Daily Sources 12/29

1. Griff Witte at the Washington Post reports that Isreal continued bombing--for the third day--the Gaza strip on Monday as Hamas fired another round of missiles into neighboring Israeli villages. On NBC's "Meet the Press," Israeli Foreign Minister Tzipi Livni said that Tel Eviv did not intend to reoccupy the strip. Hamas leader Ismail Haniyeh vowed to never retreat in televised comments Sunday.

"The UN Security Council expressed 'serious concern' Sunday over the situation in Gaza and called for 'an immediate halt to all violence." Pope Benedict XVI also urged an end to the violence, saying 'the native land of Jesus cannot continue to be witness to so much bloodshed, repeating itself without end.'"

Israeli officials indicated that they expect military operations to last weeks at the very least. Iran's Supreme Leader, Ayatollah Ali Khamenei, on Sunday called for all Muslims to fight on behalf of the Gazans, saying that anyone who dies in this effort would be received in heaven as a martyr. More credibly, however, as Juan Cole reports, in the eyes of the Shi'a Muslim community, Grand Ayatollah Ali Sistani of Narjaf, Iraq, called on Muslims to support the Gazans with more than lip service. PressTV, an Iranian government program, translated Sistani's statement as follows:

"Condemning what is going on in Gaza and supporting our brothers only with words is meaningless, considering the big tragedy they are facing ... Arab and Islamic nations need to take a decisive stance, now more than ever, to end these ongoing aggressions and to break the unjust siege imposed on the brave people of Gaza ... ."

In the meantime, hospitals and other fundamental services and commodities--such as food--in Gaza are in short supply or being overwhelmed, given that it has been subject to an Israeli blockade for some time now. Sudarsan Raghavan and Islam Abdel Kareem at the Washington Post report that humanitarian aid groups called on Israel to allow supplies through the borders Sunday, saying that medical and food supplies are dangerously short. Both Post articles give good summaries of the situation.

2. David Rosenberg at Bloomberg reports that the Bank of Isreal reduced its benchmark interest rate by 0.75% (or 75 basis points) to 1.75%.

"The rate reduction 'will help strengthen the economy’s ability to cope with the implications of the global economic crisis,' the bank said in its statement. It added that the Gaza fighting increases 'geopolitical uncertainty' in Israel and has the potential 'to impact negatively' on the economy."

3. Robert Birsel at Reuters reports that the chairman of Pakistan's joint chiefs of staff committee, General Tariq Majid, told the visiting Chinese Vice Foreign Minister He Yafei today that New Delhi and Islamabad needed to institute reciprocal de-escalation measures and to avoid "belligerent posturing." Military officials from the two countries held an "unscheduled hotline call" this weekend as the Chinese minister arrived in Pakistan. In a related story, Rama Lakshmi at the Washington Post reports that no clear winner emerged from the election results for Jammu-Kashmir released on Sunday. The National Conference and Congress parties were the largest winners, taking 45 out of 87 constituencies combined. Indian Prime Minister Manmohan Singh, of the ruling Congress Party, welcomed the results, saying,

"I think the large turnout in Kashmir is a vote for democracy and national integration. We are all happy at the turnout, and who wins or loses is a secondary issue."

4. Jeffrey Gettleman at the New York Times reports that the President of Somalia resigned today, blaming the international community for not doing enough to shore up his government.

"Under Somalia’s transitional charter, the speaker of the Parliament will take over the presidency for one month until the Parliament elects a new president. Several moderate Islamists could be candidates.

Over the weekend, fighting broke out between moderate and radical factions in the first obvious sign of tensions within Somalia’s Islamist community.

On Sunday, a powerful, newly militarized Islamist group declared a “holy war” against the more militant Islamist factions, and it seems to have the muscle to back up its threats. The group, the Ahlu-Sunna Wal-Jama, killed more than 10 fighters from a rival Islamist faction that was known as one of Somalia’s toughest in fighting over the weekend."

Worth reading in full.

5. Brad Setser at Follow the Money has a post entitled "the collapse of financial globalization" today which shows that private inflows and outflows of capital to and from the United States have collapsed to near zero in the last few months. But, Setser shows that private inflows and outflows were closely tied to each other, and did not in fact represent an increase in net financing--of US debt. Evidently:

"I think we now more or less know that the strong increase in gross capital inflows and outflows after 2004 (gross inflows and outflows basically doubled from late 2004 to mid 2007) was tied to the expansion of the shadow banking system."

Which means that central banks have been for the past five years responsible for financing the bulk of the US deficit. Outside of Japan, the current account surplus nations were building up their reserves and sovereign wealth funds. Well worth reading in full.

6. David Oakley at the Financial Times reports that emerging markets may find it difficult to find financing as the developed economies are expected to offer as much as $3 trillion in sovereign debt in 2009.

"Mr. [Nick] Chamie[, head of emerging markets research at RBC Capital Markets,] said: 'Governments or companies that are highly rated will still be able to attract buyers, but the very large amount of issuance almost certainly means they will have to pay higher interest rates to get those investors.'"

7. Denis Maternovsky at Bloomberg reports that Bank Rossi has allowed the ruble to depreciate 1.7% against a currency basket of dollars and euros. This is the twelfth time in seven weeks that Bank Rossi has not acted to stop the ruble's fall against the basket peg, which is 55% in dollars and 45% in euros.

"Bank Rossii urged the country’s banks today to avoid buying foreign currencies in the first quarter of 2009 or risk losing access to central bank loans, Chairman Sergey Ignatiev said in a letter to banks that was posted on the central bank’s Web site today. Russian banks shouldn’t increase their holdings of 'foreign currency assets' from the average level between Aug. 1 and Oct. 25, Ignatiev said."

8. Jeffrey Ball at the blog Environmental Capital reports that Russia asked for the following, outside of permanent observer status, at OPEC's meeting in Oran, Algeria, on December 17:

a) Crude benchmarks outside of Brent and WTI,
b) A discussion of whether it would be advantageous to discard oil pricing in dollars in favor of pricing it to a basket of currencies, and
c) New futures trading markets outside of Europe and the US.

Without going too deeply into it, these are basically just whitewash remarks. There have been plenty efforts to establish other crude benchmarks, mostly which have failed because of lack of volume. (You need investors outside of commercial entities to get involved to make the futures market workable.) There are other futures trading markets outside of Europe and the US which trade crude futures, but they are unpopular for reasons of the opacity surrounding the underlying crude future and other issues of risk. Pricing oil in a basket of currencies would only serve to make price discovery that much more complicated a business--and the currency markets already price in the cost of oil.

However, the report may be evidence that market data is a primary objective of Russia at OPEC. Moscow has indicated it will wait to see whether the cartel members make good on their cuts before instituting any of their own.

9. Henry Meyer at Bloomberg reports that Russia and the Ukraine failed to reach an agreement in their natural gas dispute today, with two days left before the threatened cut off of supply by Moscow--supply to pipelines that carry a considerable portion of Europe's natural gas requirement. The Ukraine owes Moscow $1.662 billion for supplies delivered in November and December, and $450 million in fines for late payments.

"'It isn’t clear who is in charge and who is the right counterpart for Russia to talk to,' said Masha Lipman, an analyst at the Carnegie Moscow Center research group in Moscow. 'Ukraine is in political turmoil and in the midst of a serious economic crisis.'"

Still, Putin told reporters today in Moscow that the Ukraine does not want to pay for the gas. Meanwhile, as Stephen Bierman and Torrey Clark at Bloomberg report, Gazprom is assuring its European customers that it will "completely fulfill its obligations."

10. Wang Ying at Bloomberg reports that Zhang Guobao, the head of China's National Energy Administration wrote in the People's Daily today that it will encourage companies to fill their available oil storage facilities in the low price environment. "Companies will be encouraged to utilize their spare oil-storage capacity while state and commercial reserves of other 'strategic resources' will be set up ...."

11. Charles Lee at Platts reports that the South Korean Energy Ministry announced that the country will spend 6.9 trillion won (~$5.4 billion) over the next 14 years to expand its natural gas storage and distribution infrastructure. Under the ministry's plan, South Korea will transform the Donghae offshore gas field into a storage facility with capacity of 1.7 million metric tonnes of LNG by 2017. Work on the transformation should begin by 2014. The Donghae terminal would increase the country's storage capacity to 24.3% of expected annual demand in 2017.

"In September, state-run Korea Gas Corp. signed a $90 billion deal with Russia's gas giant Gazprom to import 10 Bcm of natural gas annually from Russia's Far East for 30 years beginning 2015 via a pipeline.

The undersea pipeline would reach the Samcheok terminal and the offshore Donghae terminal, the ministry said."

The plan includes increasing the total length of South Korea's natural gas pipelines from 2,739 km to 3,893 km by 2013, which should make natural gas available to 78% of all South Koreans as the infrastructure will be extended into rural areas.

12. Mriganka Jaipuriyar at Platts reports that oil product demand in South Korea was down 12% year over year in November.

"Demand for fuel oil saw the sharpest year on year slump in November, falling 30.4% from 7.1 million barrels to 4.94 million barrels. Gasoil demand fell 11.3% to 11.57 million barrels; naphtha was down 13% to 23.28 million barrels; and LPG was down 10.6% to 7.69 million barrels, KNOC's data showed."

Refining output, meanwhile, was down 6.3%. South Korea imports much more crude than it uses, exporting surplus products refined into the region.

13. Matthew Walter and Daniel Cancel at Bloomberg report that Venezuela's central bank estimates the economy grew by 4.9% in 2008, the slowest rate seen in five years. Oil accounted for 93% of the country's exports according to the bank.

14. Stephan Kueffner at Bloomberg reports that Ecuador's Social Security Institute will purchase another $500 million in government bonds. Ecuador stopped making payments on its sovereign debt on December 12. The Social Security Institute also purchased $700 million in government bonds on December 24. The Social Security Institute is barred by law from investing more than 50% of its money in the public sector and has about $1.2 billion in cash. The government plans to sell an additional $1.5 billion in bonds on the domestic market. (see Daily Sources 12/16 #3 for links on first reporting on the default, social security purchases, and potential de-dollarization of Ecuador as a result.)

15. Seth Mydans and Mark McDonald at the New York Times reports that protests have resumed in Thailand. This time it is the supporters of the party recently ousted from power--former Prime Minster Thaksin Shinawatra's organization. Protesters have surrounded the Parliament, forcing a delay in the legislature's opening under a new government. The pro-Thaksin "red shirts" are calling for the dissolution of the new government and new elections.

16. Ralph Atkins of the Financial Times reports on the paper's survey which showed that a large majority of Europeans, and 48% of Americans, polled believe that the euro will overtake the dollar in "global importance" by 2014. What this means is anyone's guess, I suppose.

17. William Tucker has an op ed at the Wall Street Journal which actually calls the next bubble--alternative energy. While I think his prognostication may well be a tad early, I think his argument for nuclear power is basically the right one.

18. Glenn Kessler on Saturday had a very interesting story in the Washington Post about how in October the International Accounting Standards Board changed its accounting rules to allow European financial institutions to rearrange their books, and fooling the markets into thinking their bottom lines were better than they are. Well worth reading in full, though I still have no idea why anyone would put any faith into any accounting corporation's estimation outside of the absence of any other alternative, at this stage. (h/t naked capitalism)

Daily Sources 12/5

1. Michelle Ho at Platts reports that Zhang Xiaoqiang, deputy director of the National Development and Reform Commision, said at the China-US Strategic Economic Dialogue in Beijing on Thursday that January 1st would be a good time to introduce a consumption tax on gasoline and diesel. The measure would cut the benchmark prices for domestic petroleum products by about 30% and add a 30%-50% consumption tax.

"Many analysts say the recent decline in crude oil prices presents an opportunity for Beijing to levy the tax as a step toward letting the market
eventually set prices, as consumers will be more amenable to change when oil prices are low."

Fair enough, but another likely consequence would be to put an upper band on consumption generally, as the tax would prevent lower oil products costs from giving the economy a de facto stimulus. John Kemp at Reuters argues--in an analysis worth reading in full--that the move would likely drive Riyadh to try and stabilize prices at a lower range than some in OPEC would like. He suggests that that number is $75/b, the number mooted by King Abdullah last week in the Kuwaiti press. I think, however, that most members of OPEC would be very comfortable with $75/b. Riyadh might be more interested in destroying the economics of alternatives, at this stage, in effect taking out the competition--and $50/b may be what their budget requires in 2009. In a related story, Reuters reports that Riyadh has lifted the prices of its crudes to Asian buyers. The Strategic Economic Dialogue ended today and it looks as if little was decided. Li Yanping and Rebecca Christie at Bloomberg report that the US and China pledged $20 billion to fund trade via import-export banks and to deepen financial ties. The US encouraged China to have its sovereign wealth funds invest here.

2. Justin Stares at Lloyd's List reports that there is growing frustration in the shipping industry with the rising level of contract defaults. Traders are defaulting on futures in which they bet on, instead of hedged against, higher shipping rates. They are claiming that the financial crisis is force majeure. Worth reading in full.

3. Douglas R. Burgess Jr. has an op ed at the New York Times which suggests that, for the purpose of clarifying jurisdiction and rules of engagement over and on pirates, the international community should explicitly make piracy by definition terrorism. He suggests this could be done by giving the International Criminal Court jurisdiction over piracy and terrorism cases. This would also allow states that do not want to burden their domestic courts with international piracy cases to deliver suspects over to the Hague. So far, an interesting proposition, but Burgess also writes

"Recent evidence also indicates that the Somali pirates hand over a part of their millions in ransom money to Al Shabaab, the Somali rebel group that has been linked to Al Qaeda."

Perhaps there is some evidence of this. But there is much more evidence that the Islamic groups in Somalia will put an end to the practice of piracy, which, I suppose, may mean that they advocate one form of terrorism, but not another, though I am even leery of concluding that.

When the Islamic Union of Courts (IUC) grabbed control of Somalia in 2005, they eradicated the practice altogether. The fact that a political movement would include in its name the notion of justice, as in justice meted out by jurists in courts, is an important clue to what their appeal in Somalia--and, in fact, the world--really is. Al-Shabaab translates as "the Youth", but their political platform is not all that different from the IUC insofar as the issue of law and order is concerned, even though they are locked in battle for supremacy in Somalia. For example, on November 21st, al-Shabaab stormed the port of Haradheere in pursuit of the pirates which had hijacked the Sirius Star ... they regarded the seizure especially anathema given that the ships owners were co-religionists. (Daily Sources 11/21 #5)

4. Nidaa Bakhsh at Bloomberg reports that the Paris-based International Energy Agency cut its demand forecast for 2009 again by 170 kb/d to 86.37 mb/d. It also cut its forecast for 2008 demand by another 40 kb/d.

5. Yaakov Katz at the Jerusalem Post reports that the Israeli Defense Force is drawing up options for an attack on Iranian nuclear facilities without US cooperation. A somewhat alarmist title. It makes sense for any armed forces to plan for a wide variety of potential actions, the great majority of which never happen. Still, the drums are still beating for war on Iran, if somewhat more softly these days. I still don't think it's going to happen, nor do I think that Israel is going to attack Iran on their own. Certainly not while the US is still in the Iraqi theater.

6. Clifford J. Levy at the New York Times reports that Aleksy II, the Patriarch of the Russian Orthodox Church, died today in Moscow.

7. Emma O’Brien at Bloomberg reports that Bank Rossi weakened its defense of the ruble enough so that it fell 1% against the bank's target basket of dollars and euros. The bank has widened the trading band by 1% four times since November 11, but it is not clear from the article whether the new relaxation is official policy.

"Bank Rossii sold $2 billion to support the ruble yesterday, taking sales this week to as much as $11.5 billion, according to estimates by Moscow-based MDM Bank. That compares with about $4.4 billion sold last week and $7 billion the week before, MDM said."

8. Marcelo Teixeira at Reuters reports that Petrobras Chief Executive Jose Sergio Gabrielli dismissed concerns that the development of sub-salt reserves were uneconomic with oil below $50/b. The company expects production costs to fall along with everything else in the economic downturn.

9. Tara Patel at Bloomberg reports that a strike by workers at the Fos and Lavera oil terminals at the port of Marseilles has delayed the unloading of cargo and left 35 oil tankers idle off the southern coast of France.

"Vessels stranded by the labor disruption at the Marseille oil terminals include six oil tankers and 16 vessels carrying refined products, [port spokeswoman Claire] Battedou said. The terminals make up Europe’s second-largest oil-import hub."

10. Edward Cody at the New York Times reports that France announced a $33 billion economic stimulus plan yesterday "including cash payments to the poor, a bigger rebate on new-car purchases and a speedup in high-cost public works projects."

11. Helene Cooper reports that foreign policy aides to President-elect Obama is considering making a major foreign-policy speech in a Muslim capital within the first 100 days of taking office. She speculates it would be Cairo.

12. Henry Kissinger has an opinion piece in the Washington Post praising President-elect Obama's foreign policy cabinet selections which provides some helpful advice. "[T]he new national security team encourages the hope that America is moving beyond its divisions to its opportunities." Worth reading in full.

13. Kelly Evans at Real Time Economics reports that the Labor Department data released today shows that unemployment rose to 6.7% in November. The US lost 533,000 jobs last month. Evans also points to the U-6, which adds to the standard unemployment figure "all marginally attached workers, plus total employed part time for economic reasons… plus all marginally attached workers." That number is 12.5%, up from 11.8% in October and 8.4% in November 2007.

14. In even more frustrating news, Science Daily reports that young people between the ages of 11 and 18 just think cars are cool and really just want to drive them, as opposed to public transit, etc.