are basically bad. Given the amount loaned, that portion is enough to bankrupt the banks, which will force Bern to bail them out. The bail out will devalue the currency and make its sovereign debt difficult to roll over.

3. Edward Hugh at Fistful of Euros calculates that Ukrainian GDP fell at an annual rate of 20% in January.

"The Statistics Office don’t produce detailed information on the month by month movements in GDP, but using the raw data they do provide I have calculated the monthly growth rates, and have produced the chart below, which gives a pretty clear idea of what has been happening."

(h/t Yves Smith at Naked Capitalism.)

4. Robin Kwong at the Financial Times reports that Taiwan's GDP contracted by 8.36% in the fourth quarter compared to a year earlier.

"'There is little hope of returning to positive economic growth until the fourth quarter of this year,' said Tsai Hung-kun of the national statistics agency.

The dire economic performance prompted Taiwan's central bank to make an unscheduled, 25 basis point rate [0.25%] cut on Wednesday, bringing the island's key interest rate to a record low of 1.25%.

Yen Tzung-ta, the bank's top economist, told reporters that 'by cutting rates, we want to send a signal: the central bank will maintain a loose money policy.'"

5. Indira A.R. Lakshmanan at Bloomberg reports that "Indonesian Foreign Minister Hassan Wirajuda told Secretary of State Hillary Clinton today that his country 'could be a good partner for the United States in reaching out to the Muslim world.'"

"'President Obama has a very strong constituency in Indonesia--of course without the right to vote,' Wirajuda said. 'The Indonesian government and the people of Indonesia would very much like to welcome President Obama on his trip to Indonesia. We cannot wait,' he added, to laughter from the local press corps, 'and I wish that Secretary Clinton would convey this to President Obama.'"

This is absolutely an invitation that should be accepted as soon as is practical.

6. Glenn Kessler at the Washington Post reports that Secretary Clinton today in Indonesia refused to deny that removing sanctions on Myanmar (Burma) was an idea under serious consideration as the Obama Administration reviews foreign policy.

"'Clearly the path we have taken in imposing sanctions hasn't influenced the Burmese junta,' she said, adding that the route taken by Burma's neighbors of 'reaching out and trying to engage them has not influenced them either.'"

Sanctions are a difficult issue. They rarely have success without universal condemnation, as was the case in South Africa. Countries which can count on outside help, such as Cuba, or whose commodities exports are key to international industry and commerce, such as Iran--and to a limited extent Myanmar--tend to prove immune to, and probably the internal stability of the regimes are strengthened by, sanctions.

7. Helene Cooper at the New York Times reports that President Obama said yesterday that he would send an additional 17,000 troops to Afghanistan in support of the 33,000 already there.

"The Administration’s review of Afghanistan policy is supposed to be completed before early April, when Mr. Obama heads to Europe for a NATO summit meeting at which he is expected to press American allies for more troops and help in Afghanistan."

Margaret Talev, Nancy A. Youssef and Warren P. Strobel at McClatchy Newspapers report that the troops will be deployed to southern Afghanistan where they will be used to target poppy production which is used by the Taliban to fund its activities. (h/t Juan Cole at Informed Comment who suggests the strategy is misguided, given that there are not many means of making a living available to farmers in Afghanistan.



That said, it seems to me that targeting the source of income of your enemy makes a lot of sense. As Marcus Tullius Cicero famously put it, the sinews of war are infinite money. However, any truly meaningful attempt to cut off the flow of money would have to address consumption, either by targeting it in the US as well as distribution, or by legalizing its production and consumption here. Addressing opium via the legalization of consumption is unlikely to have any success given the extreme unlikelihood of the rest of the world following suit. (Beijing, for example, has a particularly nasty history with opium which is responsible in part for its anti-colonial ideology.) That would leave seriously targeting consumption.

8. Faleh al-Khayat at Platts reports that the Iraqi Oil Ministry has softened the terms under which it was offering oil field concessions to international oil firms. Specifically, the Iraqi share in the joint ventures operating the fields would be reduced to 25% from 51%, though unanimous decisions would be required. Also, the terms under which firms were rewarded for maintaining production above certain levels were modified.

"The six oil fields on offer under 20-year service contracts are the major producing fields of Kirkuk and Bai Hassan in the north, and the two Rumaila fields, Zubair, West Qurna I and the three Meissan fields in the south. The two gas fields are Akkas in the western Anbar desert and Mansooriya northeast of Baghdad in Diyala province."

9. Eman Goma at Reuters reports that Kuwait is considering constructing a nuclear power plant with the help of a French firm to handle power generation and water desalination needs.

10. Sree Vidya Bhaktavatsalam and Christian Schmollinger at Bloomberg report that Soros Fund Management LLC bought 16 million shares of Petrobras’ ADRs, nearly doubling its holdings of the US-traded shares of the Brazilian national oil company, bringing Soros' stake to 1.45%.

11. Courtney Schlisserman at Bloomberg reports that housing starts fell by an annual rate of 17% in January. House supply is still growing, however, due to foreclosures.

12. Paul Swartz has a post at Follow the Money which demonstrates that home mortgage credit growth has gone negative--meaning that it is subtracting from the money supply, a deflationary pressure.



Which seems consistent with the remarks of the president of the Federal Bank of St. Louis, James Bullard, reported by Michael S. Derby of Real Time Economics:

"'We face some risk--at this point only a risk--of sustained deflation,' in an environment where core inflation is already running 'at zero to slightly negative rates. ...[O}ne important near term goal of monetary policy is to guide the economy away from this outcome.'”

Bullard, who is currently not a voting member of the FOMC, also said in his speech in New York City that "current Fed programs are helpful in aiding markets and the economy, but 'we remain far from the systematic approach I would like to see.'" The $75 billion plan to reduce mortgage payments the Obama Administration announced today is meant to address this in part, though it seems on the face of it that it would reduce money supply by reducing the total value of the loans. However, it would reduce that less than foreclosures, and perhaps restored debt equity ratios would help shore up consumer credit.

Daily Sources 12/26

1. Edward Hugh has a post on The Fistful of Euros blog giving a detailed rundown on the economic crisis Ukraine is presently facing. He argues that folks in Kiev will be forced to export their way out of danger:

"Obviously Ukraine is heading into a major recession in 2009 fueled by the nasty cocktail of a credit crunch, a terms of trade deterioration, and a consequent massive slowdown in both internal and export demand. Given the damage to competitiveness caused by two years of double digit inflation, macroeconomic stabilization will require a very large and significant correction, and this will mean a significant tightening of aggregate demand and a shift in its composition away from domestic consumption and towards net exports."

But to whom will they export? He goes on to point out that Urkaine is thus especially vulnerable to external variables, and I infer by that he means in part Moscow's decisions.

"The danger of total financial meltdown (which would be in this case in the private banking sector, not sovereign debt) is real and significant. The economic downturn has only just started and further downside risks are large and depend critically on the size of external shocks and the limitations imposed by inadequate policy responses."

Worth reading in full. (The piece came to my attention via Krugman's blog.)

2. Ta Bao Long at Bloomberg reports that Vietnam's central bank has allowed the dong to depreciate against the dollar over the last few days in an effort to gird exports.

"'The new reference rate will help increase exports, narrow the trade deficit, and also ensure the stability of balance of payments,' the central bank said on its Web site yesterday."

3. Stephan Kueffner at Bloomberg writes that the newspaper Diario Hoy reported that Ecuador sold $700 million in bonds to the country's social security organization on December 24, and that it will sell an additional $750 million to the organization on December 29. Ecuador decided to default on its debt in the middle of December. (see Daily Sources 12/15 #1) Ecuador, a member of OPEC, does not have a national currency, but uses US dollars which is what contracts for crude oil is mostly priced in globally. The decision has led some analysts to predict that Quito will introduce a national currency and drop the dollar. (see Daily Sources 12/17 #5)

4. Erwan Quintin and Edward Skelton of the Federal Reserve Bank of Dallas report that Mexico is better positioned to weather the financial crisis than it has been in the past. They point out that Mexico has tamed inflation and their sovereign debt held by institutions outside the country is down to 40% from 85% at the time of the Tequila Crisis. Large dollar reserves held by the government and the decision by the Fed to provide $30 billion to help Mexico manage demand for the dollar are also signs that Mexico is better equipped to handle the crisis than most. (On October 29 the Fed established dollar swap lines with Banco de Mexico and three other emerging markets central banks--see Daily Sources 10/30 #4) Skelton and Quintin's piece is worth reading in full. (h/t Mark Thoma at Economist's View)

5. Mark Shenk at Bloomberg reports that Adnoc, the Abu Dhabi National Oil Co., will reduce the supply of the Murban crude by 15% and the Upper Zakum crude by 3% as part of its effort to meet its obligations under the December 17 OPEC oil allocation cut. Production capacity for Upper Zakum is about 500 kb/d. Murban production capacity is about 1.5 mb/d. The UAE produced about 2.35 mb/d in November. MEES estimated the UAE's total production capacity to be about 2.55 mb/d in 2003 and expected total capacity to be about 2.85 mb/d by now--at the time of their writing.

6. The head of Saudi Intelligence from 1977 to 2001 and Riyadh's Ambassador to the United States from 2005-7, Turki al-Faisal, urges President-elect Obama to pursue peace in the Middle East via the plan outlined in the Arab peace initiative of 2002. Four main points:

"· Call for an immediate withdrawal of Israeli forces from Shebaa Farms in Lebanon. This would remove the issue of "national liberation" from the arsenal of Hezbollah's propaganda and mitigate Syrian and Iranian interference in Lebanon.

· Work with the U.N. Security Council for a resolution guaranteeing Iraq's territorial integrity. This would dampen Iraqi politicians' ambitions for dismembering Iraq and force them to negotiate for national reconciliation, putting their interests as Iraqis before their interests as Arabs, Kurds, Shiites or Sunnis. It would also stop any ambitions -- economic or territorial -- that Iraq's neighbors may be considering.

· Encourage Israeli-Syrian negotiations for peace. This would engage Syria and diminish Iranian obstructionism. It would also force Palestinian groups based in Syria to follow the Syrian example.

· Declare America's intention to work for a Middle East free of weapons of mass destruction, with a security umbrella and other incentives for countries that sign up and a sanctions regime for those that don't. This would remove the issue of double standards that the Iranian government uses to raise support among its people for its nuclear policy. It would also resolve the security concerns with which Israel's leaders justify their possession of nuclear weapons."

Well worth reading in full.

7. Alissa J. Rubin at the New York Times gives a decent summary of the political situation in Baghdad.

8. Richard A. Oppel Jr. in the New York Times writes that 20,000 or so troops in Pakistan are being deployed away from the Northwest province where the struggle with the Taliban is taking place as tensions with India continue to build. Pakistani officials would not indicate where these troops were being sent. The military is also denying soldiers leave.

9. Min Zin asks that we not forget the struggle for freedom in Burma in a piece in the Wall Street Journal.

10. Ann Zimmerman, Jennifer Saranow and Miguel Bustillo at the Wall Street Journal write that MasterCard Advisors report that consumer spending fell 8% in December from a year earlier, more steeply than the 5% fall they saw in November from a year earlier. Not being in possession of the report, I cannot intelligently critique it. But, if the numbers, as would be plausible, are the result of aggregated credit card receipts, then they may be partially a result of people choosing--for reasons of thrift or of new credit limits--to use cash. The Commerce Department on December 24 reported that consumer spending had actually increased by 0.6%, after adjusting for inflation, in November from the month earlier. On the 23rd, the Commerce Department reported that consumer spending had fallen by 3.8% from a year earlier in the third quarter. (see Daily Sources 12/24 #14)

Daily Sources 11/21

1. Bill Faries and Shamim Adam at Bloomberg report that the heads of state from the Asia-Pacific Economic Cooperation forum will be meeting this weekend in Lima.

"With talks on a global trade deal stalled, APEC members are unveiling new bilateral agreements this week to sustain growth amid predictions of a prolonged slowdown. Peru and China announced a free trade deal on Nov. 19, while Australia and the U.S. disclosed yesterday they are planning to join a pact with four other nations to lower trade barriers."

The leaders are expected to back the crisis strategy outlined in the November 15 G-20 summit and to look for ways forward on the global trade deal known as the Doha round.

2. Brent Scowcroft and Zbigniew Brzezinski have an op ed in the Washington Post urging President-elect Obama to make the Israeli-Palestinian peace process a priority.

"Resolution of the Palestinian issue would have a positive impact on the region. It would liberate Arab governments to support U.S. leadership in dealing with regional problems, as they did before the Iraq invasion. It would dissipate much of the appeal of Hezbollah and Hamas, dependent as it is on the Palestinians' plight. It would change the region's psychological climate, putting Iran back on the defensive and putting a stop to its swagger.
...
This weakness [the political weakness of the negotiating parties limits their ability to come to an agreement by themselves] can be overcome by the president speaking out clearly and forcefully about the fundamental principles of the peace process; he also must press the case with steady determination. That initiative should then be followed -- not preceded -- by the appointment of a high-level dignitary to pursue the process on the president's behalf, a process based on the enunciated presidential guidelines. Such a presidential initiative should instantly galvanize support, both domestic and international, and provide great encouragement to the Israeli and Palestinian peoples."

Brzezinski is widely known to be a key foreign policy adviser to Obama. The piece is well-worth reading in full.

3. Gregory Gause has an analysis in the UAE paper The Nation, arguing that should Iran acquire the bomb it will not acquire commensurate influence in the Middle East. He points out that Iran's influence is primarily with non-state actors and that their clout with such organizations is unlikely to increase with the nuclear arms. Furthermore, Iranian hard power gains would probably cause other regional actors to work together to offset any perceived imbalance, and, in fact, are already doing so absent an Iranian bomb. Worth reading in full.

4. The Wall Street Journal editorial board takes issue with Democratic efforts to prevent military ties with Indonesia unless more progress is made on the human rights front in that country.

"[T]his issue is starting to impinge on U.S.-Indonesia ties. In February, Secretary of Defense Robert Gates visited Indonesia, pledging full military support. The State Department canceled joint military exercises with Kopassus [a special forces unit which is the cause of much human rights concern] two months later, under pressure from Senator Leahy. In retaliation, Jakarta has stopped cooperating in U.S. counternarcotics efforts in the region."

Indonesia is an important ally of the United States. It is a state with a moderate Muslim majority--a worldview the US wants to encourage. However, the US Navy is probably the most important protector of Indonesian interests outside of Jakarta itself, given the security requirements of the Straits of Malacca, Lomboc, and Sunda. The US is not in the best position, just now, to lecture other countries on human rights abuses. Still, US-Indonesian ties are strong enough (and important enough) to support encouragement by American Senators for an increased respect for human rights.

5. Keith Wallis at Lloyd's List reports that India is considering plans to send four warships to the Gulf of Aden in an effort to police that sea lane in response to a request from the shipping ministry. New Delhi is already replacing the guided missile frigate which destroyed a pirate "mother ship" Tuesday with a larger Delhi-class destroyer. Although India is reportedly eager to increase its naval presence short-term, it appears to be against a long-term role, favoring instead a UN-mandated operation comprised of existing US and European task forces. In the meantime, as Caroline Alexander and Marianne Stigset at Bloomberg write, Saudi Foreign Minister Prince Saud al-Faisal told reporters in Oslo today that the kingdom would contribute "naval assets" to a NATO fleet on an anti-piracy mission in the region.

"The North Atlantic Treaty Organization has four warships off Somalia. India, Malaysia and Russia have sent warships, and a European Union fleet is expected to reach the zone next month. The U.S. coalition in Afghanistan has a task force there, bringing the total of warships in the area to 15, according to French military spokesman Christophe Prazuck."

David Osler, also at Lloyd's List, reports that the UN's International Maritime Organization hailed yesterday last week's decision by the UN Security Council to toughen economic sanctions against Somalia. However, it is not known whether the Security Council extended resolution 1816, which provides the legal basis for naval intervention off the Somalian littoral and is due to expire next month. A press briefing by the Security Council said that

"Prior to the open meeting, the Security Council voted unanimously to freeze, without delay, the funds and other financial assets of individuals designated as engaging in, or providing support for, acts that threaten the peace, security and stability of Somalia."

In the meantime, Reuters reports that dozens of Somali Islamists stormed the port of Haradheere in pursuit of pirates who had hijacked the Sirius Star.

"'Saudi Arabia is a Muslim country and hijacking its ship is a bigger crime than other ships,' Sheikh Abdirahim Isse Adow, an Islamist spokesman, told Reuters. 'Haradheere is under our control and we shall do something about that ship.'"

The Somali Islamist movement--al Shabaab--pledges to stamp out piracy if they gain power.

"Some analysts, however, say Islamist militants are benefiting from the spoils of piracy and arms shipments facilitated by the sea gangs. Analysts also accuse government figures of collaboration with pirates."

6. The New York Times editorial board is skeptical of efforts to negotiate with the Taliban and calls on the Bush Administration to authorize the 20,000 additional troops military commanders have requested for Afghanistan.

7. Stephen Farrell reports in the New York Times that 10,000 supporters of Moktada al-Sadr convened in Baghdad square today to protest the status of forces agreement being debated in the Iraqi Parliament. The protesters do not believe that the agreement guarantees the eventual exit of US forces. The protest was peaceful. From an ideological perspective, the Iranian support for the agreement, which could be characterized as pragmatic, contrasts strongly with Sadr's opposition, which might be seen as principled.

8. Eric Watkins of the Oil & Gas Journal reported yesterday that Myanmar awarded the right to manage two pipelines which the two countries plan to construct to take gas and oil from the Bay of Bengal to the Chinese province of Yunnan. The oil pipeline would carry crude shipped from the Middle East to Myanmar onward to China, thus avoiding the Strait of Malacca. The gas pipeline would carry natural gas from wells in the Bay of Bengal. I've given a rough idea of the planned path of the pipelines below.



China was recently called upon by Myanmar and Bangladesh to resolve their dispute over gas exploration in the Bay of Bengal. The plan may have some added luster given recent concerns about piracy.

10. PFC Energy gave Reuters a useful estimate of the oil prices required by various OPEC countries to balance their external accounts:



The key is Saudi Arabia, the swing producer--the numbers suggest that it will be likely to defend $50/b.

11. Pratik Parija at Bloomberg reports that the Chairman of Indian national oil company ONGC, R.S. Sharma, told the media that he expected the price of oil to rebound to $100/b in the long term. He was offering the price point as justification for the overseas acquisition of Imperial Energy, Plc, which has exploration and production projects in Siberia and registered reserves of 526 million barrels of oil equivalent. ONGC has been unable to build its reserve base and thus overseas acquisitions have become a part of India's long term energy strategy. Overseas acquisitions have also become a key part of the energy security strategies of China, South Korea, and Japan in recent years. Imperial Energy represents the one key acquisition that India has managed to make in competition for overseas assets with Chinese national oil companies, which has led to some hand wringing in New Delhi. Still, recently the cost of reimbursing the oil companies for sales of subsidized petroleum products inside of India has put serious pressure on the country's finances and some may be questioning the wisdom of pursuing high cost assets in a country with a government so tightly aligned to its own domestic oil industry and the current low-price environment.

12. David Brunnstrom and Christian Lowe at Reuters report that U.S. Assistant Secretary of State Dan Fried indicated today that the US was reluctant to renew NATO dialogue with Moscow.

13. The Wall Street Journal's editorial board reports that the Russian Prosecutor General's office warned media outlets to be careful about how they report on the financial crisis. Andrew Osborn in the Wall Street Journal reports that wage arrears in Russia have jumped to over 4 billion rubles (~ $145 million)--the highest seen in a year. Government data shows that over 300,000 people in Russia are owed back pay.

14. Stephen Bierman and Gianluca Baratti at Bloomberg report that Spanish paper El Economista reported today that Lukoil has offered €28 (~ $35) a share to Criteria Caixacorp SA and Sacyr Vallehermoso SA for a stake of just under 30% in Repsol. The Spanish government had earlier voiced opposition to the notion of Gazprom taking a stake in the company. And some suggested that Spain might follow Sarkozy's suggestion of using sovereign wealth funds to defend national assets in a period where they would be sold cheap. Given the financial support provided to the major oil companies by the Kremlin in recent months, such a purchase might strike some as odd. Beyond that consideration, Bierman and Baratti point out that financing for the deal might be difficult to find.

15. Juan Forero at the Washington Post reports that opposition groups expect to make gains in Sunday's elections for governors and mayors in Venezuela.

16. Platts reports that Petrobras announced today that it has discovered an additional 1.5-2 billion barrels of oil equivalent in subsalt in the Santos Basin. The oil is light, with a reported gravity of 30ºAPI.

17. Brian Blackstone at Real Time Economics reports that Federal Reserve Bank of Richmond President Jeffrey Lacker expressed more concern about impending inflation than deflation in prepared remarks to the Tech Council of Maryland. He was skeptical of the theory that there is a causal relationship between a weak economy and a decline in core inflation. (Isn't he taking issue with the notion of supply and demand determining price, then?)

"Once the recovery begins, the temptation is to keep interest rates low until a clear rebound is ensured, Lacker noted. “The risk associated with that path is that inflation may not moderate obediently during the downturn, and may firm with the ensuing recovery,” Lacker said."

Lacker is considered an inflation hawk.

18. Brad Setser at Follow the Money notes that yields on 3 month treasury bills are at nearly zero again. 0.02% to be exact.

Daily Sources 11/11

1. Stephen Castle at the New York Times reports that the European Union announced yesterday that it will resume strategic partnership talks with Russia after having postponed them on August 1st in response to the Georgia crisis. 26 out of 27 Union countries agreed to resume the talks, the dissenter was Lithuania. "Among the issues expected to be discussed when talks resume are energy, trade, and cooperation on security and combating terrorism." French President Sarkozy will meet with Russian President Medvedev on Friday in Nice in preparation for the G20 summit in Washington on Saturday, November 15.

2. Laura Cochrane and Emma O'Brien at Bloomberg report that concerns regarding the weakening of the ruble have driven a steep fall in the Russian stock markets.

"Bank Rossii widened its range on the ruble against a basket of dollars and euros by 30 kopeks (1 cent) to increase the currency's ``flexibility'' and lifted its benchmark refinancing rate to 12 percent from 11 percent to arrest outflows, according to separate statements after the stock market closed. The Micex Index plunged 13 percent, the biggest decline worldwide, and won't open tomorrow, spokeswoman Anna Cheryomushkina said."

Russia has used 19% of its currency reserves since August to stem the flow out of rubles into the dollar and euro. Kremlin officials are concerned that if oil falls below $50/b it will trigger a further collapse in the ruble exchange rate.

3. Anna Shiryaevskaya at Platts reports that "Russia, Qatar and Iran plan to discuss the implementation of the South Pars project at a second round of talks in the Qatari capital Doha on Wednesday, Gazprom said in a statement Tuesday." Difficulty in developing South Pars has perennially dogged Iran's natural gas plans, including decisions as to gas injection into oil fields, exports to Pakistan and India, and power generation. (It was argued recently that if the current plans are not implemented in time that Iran will face a major heating crisis this Winter.)

4. Eric Watkins at the Oil & Gas Journal reports that Turkey's future gas demand is a major obstacle to the planned Nabucco pipeline.

"Nabucco's gas needs appear increasingly to be in conflict with those of its main transit country, Turkey, which also needs to find new sources of gas both to meet increasing demand and to reduce dependence on Russia."

Nabucco would potentially transport 30 billion cubic meters/year through Turkey to Austria, via Bulgaria, Romania and Hungary.

"With a view to securing gas supplies for the line, the EU has already signed agreements with Turkmenistan, Azerbaijan, Kazakhstan, and Ukraine to help develop their reserves. The EU also is eyeing Egypt and Iraq as possible future suppliers."

5. Winnie Lee at Platts reports that Xinhua carried the story Tuesday that on Monday Iraqi Oil Minister Hussein al-Shahristani signed the oil services contract to develop the al-Ahdab oil field with CNPC president Jiang Jiemin. Al-Ahdab is located in the central Wasit province and is expected to produce more than 110 kb/d. Most of the oil is slated for use by the al-Zubaydiya power plant in Wasit; the surplus is slated for export--to China. Production is expected to start in three years time at 25 kb/d and the contract is for 20 years. CNPC will receive 4% of production (4.4 kb/d), but no equity. The field contains 225 million barrels of recoverable reserves.



6. Justin Fox at the Curious Capitalist argues that the markets are discounting the Chinese stimulus plan as mostly more of the same. Infrastructure spending has increased at an average annual rate of 20% over the last 30 years. The question, it seems, is whether the $586 billion will be monies on top of expected infrastructure spending or the total. That and whether Beijing will be able to stimulate consumer spending.

7. Randall W. Forsyth at Barron's argues that the growing yield curve on US Treasuries may be a sign the markets are anticipating a default. The climbing yield curve--which is now as much as 2.5%--is accompanied by increasing cost of insuring against default. That is, CDSs insuring against default on US Treasuries are becoming more expensive. Forsyth calls it unthinkable that the US would default on its debt obligations. However, many state governments in the US defaulted on their debts in the 1830s despite grave warnings, especially from England, as to it ruining American credit-worthiness forever. His article is well-worth reading in its entirety.(h/t Jesse's Café Américain) For a libertarian take on the desirability of default, with which I take issue but still find interesting, see Jeffrey Rogers Hummel's post on the History News Network.

8. Platts reports that MEND is threatening a new oil war--operation "Hurricane Obama"--should the Nigerian Joint Task Force carry out attacks on MEND positions. MEND says it is in possession of plans for such an attack and would respond by targeting

"the oil industry in a way never done before which will in turn make the Nigerian governments 2009 budget projections based on oil revenue an economic disaster."

MEND says it is assured of a "landslide victory."

9. Scott MacLeod has a very interesting post on the response in the Middle East to Obama's selection of Rahm Emmanuel for chief of staff. Emmanuel's father apparently is connected to Irgun Zvai Leumi, one of the terrorist or freedom fighter groups--depending on your point of view--that operated in Palestine during the British mandate. This is obviously contentious material; I would point out that past affiliation with, say, the IRA by an Irish American would not necessarily be an definite indicator of foreign policy positions today. But it would indicate a strong family and emotional tie to the country in question.

"The Arab News in Jeddah, whose editorials are a good reflection of the Arab mainstream, did an astounding somersault on Friday. Just the previous day, the paper hailed the 'symbol of hope and change' in the U.S., saying Obama's historic election 'threatens the cosy Washington consensus. We are, therefore, embarking on exciting times.' After hearing of Emanuel's appointment, the paper headlined its next editorial 'Don't pin much hope on Obama.' Arab expectations, the paper warned, 'are likely to be dashed, generating a great deal of pain and resentment...The new team may turn out to be as pro-Israeli as the one it is replacing.'"

The post, though controversial, is well-worth reading. I think it is plain that the choice of Emmanuel will be reassuring to many Jewish Americans who were worried that Obama's presidency would represent a turning away from Israel--and thus a politically savvy move domestically. However, the story that an Isreali diplomat worried that Emmanuel might be more problematic for Israel given that his familiarity with Hebrew and its history will make it difficult to "pull the wool over his eyes" is likely to raise eyebrows here, given the inference that Israeli diplomats make a habit of pulling the wool over DC's eyes!

In a related post, Tony Karon at Time writes on how Obama's win will affect upcoming elections in Israel, Iran, Iraq, and Afghanistan. Karon argues that Isreali voters might be inclined to swing right towards Netanyahu given fears about a nuclear Iran. On the other hand, he argues that voters in Iran might decide to move leftwards from Ahmadinejad, given that his inflammatory rhetoric would undermine attempts at detente. He also argues that Obama's election, and the commitment to a near term withdrawal, may exacerbate sectarian conflicts in Iraq, because he believes elections tend to stoke division in tribally organized societies. On balance, however, he thinks it would shore up support for al-Maliki, who would be the man who managed the American withdrawal. Worth reading in full.

10. Gareth Porter at The Raw Story reports that:

"The International Atomic Energy Agency (IAEA) has obtained evidence suggesting that documents which have been described as technical studies for a secret Iranian nuclear weapons-related research program may have been fabricated."

If so, the forgery will further undermine the case for confrontation with Iran over its nuclear program. However, it seems to me that American credibility will still be renewed come January 20.

11. Eric Watkins at the Oil & Gas Journal reported yesterday that Daewoo has suspended their exploration effort in the Bay of Bengal under pressure from the Bangladeshi government. Delegations from Mayanmar and Bangladesh are scheduled to meet in Dacca Nov 16-7 to discuss the maritime boundary dispute.

12. John Kingston at the Barrel gives a roster of major hydrocarbon projects that have been postponed in the last few weeks due to the fall in the price of crude. Given flat non-OPEC production capacity additions over the last five years some analysts are worrying about a spike in price by the second half of 2009.