Daily Sources 1/13

1. Andrew E. Kramer and James Kanter at the New York Times reports that the deal resolving the Russo-Ukrainian gas dispute may be falling apart. Access to gas dispatching centers in Moscow and Kiev has been denied to 8 EU monitors--2 in Moscow and 6 in Kiev.

"Pia Ahrenkilde Hansen, a spokesperson for the European Commission, said: 'Little or no gas is currently flowing. We are not at this stage jumping to conclusions. But this situation is obviously very serious and needs to improve rapidly. We do need to get to the bottom of this.'

'The situation is very difficult on the ground. We are urging both Russia and Ukraine to make sure that their commitments are honored. EU experts should be given full access to dispatching centers in Moscow and Kiev.'"

Access to the dispatching centers was part of the monitoring agreement, insisted upon by Moscow, which makes their refusal to grant access especially suspicious and, well, obnoxious. On the other hand, Oleh Dubyna, the head of Naftogaz, told reporters that it was impossible to meet Gazprom's shipping demand without halting supply to parts of Ukraine, which suggests to me that perhaps Ukraine does not have as much natural gas in storage as claimed. Meanwhile, Aleksandr I. Medvedev, the deputy CEO of Gazprom, said that Kiev has not allowed the natural gas through and argued that the US (!) was behind this,

"'The Ukrainians didn’t plan to open the system. It looks like they are dancing under the music that is not orchestrated in Ukraine. They are dancing to music orchestrated elsewhere. I am making reference to the agreement between Ukraine and the United States.'"

The article is worth reading in full.

Eric Watkins at the Oil & Gas Journal reports that on January 9 Secretary of State Condoleeza Rice signed the US-Georgia Charter on Strategic Partnership, in which the US agreed to coordinate stepping up the security of the trans-Caucasus oil and gas pipelines. The agreement reportedly included a US commitment to a new Southern corridor pipeline (away from Georgia's border with Russia). Rice said that:

"The US ... will always support Georgia's sovereignty and its territorial integrity, as well as its Euro-Atlantic aspirations and its integration into the institutions of the Euro-Atlantic."

Emma O’Brien at Bloomberg reports that Bank Rossi sold 6 billion US dollars and 700 million euros in defense of the ruble yesterday. (Bank Rossi pegs the ruble to a basket of 55% US dollars and 45% euros.)

The Associated Press reports that Donald Tusk, the Polish prime minister, told the media that his cabinet decided today to push up the construction of nuclear power plants in that country, and expects first power by 2020. Clearly the dispute makes nuclear that much more attractive--completely outside of the fact that nuclear power plants emit close to zero carbon--and may well reverse Germany's decision to abandon nuclear altogether as a power source.

Either way, both Moscow and Kiev playing games with heat in the middle of the Winter is bound to get tiresome for the rest of Europe rather soon. Germany may especially be likely to consider reversing its integrative policy with Russia.

2. Edward Hugh at Fistful of Euros reports that Standard & Poor's has put Spanish sovereign debt on "ratings watch negative." Hugh points out that a year ago the cost of financing Spanish debt was barely more than for German debt, but that now the 10 year bond spread between the two has reached 92.3 basis points (0.923% or nearly a full percentage point.) Credit default swaps linked to Spanish sovereign debt rose 11 basis points, meaning that they are becoming more expensive as more of the market regards the possibility of default as more likely.

"In a climate where governments across the OECD are preparing to significantly increase their bond issues in 2009 , Spain, Ireland and Greece could find themselves paying significantly more to borrow money if their ratings do in fact fall. Spain is set to increase 2009 debt issuance by around 51 percent to 104.5 billion euros to cover the growing fiscal deficit. This borrowing requirement follows government announcements of something in the region of 90 billion euros in various packages of stimulus measures, in addition to measures to support banks, while at the same time tax revenue is falling due to the contraction in the economy."

Hugh, a Catalan, believes that Madrid will need a stimulus program on the order of 50 to 60% of GDP "to break the back of the credit crunch."

Heidi N. Moore at Deal Journal reports that last week saw the highest volumes of corporate debt offerings since the first full week of 2008 at $152.6 billion in bonds. "Of the 105 debt offerings last week, more than one-third, or 37, were bigger than $1 billion, according to Thomson Reuters." That said, much of the corporate offerings were implicitly or explicitly backed by governments and it does not appear that they were able to get the money cheaply.

Peter Garnham at the Financial Times reports that "Brian Lenihan, the Irish finance minister, accused the UK authorities of, in effect, devaluing the pound by expanding the UK money supply, action that was causing 'immense difficulties' in the Irish economy. 'It is a question for all of us in the EU as to the extent to which a competitive devaluation can be used as any kind of weapon,' he said." Westminster might find the complaint somewhat ironic given Ireland's decision to unilaterally guarantee six domestic banks last year, and thus giving them a competitive advantage to the rest of the European financial system facing the financial crisis (see Daily Sources 10/6 #1), and predictably enough UK officials suggested that Dublin would do better to look to the ECB for blame.

Meanwhile, Eurointelligence writes that German television late last night reported that the German coalition agreed upon a stimulus plan. It's key points include:

"· The government creates a €100bn (~$131.8 bn) fund for loan guarantees to industrial companies through the government-owned KfW bank. KfW will guarantee up to 80% of the loan.

· The heart of the stimulus package itself is a public infrastructure investment programme of €18bn ($23.7 bn).

· The lower tax rate is cut from 15% to 14%, and the tax free allowance raised by €340 to €8004 (~$10,550).

· Health care contributions fall by 0.6pp to 14.9%, for both employers and employees. This means that German wage costs are falling.

· A one-time bonus of €100 (~$132) per child

· More help for employers forced to work reduced hours.

· A €2500 (~$3,295) lump sum for anybody who sells a car at least 9 years old to buy a new one."

The tax measures will not come into effect until July 1.

3. Galrahn at Information Dissemination carries the text of the Arctic region policy of the United States, which was officially established yesterday.

4. Henry Kissinger has an opinion piece in RealClearPolitics where he argues that the Obama Administration has a chance to create the new world order. Key excerpts:

"Not since the inauguration of President John F. Kennedy half a century ago has a new administration come into office with such a reservoir of expectations. It is unprecedented that all the principal actors on the world stage are avowing their desire to undertake the transformations imposed on them by the world crisis in collaboration with the United States.

The extraordinary impact of the president-elect on the imagination of humanity is an important element in shaping a new world order. But it defines an opportunity, not a policy.

The ultimate challenge is to shape the common concern of most countries and all major ones regarding the economic crisis, together with a common fear of jihadist terrorism, into a common strategy reinforced by the realization that the new issues like proliferation, energy and climate change permit no national or regional solution.

The new administration could make no worse mistake than to rest on its initial popularity. The cooperative mood of the moment needs to be channeled into a grand strategy going beyond the controversies of the recent past."

Kissinger argues that a new Bretton-Woods type of arrangement is "by far" the most preferable outcome. He also says:

"The Sino-American relationship needs to be taken to a new level. The current crisis can be overcome only by developing a sense of common purpose. Such issues as proliferation of weapons of mass destruction, energy and the environment demand strengthened political ties between China and the United States.

This generation of leaders has the opportunity to shape trans-Pacific relations into a design for a common destiny, much as was done with trans-Atlantic relations in the immediate postwar period - except that the challenges now are more political and economic than military."

Well worth reading in full. Edward Wong at the New York Times reports on the commemoration of 30 years of diplomatic ties between China and the US in Beijing yesterday.

"The American and Chinese officials who helped engineer China’s re-entry into the world were in attendance, sitting at a long table at the front of the room. Mr. Carter and his wife, Rosalynn, were at the center.

On the American side, the names were familiar: Henry A. Kissinger, Zbigniew Brzezinski and Brent Scowcroft, all former national security advisers, and a handful of other officials and diplomats.

The Chinese were represented by, among others, Qian Qichen, former vice premier of the Chinese cabinet; Tang Jiaxuan, former foreign minister; and Li Zhaoxing, also a former foreign minister."

5. Platts reports that Sinopec announced it began filling its first commercial petroleum reserve on December 29 in Zhejiang province in eastern China. The "Lanshan" reserve is in the Zhenhai district of Ningbo and next to the 5.2 million cubic meter Zhenhai National Strategic Petroleum Reserve which was completed in 2006. (Indeed, the notion of a national oil company possessing a "commercial" as opposed to "strategic" reserve is somewhat odd, but never mind.)

"Sinopec's base, completed late November 2008, has a storage capacity of 3.8 million cubic meters (23.9 million barrels) over 38 tanks. Sinopec has filled 18 tanks with crude to date, while it is unclear when the remaining 20 tanks will be filled, the source said."

Sinopec finished building another 2 million cubic meter reserve at Baishawan in Jiaxing city in Zhejiang in late December. It is unclear whether the company has begun the process of filling that reserve as of yet.

(Friday CNPC indicated that it had begun filling its Shanshan county reserve in Xinjiang, see Daily Sources 1/9 #6.) Winnie Zhu at Bloomberg reports that Chinese crude oil imports grew at the slowest pace in three years in 2008.



Beijing plans to spend 100 billion Yuan (~$14.6 billion) over 15 years to increase the capacity of the country's petroleum reserves.

6. Ayesha Daya at Bloomberg reports that the oil minister of Oman, Mohammed al-Rumhy, said that he did not expect the price of oil to move above $50/b in 2009. In an interview in New Delhi, al-Rumhy said:

"'I don’t see much movement in the oil price this year, prices won’t go much above $50 a barrel. Of course, it depends on Obama’s success--he wants to create 4 million jobs, so if we have 4 million new drivers tomorrow that we don’t have today, demand will rise and so will the price.'"

Oman is not a member of OPEC.

7. Mohamed Ibrahim and Jeffrey Gettleman at the New York Times reports that Ethiopian troops pulled out of their bases in Mogadishu today.

8. Karen DeYoung at the Washington Post reports that President-elect Obama intends to sign off on a plan to send an additional 30,000 troops to Afghanistan in order to "buy time" so as to appraise the situation, strategy and tactics being utilized there.

9. Juan Cole at Informed Comment has a long analysis of the US government's Open Source Center's translation of Israeli Prime Minister Ehud Olmert's remarks in Hebrew yesterday in which he indicated that he overruled Secretary Condoleeza Rice's UN Security Council effort in a phone call with President Bush. Cole does not typically sympathize with the difficulties facing Tel Eviv, but here is the translation:

"[Olmert:] "It transpired all of a sudden that a vote would be held in 10 minutes' time. I tried to find President Bush, and I was told he was attending an event in Philadelphia."

'I know that if somebody tried to find me on the phone right now, it would have to be something unusual and extraordinary for them to say: Leave it all and go to some room to talk to me. In this case, I said: I don't care, I have to talk to him right now.

He was taken off the podium and brought to a side room. I spoke with him; I told him: You can't vote for this proposal.

He said: Listen, I don't know, I didn't see, don't know what it says.

I told him: I know, and you can't vote for it!

He then instructed the secretary of state, and she did not vote for it.

It was a proposal she had put together, one she formulated, one she organized, one she maneuvered. It left her rather embarrassed, abstaining in the vote on a proposal she herself had put together. That was why the French and the Brits said she had pulled a fast one on them, she having been the one to spur them to submit the proposals."

Worth reading. Paul Richter at the LA Times reports that UN counterparts to Rice were somewhat surprised that the US abstained in the measure that she had crafted. Reaction in Washington to the remarks:

"'This is terrible for the United States,' said Daniel Levy, a former Israeli peace negotiator. 'This confirms every assumption they have in the Arab world about the tail wagging the dog. . . . It's a story you're likely to hear quoted there for years to come.'

Levy also accused Olmert of 'unparalleled arrogance.' Olmert, who is about to leave office, may have thought mistakenly that his words would not be widely noticed.

'There are some things you don't say, even in Ashkelon, even in Hebrew,' said Levy, who is now with the Century Foundation in Washington."

10. The Oil & Gas Journal reports that Canada's Heritage Oil Corp. has announced that it has discovered sufficient oil in a reservoir in Uganda to expect a return on development costs.

11. Valerie Rota at Bloomberg reports that the Mexican peso is falling on news of the continuing decline in US imports.

12. Calculated Risk reports that both US imports and exports are falling. The US trade deficit in November was at $40.4 billion, down from $56.7 billion in October.



13. Keith Johnson at Environmental Capital writes that the ethanol industry is facing some rough times as it seeks more government support.

"Corn prices are rising, seemingly without a good explanation after a record harvest, even as crude prices continue sinking. That is killing ethanol, which relies on cheap-ish corn, pricey gasoline, and federal subsidies to stay afloat."

Ethanol currently grabs 75% of the federal alternative energy budget. Problematic, especially because the production of ethanol via corn uses more energy on a Btu basis than it produces--or last I looked anyways. And the corn-producing states have disproportionate representation in our government via the Senate. There is little reason to upset them, and so their constituents will likely continue getting the utterly pointless--from the perspective of ensuring energy supply security--subsidy.

As Parke Wilde at US Food Policy points out, the heartland, though it gets the bulk of agricultural subsidy, is not the largest value adder in terms of US crop production. I need to take a careful look at how energy policy distorts even this picture:

Daily Sources 10/20

1. Brad Setser at Follow the Money has a piece on how the unlimited dollar currency swaps established by the Fed has eased the pressure on large institutions to purchase dollars, but that countries whose currencies have not been afforded unlimited dollar swaps, ie emerging economies, are facing tougher times as a result. Since a large percentage of debt worldwide is denominated in dollars, the lack of access to unlimited dollar currency swaps means that institutions exposed to such debt must either borrow the currency from their own central banks--which have plenty of dollar denominated debt on their books as well, generally speaking--or purchase dollars on the currency markets in order to service their debt.

Setser thinks this may make the gap between the G7 and emerging nations larger and deeper, balkanizing the international financial system in effect. His post is well worth reading in its entirety.

It occurs to me that many of the nations--with the exception of China--being forced to purchase dollars are export-oriented nations, whose interests are served by a weak exchange rate to the dollar insofar as their exports are thus more affordable in the importing nations--of which the US is the most significant.

As long as the price of oil does not climb too high, this might provide the underpinnings of a recovery. One set of nations scrambling for dollars under this "balkanized" scheme are the Gulf nations and most of the OPEC nations. Juan Forero of the Washington Post reports on some of the speculations regarding the effects on the Venezuelan economy. Ariana Eunjung Cha, also of the Post, reported on Saturday on US investors selling off their assets in the stock markets of the emerging economies is helping to push their currencies to new lows. It is bankrupting companies and leaving infrastructure projects unfinished throughout the emerging world. This includes Russia, Mexico, and I deduce Oman--three of the largest oil exporters which are not members of OPEC.

In terms of the rest of the G7, I imagine (as a non monetary economist) there would be less purpose to a strong dollar, especially given that the American share of consumption must fall until new credit can be credibly extended to the American consumer. Exports to the rest of the G7 could lead the way.

China, evidently, is not being affected by the currency swaps given its tremendous reserve of dollar holdings. Corporations do not need to turn to the international markets for dollars, but can simply turn to the Bank of China. However, Ariana Eunjung Cha reported today that China's growth in the third quarter, though high at 9%, was sharply below analyst expectations.

"Economists had expected China's exports to be affected by the slowdown in the United States and in Europe. But the extent to which other parts of its economy had deteriorated -- such as industrial production, government revenue and imports -- was a shock. This is the first time in more than five years that the National Statistics Bureau has recorded a single-digit GDP growth rate."

Analysts are widely quoted as noting that GDP growth must stay at at least 8%, as below that it no longer keeps pace with the growth in the size of the labor market--the number of workers.

Keith Bradsher at the New York Times reports that Beijing is moving quickly to stimulate the economy in response.

"As part of the new policy, the State Council announced that it would increase export tax rebates for everything from labor-intensive products like garments and textile to high-value products like mechanical and electrical products. Banks will be encouraged to lend more money to small and medium-size enterprises and support programs will be drafted to help farmers, the government said."

I wonder how welcome such rebates would be in Washington. Jim Yardley, also at the Times, reported yesterday that Beijing had decided to move forward with land reforms, which allow farmers to sell or lease the land to which they have "use rights."This at a time when high food prices have made farming a much more remunerative occupation in China than it has been in the past. Real Time Economics has a blurb from Hong Liang, an analyst at Goldman Sachs, which indicates that most of the decrease in growth actually comes from declines in domestic demand, as "the nominal trade surplus grew by 13.8% [year-to-year] in [the third quarter] versus -12.1% [year-to-year] in [the second quarter]." I find this hard to square with evidence such as the Baltic Dry Index--and suspect that the increase might have come as a result of the reduction in the cost of oil imports, but it's something to consider. Either way, just now it looks as if China is still mostly depending on exports for economic growth, mainly.

If all the above is a fair statement of the facts, I am led to ask the following questions:

A) If, hypothetically-speaking, China continues to buy dollars indefinitely in order to subsidize its exports, is it likely to alienate the rest of the (non-oil producing) export nation bloc? Presumably oil producers will benefit from a high-dollar currency exchange, even as the price of oil drops. Countries without oil reserves forced to purchase dollars in order to service debts might find this onerous, even if ultimately it would be likely to make their products even more competitive, on a currency-exchange basis, than China's. Would even such additional competitiveness serve to separate China's interests from most of the exporting economies ... except perhaps from Japan's?

B) If OPEC cuts its production, as most expect it to, what happens to the viability of continuing to rely on exports to the US? That is, if the price of oil goes up in response to OPEC cuts--and it did today and Friday, but that really means nothing even short term--at what price will the price of oil make exports to the US from the emerging markets non-viable? Muriel Boselli at Reuters reports that IEA Executive Director Nobuo Tanaka said at a news conference that "The IEA is concerned (an OPEC cut) might have a negative impact on the global economic recovery." Platts also reports that on October 17, UK Prime Minister Gordon Brown said, "I think it is absolutely scandalous that OPEC is thinking of meeting in the next few days to cut oil production so they can push up the price of oil again and we will certainly try and prevent this happening." On the other hand, the IEA is a political child of the consuming nations--which the UK is slated to become--and Nesa Subrahmaniyan at Bloomberg reports that London-based Goldman Sachs analysts said that the first cuts OPEC makes to production in a recessionary environment have historically not supported a price recovery, but only subsequent cuts did so.

The analysts also gave the following helpful estimations:Iran, Nigeria, Venezuela and Indonesia need a crude price of more than $80 a barrel to balance their national budgets, and the United Arab Emirates needs $30, while Saudi Arabia, the biggest OPEC member, requires $54 a barrel, the analysts said.

Aresu Eqbali at Platts reports that Iran's OPEC governor Mohammad Ali Khatibi thinks the organization will need to cut supply by 3 mb/d to see the price of oil recover. It is my sense that supply is still so tight that Iran, Nigeria, and Venezuela, were they to coordinate a cut independently of Riyhad, would be able to drive up the price. Barclays Capital, on the other hand, thinks that a 1 mb cut is unlikely to be made effective, given the imminent addition of 3 mb to the market.

I suspect that $54/b would sustain an export-based growth/recovery of the international economy, but am not sure about $80/b. The general consensus seems to be that supply capacity additions at the margin would require at least $70-80/b, in which case there may be no price at which the international economy can continue to grow on the back of international trade (where ships and planes run on oil anyways). So, to sum, at $54/b, international trade could underpin a recovery via exports, but would the balance of that growth go to nations other than China, given that their currencies will be much worse off vis-a-vis the dollar than the yuan? (The Bank of China has been keeping down the value of the yuan since June.) If that were to prove the case, would it make sense for China to stimulate demand for oil internally--putting it more at odds with the rest of the world?

C) If the dollar falls in value relative to the Euro, will Europe be the destination of choice for exporting countries, given the relative return? Is that possible given consumer behavior in Europe? If the US stops importing a considerable share of the world's exports, is it likely that debt will be denominated in Euros or Sterling? Will the Eurozone be the only area able to bear the cost of transportation inherent in oil-based trade?

D) We might expect the price of oil to rise as it should remain a decent hedge. As the price of oil relative to the Euro falls demand for oil might pick up in Europe--where a small percentage increase means a large absolute increase in oil demand. Would there be more enthusiasm for Euro-denominated oil contracts on the part of producers, even though Europe has been fairly serious about reducing consumption?

2. Stephanie McCrummen at the Washington Post reports that fighting between government forces and a renegade general in Eastern Congo has erupted, creating over 100,000 refugees.

3. Sahar Ahmed at Reuters reports that Pakistan was unable to secure a loan from Beijing and now is looking to the IMF in a meeting at Dubai slated for tomorrow.

4. Thom Shanker at the New York Times writes that the Chairman of the Joint Chiefs of Staff, Adm. Mike Mullen, is visiting Serbia. This is the first visit of a Chairman of the Joint Chiefs of Staff to Serbia.