Daily Sources 7/27

1. US-CHINA STRATEGIC AND ECONOMIC DIALOGUE KICKS OFF TODAY

Secretary of State Hillary Clinton and Treasury Secretary Timothy Geithner have an op ed in today's Wall Street Journal to outline the aims of the US-China Strategic and Economic Dialogue which kicks off today. Key excerpt:

"To keep up with these changes that affect our citizens and our planet, we need to update our official ties with Beijing. During their first meeting in April, President Barack Obama and President Hu Jintao announced a new dialogue as part of the administration’s efforts to build a positive, cooperative and comprehensive relationship with Beijing. So this week we will meet together in Washington with two of the highest-ranking officials in the Chinese government, Vice Premier Wang Qishan and State Councilor Dai Bingguo, to develop a new framework for US-China relations. Many of our cabinet colleagues will join us in this 'Strategic and Economic Dialogue,' along with an equally large number of the most senior leaders of the Chinese government. Why are we doing this with China, and what does it mean for Americans?

Simply put, few global problems can be solved by the US or China alone. And few can be solved without the US and China together. The strength of the global economy, the health of the global environment, the stability of fragile states and the solution to nonproliferation challenges turn in large measure on cooperation between the US and China. While our two-day dialogue will break new ground in combining discussions of both economic and foreign policies, we will be building on the efforts of the past seven US administrations and on the existing tapestry of government-to-government exchanges and cooperation in several dozen different areas.

At the top of the list will be assuring recovery from the most serious global economic crisis in generations and assuring balanced and sustained global growth once recovery has taken hold. When the current crisis struck, the US and China acted quickly and aggressively to support economic activity and to create and save jobs. The success of the world’s major economies in blunting the force of the global recession and setting the stage for recovery is due in substantial measure to the bold steps our two nations have taken.

As we move toward recovery, we must take additional steps to lay the foundation for balanced and sustainable growth in the years to come. That will involve Americans rebuilding our savings, strengthening our financial system and investing in energy, education and health care to make our nation more productive and prosperous. For China it involves continuing financial sector reform and development. It also involves spurring domestic demand growth and making the Chinese economy less reliant on exports. Raising personal incomes and strengthening the social safety net to address the reasons why Chinese feel compelled to save so much would provide a powerful boost to Chinese domestic demand and global growth."

2. CHINA TO LAUNCH ARABIC-LANGUAGE TV STATION IN MIDDLE EAST AND AFRICA

The AFP reported on Saturday that China Central Television launched an Arabic-language channel which will air in the Middle East and Africa.

"Beijing is carrying out a multibillion-dollar effort to raise the profile of its state media abroad by expanding CCTV, the Communist Party newspaper People's Daily and the official Xinhua News Agency.

The effort has a budget of 45 billion yuan ($6.6 billion), according to a report last month by the Hong Kong newspaper South China Morning Post.

The Arabic channel will carry news, feature stories, entertainment and education programs and will gradually expand its offerings, CCTV said. The network already broadcasts in English, French and Spanish as well as in Mandarin."

It also has plans for a Russian language channel. (h/t Sky Canaves at China Journal.)

3. FIRST PUBLIC PRESIDENT-TO-PRESIDENT EXCHANGE BETWEEN BEIJING AND TAIPEI IN 60 YEARS


Weiyi Lim at Bloomberg reports that China’s President Hu Jintao sent a message congratulating Taiwanese President Ma Ying-jeou on his election to the head of the Kuomintang Party. It was the first public exchange between the leaders of mainland China and Taiwan in 60 years.

4. PETROCHINA BUYS 70.13% OF SINGAPORE PETROLEUM COMPANY

Norazlina Juma'at at Platts reports that PetroChina International on Friday announced it had increased its holdings of Singapore Petroleum Company to approximately 70.13% of the shares outstanding.

"On June 21 PetroChina had completed a deal to buy 45.51% in SPC from Singapore's Keppel Corp. for just over $1 billion and had launched an offer for all remaining shares."

SPC operates one of the three major refining projects in Singapore, which is a major trading and shipping hub for petroleum products in the Asia Pacific. The city state's total refining capacity is about 1.3 mb/d. SPC owns 50% of Singapore Refining Company Private Limited which has a 50% stake in the 273.6 kb/d refinery joint venture with Chevron on Jurong Island.

5. INDIA LAUNCHES FIRST INDIGENOUS NUCLEAR POWER SUBMARINE FOR SEA TEST

Voice of America reports that India has launched its first indigenously built nuclear-powered submarine, the Arihant or "Destroyer of Enemies," for sea trials in the Bay of Bengal. The Arihant was built with the assistance of Russia, has a crew of about 100 men, and will be armed with ballistic missiles.

"India already has fighter aircraft and missiles capable of carrying nuclear warheads. If all goes well with the trials, the Arihant will give India an underwater ballistic missile capability after the tests are conducted.

After launching the submarine, Prime Minister Singh said 'we do not have any aggressive designs nor do we seek to threaten anyone.' But he said that the sea is increasingly becoming relevant in the context of India's security interests, making it necessary to 're-adjust our military preparedness to this changing environment.'"

Galrahn at Information Dissemination comments:

"This beings India closer to becoming the first nation in decades to develop a nuclear triad, and the first nation to do so in the Indian Ocean area. While this development does not shift any balance of power in the region, it certainly gives both Pakistan and China something to think about. There is something else though, it will also give India a case for becoming a permanent member of the UN Security Council, a discussion the current permanent five members are not looking forward to."

6. RUSSIAN ORTHODOX CHURCH PATRIARCH IN KIEV TO TRY AND MEND RIFT WITH UKRAINIAN METROPOLITAN

Maria Danilova at the Associated Press reports that the Russian Orthodox Church Patriarch Kirill led a prayer service in Kiev today in part of a 10-day visit intended to mend the rift between the Russian Orthodox Church and a breakaway Ukrainian Orthodox church.

"Currently, Ukraine's main Orthodox church answers to Kirill, but a breakaway church that has proclaimed itself independent from Moscow in the 1990's has been gaining popularity and political support in this predominantly Orthodox country of 46 million.

[Ukrainian President Viktor] Yushchenko, who has sought to break free from Russia's centuries-old political dominance and integrate with the West, has appealed to the spiritual leader of the world's 250 million Orthodox believers, Patriarch Bartholomew I of Constantinople, to recognize a local Ukrainian church that would be independent of the powerful Moscow patriarchate.

Bartholomew, who visited Kiev last summer, has not given a clear response.

Kirill is to meet with Yushchenko later in the day. He told reporters after the prayers that he had no immediate plans to meet with the representatives of the breakaway church, the Ukrainian Orthodox Church Kiev Patriarchate."

7. TURKMENISTAN SAYS IT WILL HONOR DECISION OF INTERNATIONAL ARBITRATION COURT'S RULING ON CASPIAN BORDER WITH AZERBAIJAN

John Roberts at Platts reports that Turkmen President Gurbanguly Berdimukhammedov on Friday officially asked foreign minister Rashid Meredov to file a request before an international court of arbitration asking it to settle a long-standing dispute between Ashgabat and Baku on their Caspian borders.

"'The issue of demarcation of the sea bed and the sea's mineral resources between Turkmenistan and Azerbaijan, as well as the definition of median line there, remain unresolved for a long time due to Azerbaijan's specific position,' Berdimukhammedov [reportedly said on Saturday].

'Turkmenistan will be ready to accept any ruling to be issued by the International Court of Arbitration on this issue,' he said.

In its first response to the Berdymukhammedov declaration, Azerbaijan made no direct reference to arbitration, but the statement from deputy foreign minister Xalaf Xalafov to Azerbaijan's ANS television Saturday that Baku would defend its position could be interpreted as an indication that it was prepared to submit its case to arbitration."

Any planned natural gas pipeline that would traverse the Caspian would theoretically at least require the demarcation and sea bed issues resolved previous to construction. One potential pipeline to be routed through the Caspian is Nabucco. Worth reading in full.

8. 80-90% VOTER TURNOUT REPORTED IN KURDISH REGIONAL GOVERNMENT ELECTIONS THIS WKEND

Ben Lando, Serage Malik, Rawsam Latif and Istifan Braymok at Iraq Oil Report that turnout in the Kurdish Regional Government's elections this weekend was at, according to early estimates, between 80 and 90% of eligible voters.

"To be sure, there have been complaints, during the campaign and at the polls, and it’s up to the Independent High Electoral Commission in the coming days to determine how serious they are. Preliminary results are expected by Sunday, and final results certified by the IHEC within five days. But in a region specifically and in a country generally where the challenger has seen bullets and prison instead of campaign flyers, the general sentiment is forward looking."

9. IRANIAN PARLIAMENTARIANS CRITICIZE PRESIDENT'S RELUCTANCE TO IMMEDIATELY HONOR LOTR'S INSTRUCTIONS, SOME CALL FOR VOTE OF CONFIDENCE

Press TV reports that more than 200 members of Iran's parliament, the Majlis, have called upon President Ahmadinejad to "fully and promptly comply with the Leader's instructions."

"[T]he president's reluctance to reverse the decision [to appoint his son in law first Vice President] was called into question even by his own ministers. As a sign of protest, three of the ministers--Intelligence Minister Gholam-Hossein Mohseni-Ejei, Culture and Islamic Guidance Minister Mohammad-Hassan Saffar-Harandi and Labor Minister Mohammad Jahromi--walked out of a Cabinet meeting on Thursday.

Although news broke out that the Ahmadinejad administration had sacked the ministers, the government moved to clarify the issue after a senior member of parliament suggested that the administration had lost its legitimacy with the measure as it had removed too many Cabinet members during the first Ahmadinejad tenure.

Only the intelligence minister has been removed, said an official working for the presidential office.

The dismissal has intensified pressures on Ahmadinejad by parliament members who contend that the ninth government is obliged to seek a new vote of confidence in its remaining 7 days in office.

According to parliament Vice Speaker Mohammad-Reza Bahonar, all Cabinet sessions of the current government are 'illegal' until the official second-term inauguration of the president."

Article 136 of the Constitution requires the President to call for a vote of confidence at the Majlis is half or more of his cabinet is replaced.

10. KUWAIT, QATAR, BAHRAIN LINK ELECTRICITY GRIDS

Miriam Amie at Platts writes that KUNA reported today that Sunday Kuwait, Qatar, and Bahrain successfully linked their electrical power grid networks.

"Over a decade ago, the six GCC states agreed at a summit to set up the power grid to cope with the regions rapidly increasing electricity consumption. Draws on electrical power stations throughout the GCC increase dramatically during peak usage times in summer between April and September.

The estimated $1.4 billion electrical network is being initiated one year later than previously expected.

Earlier this month, five of the GCC states, except Oman, signed a power trading agreement setting terms between transmission system operators, and power procurement companies for the purpose of exchanging or trading electrical power."

11. DECOUPLING WAS ALWAYS A MYTH, ARGUES WÄLTI

Sébastien Wälti at VoxEU argues that the notion that the developing economies were decoupling from the developed economies was always a myth, and that the process of globalization leads, intuitively even, to greater business cycle synchronization.

"Figure 2 shows that the degree of business cycle synchronicity between emerging markets and advanced economies has not decreased in recent years. The evidence on individual emerging markets shows that there is no country (except for Peru) which reports a general decline in its degree of synchronicity with all four groups of advanced economies."

12. IEA OIL DEMAND FORECAST AHISTORICAL RELATIONSHIP TO GDP PREDICTION

Mark Shenk at Bloomberg notes that the most recent IEA forecast of a 1.7% increase in oil consumption in 2010 does not fit the historical relationship between GDP growth as forecast by the IMF and oil consumption.

"[T]he IEA’s projections for oil demand growth will trail the World Bank’s forecast for GDP growth by 0.8 percentage points, the least in 14 years. Since 1997, oil use has followed GDP by an average of more than 2 percentage points and in 2006 the spread widened to 3.9 percentage points."

"'There’s been a remarkable correlation between GDP and oil demand growth,' said Edward Morse, head of economic research at LCM Commodities LLC in New York. 'The IEA numbers are implausible.'"

(h/t Joshua Keating at the FP Morning Brief.)

13. NEW SINGLE FAMILY HOME SALES DOWN 21.3% (±11.4%) FROM JUNE 2008

Barry Ritholtz at the Big Picture reports that US Census Bureau and Department of Housing and Urban Development announced today that sales of new one-family homes were up 11.0% (±13.2%) in June from May, which is statistically insignificant. They are down 21.3% (±11.4%) from June 2008, which is statistically significant.

14. 80% OF DERIVATIVE ASSETS AND LIABILITIES HELD BY 5 FIRMS (ENERGY FIRMS USING DERIVATIVES MOSTLY FOR HEDGING) PER FITCH REPORT

In a story picked up on in the econoblogosphere over the weekend, David M Katz at CFO.com wrote on July 24 that a Fitch Ratings report released a week prior to his story indicated that about 80% of derivative assets and liabilities are held by five firms--JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley.

"Those five banks also account for more than 96% of the companies' exposure to credit derivatives.

About 52% of the companies reviewed disclosed there were credit-risk-related contingent features in their derivative positions. Such features require a company to post collateral or settle outstanding derivative liabilities if there's a downgrade of the company's credit rating.

The Fitch analysts also found that just 22 companies disclosed the use of equity derivatives. Just six nonfinancial firms--IBM, General Motors, Verizon, Comcast, Textron, and PG&E--reported exposure to share-based derivatives.

For the report, the rating agency reviewed first-quarter 2009 filings of the companies, which come from a range of industries and represent almost $6.4 trillion in aggregate outstanding debt. The companies also recorded a total notional amount of derivative positions of more than $296 trillion.

Unlike the financial firms, which both use derivatives and issue them for profit, nonfinancial companies seem mostly to use derivatives just to hedge specific risks, according to Fitch. While 'derivatives trading by utilities and energy companies appear to be very limited,' for instance, 'most of the companies reviewed in both industries report the use of derivatives for hedging commodity risks,' the report found."

It is rather hard to disaggregate hedging from speculative use of derivatives by major energy firms, I would be rather interested to see the methodology for that in this report.

Daily Sources 1/19

1. David Jolly at the New York Times reports that the Brown Administration announced a new bailout for British banks today. The new plan would increase controls over lenders, offer banks insurance on troubled assets as well as other steps to restore the offering of credit. The government is also revising its assistance to the Royal Bank of Scotland, now taking 70% of the company's shares, up from 58%.

"The British Treasury said the latest steps would cost taxpayers another £100 billion, or $147 billion, on top of the £37 billion plan announced in October and a £20 billion stimulus plan announced in November."

Pan Pylas at the Associated Press reports that European stock markets have responded to the news by falling and with financial stocks in "free fall."

2. Eurointelligence reports that the Der Spiegel ran the story this morning that German banks have about €300 billion ($398.4 billion) in toxic assets, which is much worse than previously estimated. The FD Deutschland has the story that the EU is pushing ahead with regulation which would force all credit default swaps to be traded through a central clearing system.

3. Platts reports that the German Parliament is set to have a final vote on legislation proposed by the Merkel Administration which would ban the importation of biofuels derived from soybeans or palm oil that benefit from foreign tax relief. Even though this is consistent with WTO regulations, I believe you will see more aggressive attempts to prevent dumping generally.

4. Chris Bryant at the Financial Times reports that the conservative coalition of the Christian Democratic Union (Chancellor Angela Merkel's party) and the Free Democratic party won big in the election in the western German state of Hesse. It is interesting that the German voter would reward the party of free markets over the Social Democratic party, given the current situation. Apparently the election being regarded as a bellwether of German politics going forward in the European press generally.

5. Edward Hugh at Fistful of Euros reports that S&P cut the rating for Spanish long term sovereign debt to AA+ from AAA.

6. Platts reported yesterday that Gazprom and Naftogaz began drafting documents for the resumption of supplies to Ukraine and via Ukraine to the rest of Europe. Kiev has apparently agreed to the European pricing formula for the gas. In 2009, "Russia will grant Ukraine a 20% discount on gas imports as long as Ukraine keeps its tariffs for the transit of Russian gas to Europe at the 2008 level." In 2010, Ukraine will switch to the full European price. Andrew E. Kramer in the New York Times reports that European gas prices are tied to oil prices, but on a six month delay. NYMEX sweet light was trading at $134.60 on July 16, which on a Btu basis roughly translates to $23.20/MMBtu or $819.20/tcm. European customers were reportedly paying an average of $450/tcm at the beginning of the year, so we still don't have enough to suss out the terms.

"Gazprom ... has projected the average price in Europe next year to be between $260 and $300 for 1,000 cubic meters of natural gas. The prices are pegged to oil prices with a delay of six months. Thus Ukraine would pay between $208 and $240."

Daryna Krasnolutska and Stephen Bierman at Bloomberg report that the contract signed today is a contract for 10 years of supply. Mathew Carr and Kateryna Choursina at Bloomberg reported that in an official statement the European Union expressed some skepticism as to whether the deal is really done, and that no more fireworks were forthcoming. The statement read in part: "We have seen many false dawns in this dispute. The ‘test’ in this case is whether or not the gas flows to Europe’s customers. Until that point, the wait goes on." Laura Cochrane at Bloomberg reports that the gap in yields between Ukraine's bonds and treasuries tripled to 25.1%, signaling that the market now expects default. The long bonds now yield 9.6% more than comparable debt sold by Argentina. Meanwhile, Emma O’Brien at Bloomberg reports that Russia has allowed the ruble to devalue against a currency basket of dollars and euros (55% dollar, 45% euro) for the sixth time this year. Toni Vorobyova at Reuters reports that Vladimir Putin has advised the cabinet that the 2009 budget should be reviewed with the assumption that oil will average $41/b this year. $41/b is roughly $7.06/MMBtu on a Btu basis or about $249.53/tcm. Edward Hugh--yes the same Catalan economist who writes at Fistful of Euros--at Russia Economy Watch writes that Russia's GDP contracted by a full percentage point in December.



7. Brad Setser at Follow the Money argues that, in terms of China, what we should be worrying about is them importing less, not purchasing less US treasuries. As imports slow, China's trade surplus will grow, which will likely draw the People's Bank of China to sell yuan in order to prevent a rise against the dollar. But, even if dollar demand inside China grows to the point that the government does not need to defend against a rise in the yuan, then at least a portion of that dollar demand will likely translate into purchases of US treasuries. Meaning that they will be purchased willy-nilly, even if by the private sector instead of the public. Thus:

"A big fall in [economic] activity [in China] also means less Chinese demand for the world’s products — as well as less Chinese demand for China’s products, which frees up capacity to export. That adds to the deflationary forces in the world economy.

And right now, the risk of a shortfall in global demand strikes me as the bigger risk than a shortfall in demand for Treasuries. The last thing the US should want is a larger Chinese current account surplus, even if a larger surplus would increase China’s capacity to finance the US deficit."

Setser's proposes to Beijing stimulus spending. (But I have to wonder if private Chinese demand for US treasuries would really make up for a lack of demand from the People's Bank of China due to a need to finance a social net. As Setser has pointed out in the past, the vast majority of treasuries purchases in 2007 appear to be by central banks.)

8. Winnie Lee at Platts reports that CNOOC plans to bring its greenfield 240 kb/d capacity Huizhou refinery in Guangdong province online in March.

"The Huizhou refinery is designed to process high-acid heavy crude from CNOOC's offshore blocks in China's Bohai Bay. The plant is capable of producing 7.3 million mt/year of gasoline, gasoil and kerosene meeting Euro III and Euro IV standards, 1.5 million mt/year of ethylene and 800,000 mt/year of paraxylene."

9. Platts reported yesterday that on Saturday Algerian oil minister Chekib Khelil told journalists that OPEC might cut production again in March if prices continue to fall. He went on to say,

"I think that prices will stabilize around current levels of $45-$46/barrel before rising again during the third quarter of this year as a result of adherence by OPEC members with agreed output cuts."

Platts reports that Venezuelan oil minister Rafael Ramirez also indicated on Saturday that Caracas would back further cuts in the March meeting.Meanwhile, Alexander Kwiatkowski at Bloomberg reports that Angola announced it will increase crude shipments by 1.8% in March. Angola is the current holder of the presidency of OPEC. Xinhua yesterday reported that in a meeting in Luanda, the Chinese Minister of Commerce Chen Deming told the prime minister that China would provide assistance in reviving the Angolan agricultural sector. (China is a net importer of basic foodstuffs.)

10. Shashank Shekhar at Emirates Business 24/7 reported yesterday that Gustavo Soares, a senior commodity strategist with Merrill Lynch, thinks that given current oil prices plans to switch to cleaner fuels for power generation by the Gulf countries may face roadblocks. However,

"'Nuclear power is more of a policy-driven market,' Soares said and added the Gulf states can sustain their nuclear energy projects if the governments so decide it as a policy."

Arif Sharif at Bloomberg reports that the Saudi Arabian Monetary Authority cut its benchmark rate to 2% and that the UAE will cut its benchmark lending rate to 1%.

11. Reuters reports that Iranian oil Minister Gholamhossein Nozari told the state media that "In the opinion of the Oil Ministry, taking into account predictions by various international institutes, the anticipated oil price in the year 2009 will be around $40." He also said that non-OPEC countries were not cooperating with the cuts so far, in a reference to Russia, which had suggested it might cut in cooperation with OPEC if it decided that the organization was making good on its quota reductions. Most analysis that I have seen so far suggests that Iran is supplying much more than it promised.

12. The Oil & Gas Journal reports that the Pakistani government has decided that it cannot afford to import gas from Iran, which would cost $500 million per month. That, I take it, puts the kibosh on the proposed Iran-Pakistan-India pipeline, which has been stalled for some time as New Delhi has been uncomfortable with the contract terms Tehran has proposed.



13. Ibrahim Barzak and Christopher Torchia at the Associated Press report that Israel began withdrawing from Gaza Sunday.

"Hamas Prime Minister Ismail Haniyeh claimed "a heavenly victory" in remarks broadcast on Al-Jazeera Arabic news channel."

"The Israeli military warned that the next few days were critical and that any Hamas attacks would be met with harsh retaliation.

'Right now the operation hasn't ended,' Maj. Gen. Amir Eshel said. "It has just transitioned to a new phase, to hold fire. To give a chance to a cease-fire to take over and end this operation.'"

14. James Taranto suggests in the Wall Street Journal that a way to disambiguate radical Islamists in a way which might have the effect of making them pariahs would be to introduce the term "Islamic Supremacists." There is a need to disambiguate Islam generally from Islamists, but I suspect the effect Taranto is looking for will take place more in the Western world than in the Islamic one.

15. Jorge Silva at Reuters reports that on Saturday Venezuelan president Hugo Chavez said,

"If Obama as president of the United States does not obey the orders of the empire, they will kill him, like they killed Kennedy, like they killed Martin Luther King, or Lincoln, who freed the blacks and paid with his life."

Rhetorical repositioning to be sure, for Chavez needs the US as an enemy. But, depending on the Obama Administration's approach, it may become more and more difficult to sustain.

Daily Sources 12/30

1. Ethan Bronner and Taghreed el-Khodary at the New York Times reports that Israeli Prime Minister Ehud Olmert said Tuesday that the Gazan airstrikes were "the first of several stages approved by the security cabinet." He went on to say "The government is giving the military its full backing and the room for maneuver to achieve the goal set out by the government."

"Interior Minister Meir Sheetrit told Israel Radio, 'There is no room for a cease-fire. The government is determined to remove the threat of fire on the south. Therefore, the Israeli Army must not stop the operation before breaking the will of Palestinians, of Hamas, to continue to fire at Israel.'"

Gazan residents reported seeing Israeli ships gathering offshore Gaza. Griff Witte and Sudarsan Raghavan at the Washington Post report that Israeli Defense Minister Ehud Barak declared "an all-out war against Hamas" on Monday. (I have no idea what practical effect that has in terms of international law--or whether a Defense Minister can declare war or whether the Israeli Cabinet and Parliament are required to pass a motion declaring war or whether, even such a declaration would mean a de facto recognition.)

The rhetorical reaction of the Islamic world has been pretty uniform. The Gulf Daily News reports that a prominent Saudi cleric, Sheikh Awad Al Qarni, published a fatwa ruling all Israeli interests--and "anything else related to Israel--legitimate targets. (h/t Will McCants at Jihadica) Sayed Salahuddin at Reuters reports that the Taliban has called upon the Muslim community to rise up in response to the Gaza conflict. Zeina Karam at the AP reports that tens of thousands of Hezbullah supporters stood in the rain in Beirut to protest the situation in Gaza, some 3,000 rallied in Cairo, and about 1,000 al-Sadr backers protested in Baghdad. The same piece reports--buried near the bottom--that the al-Maliki government issued a statement condemning the attacks and calling on all Muslim nations to end relations with Israel and all secret negotiations with it. Juan Cole has translated Grand Ayatollah Ali Sistani's fatwa issued on Sunday. It calls on action, more than has been done in the past, and strongly condemns words as opposed to practical action in response to the events:

"Mere verbal expressions of condemnation and disapproval of what is being done to our Palestinian brethren in Gaza, and of solidarity with them, mean nothing before the immensity of this horrific tragedy to which they are being subjected.

The Arab and Muslim worlds are called upon, more than at any past time, to take practical steps in order to stop this continual aggression and to break this cruel blockade that has been imposed on that proud people."

Cole's translation is well worth reading and many of the articles linked here came to my attention via his site.

Daoud Kuttab--a Palestinian journalist and former Princeton professor--has an op ed in the Washington Post in which he points out that Hamas was losing its popular appeal prior to the Israeli attacks--polls conducted in November gave them a 16.6% approval rating and Fatah 40%. He suggests that the IDF's attack serves to resurrect Hamas's bona fides while shoring up support for the government on the eve of elections in Israel. A more cynical person might suggest that Tel Eviv definitively wants an unattractive and unrelentingly hostile government in Palestine as it justifies intransigence. Kuttab, however, critically undermines the moral appeal of his argument when he poo-poos the rocket attacks into neighboring Israeli villages as "amateur rockets" which are "nagging" some of their citizens.

Benny Morris, an Israeli historian (whose books I've found especially enlightening) has an op ed in today's New York Times which gives a better sense of what the Israeli public fears. He outlines three "dire threats":

a) An Iran pursuing a nuclear program which many believe is intended to build Iran nuclear weapons, which they feel will be used against them. They regard Ahmadinejad's denial of the Holocaust and of the existence of homosexuality in Iran as evidence of his irrationality.

b) Hezbollah has rearmed in Lebanon, and now according to estimates has 30,000 to 40,000 Russian-made rockets.

c) Hamas, "whose charter promises to destroy Israel and bring every inch of Palestine under Islamic rule and law," has an army of thousands in Gaza and a substantial arsenal of home made and Russian made rockets.

Morris also undermines his argument with disingenuous claims. The "direness" of the threat to the north is substantially accounted for by reasonably successful talks with Syria, which Tel Eviv has just to all intents and purposes put on the kibosh. Clearly Hamas presents no clear and present existential danger to Israel, as we witness its armed forces basically running roughshod over the, what are in fact, irregulars in Gaza. Finally, Ahmadinejad is not the commander in chief of the Iranian armed forces and would, under no circumstances, have access to the button, so to speak. His irrationality is therefore a matter of relative indifference when calculating the potential threat arising from a potentially nuclear-armed Iran.

That said, it is always very easy to dismiss the threats made to someone else than it is to yourself and I think it is misleading to pish-posh these threat analyses as mere propaganda. However, they do seem to indicate that we should worry more about irrational responses from Tel Eviv than from Iran. I suspect that the realists more regularly prevail there, however, past performance is not a guarantee of future results. Morris's ultimate point remains fairly pointed, that the Israeli long term threat is internal--the birthrate of Israeli Arabs.

Israeli ideology does not make room for the notion of a non-majority Jewish state. Arab ideology does not make room for the notion of an Israel ruled by Jews. The raison d'etre of all the political associations on offer in both Palestine and Israel would be undermined by peace.

Bret Stephens in the Wall Street Journal has an opinion piece which points out that Hamas quite literally calls for genocide in Israel, quoting Palestinian cleric Muhsen Abu 'Ita as saying "The annihilation of the Jews here in Palestine is one of the most splendid blessings for Palestine." But, he says, Israel has won most of its conflicts as the proverbial hedgehog, when now it is the fox.

Either way, I'd say Morris is right when he says we can expect the conflict to continue.

2. Daryna Krasnolutska and Stephen Bierman at Bloomberg report that Ukraine has agreed to pay the amount Gazprom says it owes--over $2 billion. President Viktor Yushchenko’s office said in an email that the November gas has been paid for--$806 million--and that an advance payment has been made for December supplies, which were forecast to cost about $862 million in full. Gazprom had threatened to cut off natural gas supplies to the Ukraine on January 1 if back payments were not made. Since much of the natural gas that Europe consumes is provided via pipelines which traverse the Ukraine, the situation set off alarm bells across the continent as well as in the US.

3. Philip P. Pan and Howard Schneider at the Washington Post report that President Medvedev has signed into law a Constitutional amendment which extends the Presidential term to six years from four. The amendment will not come into force until the next presidential election. Many see this as a move to prepare a longer term for Putin who they believe will run for President again.

4. Glen Carey and Matthew Brown at Bloomberg report that Gulf Arab leaders have agreed to a plan to create a monetary union and central bank for the region. The plan must now be submitted to the national governments of the Gulf countries which are interested in the proposal. Saudi Arabia, Kuwait, Bahrain, Qatar, and the UAE will submit the plan. (Oman has withdrawn from the effort, which began in 2001 when the entire Gulf Cooperation Council agreed to form a monetary union along the lines of the European Union.)

5. Tarek el-Tablawy and Khaled el-Deeb at the Associated Press report that the head of the Libyan National Oil Company, Shukri Ghanem, told the journalists in a telephone interview today that Libya has ordered cuts in production of 270 kb/d, more than the cut of 252 kb/d that the December 17 meeting in Oran had mandated. OPEC, so far as I know, has not released its data on what the actual production of each member state was in September--and that was the number from which the December 17 announced a cut. The reporters also talked to Conrad Gerber of Petrologistics, who suggested that OPEC was making good on their cuts.

"According to Gerber's figures - which come from carefully monitoring tanker shipments and do not include oil in storage - OPEC had already cut output by 1.56 million barrels per day by the end of November, and has slashed another 320,000 barrels per day in December."

In a separate Reuters story by Alex Lawler today, Gerber said that Iran was expected to increase production by 170 kb/d to 3.85 mb/d and Venezuelan production is steady at 2.32 mb/d. Presumably the additional production is inferred by looking at additional shipments, and hence supply, though the way it is put is deliberately obfuscatory.

6. The Wall Street Journal Asia's editorial board reports that Bangladesh had a 80% turnout for its recent elections. Prime Minister Sheikh Hasina's Awami League won about 250 of 300 seats up for direct election. Islamist parties did not do very well.

7. Annika Breidthardt has an analysis at Reuters which argues that the commission of the new Reliance refinery in Jamnagar--a 580 kb/d capacity refinery which is very sophisticated--may bring Middle Eastern sour crudes to price parity with the light sweet benchmarks. Worth reading.

8. William Sim at Bloomberg reports that South Korea posted a current account surplus of $2.06 billion in November, up from $1.67 billion in October.

"South Korea may keep posting current-account surpluses in coming months as imports fall faster than exports amid a decline in oil costs, Yang Jae Ryong, a statistics official at the central bank, said in Seoul today."

9. Alan Beattie at the Financial Times wrote yesterday that a report just published by the IMF argues that tax cuts and specific industry bailouts are likely a waste of government resources in handling the financial crisis, what is needed is stimulus designed to provide credit to those who are having a hard time obtaining it. Providing funds to those who will likely put it in their savings would not be productive, in the organization's view.

10. Bob Willis at Bloomberg reports that the S&P/Case Shiller index declined 18% year over year in October, after falling at an annual rate of 17.4% in September. "The 20-city index is down 23% from its 2006 peak."

11. Greg Mancina in the Saginaw News tells us the news from Detroit is, now that the price of gasoline is averaging well-below $2/gallon, that in December trucks and SUVs are again outselling cars in the US. Depressing. But I suppose that simply means they are more popular than the alternatives--as long as the price of gasoline doesn't get too high. Completely understandable. Also, I imagine that the US might have some comparative advantage when it comes to making trucks and SUVs. That said, higher CAFE standards are desperately needed and this news means oil demand should recover in the US. Not that that's all that surprising. (see Daily Sources 10/15 #3--near the end where it is reported that SUVs maintained their market share in September.)

12. In a strange pair of pieces by the Wall Street Journal, we get a peek into some strange thought processes. The Editorial Board calls for a strong dollar--claiming it is the source of high oil prices--and a reversal of relaxed monetary policy in order to weaken Russia, Iran, and Venezuela. One might suggest that it's a tad late for that--and conveniently well past the time the financial bail out commenced--and that our monetary policy should focus on producing prosperity in the United States more than freedom overseas. But, beyond that, the estimation that a low crude prices will encourage the establishment of democracy in Venezuela, Russia, and Iran is based on the same faulty thinking that led to a 50 year and totally pointless embargo on Cuba. And to combat one almost laughable misapprehension: Russia's ability to squeeze European supply is not affected one whit by the price paid for it ... the fact is that Russia supplies a tremendous percentage of total supply which cannot be replaced if withdrawn. Still, the notion that Russia would have tried to use such a tool to pressure Europe in any but the most extreme of conditions is deliberately misleading. And a lower price only means that there is less economic incentive to get more out of the ground and thus meet Europe's future energy requirements.

I guess we can all take comfort though, in the revelation via Andrew Osborn's piece in the Wall Street Journal that Igor Panarin--a major US analyst in Russia--thinks that the United States will break up into different regions come 2010. Well, I guess I can say that I know of more than one region where there are people who openly advocate such a breakup--Hawai'ian secessionists come to mind--and there are plenty of blue staters fed up with the politics of red staters and vice-a-versa. It is a little disconcerting that Russian analysts would seriously be considering this future scenario. Still, sometimes it's nice to think that they understand us no better than we do them. It is also very important to note that Panarin says "But if we're talking reasonably, it's not the best scenario -- for Russia."

Daily Sources 12/3

1. Eduard Gismatullin at Bloomberg reports that BP's chief economist, Christof Ruehl, told a conference in London yesterday that oil prices will continue to fall in the next 12 to 18 months unless OPEC institutes sufficient cuts. He expects the global economy to recover in 18 to 24 months, after which time there will be the possibility of oil price spikes. Christopher Swann at Bloomberg reports that the Institute for International Finance today released analysis arguing that the price of oil will average $56/b in 2009.

"The collapse in oil prices will reduce growth of the GCC countries -- Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates -- to 3.6 percent in 2009, down from 5.7 percent this year, the IIF said."

The report also suggests that housing prices in the Gulf are at risk of a "major correction." The IIF also predicted that the GCC countries will have $1.47 trillion in foreign assets at the end of the year, up from $1.24 trillion in 2007. (Of this, Saudi Arabia's central bank held ~$448 billion at the end of October, or a little over 30%. See Daily Sources 12/1 #3)

In the meantime, Anthony DiPaola and Arif Sharif at Bloomberg reports that Qatar's Oil Minister, Abdullah bin Hamad al-Attiyah, told a conference in Dubai today that OPEC will "definitely" cut production allocations in the December 17 meeting in Oran. And Alex Lawler at Reuters reports that a Reuters survey shows that OPEC has made good on about 990 kb/d of 1.5 mb/d in cuts effective November 1, or about two-thirds. Even were all cuts made by the member nations, the organization would still require about another 270 kb/d to reach the implied supply quota for OPEC-11. Saudi Arabia and the UAE have nearly made good on promised to cut by 480 kb/d and 134 kb/d, respectively. Nigeria's production has also dropped by more than the cut, due to violence in the Niger Delta. In any case, their production is well below their implied target. Venezuela and Iran have made 10 kb/d and 50 kb/d cuts in supply on 129 kb/d and 199 kb/d production cut promises in the October 24 meeting. Both countries' budgets required high oil prices in order to balance.



The Associated Press' Nasser Karimi reports the Iranian President Mahmoud Ahmadinejad told the state news agency that the drop in oil prices will force the government to make steep cuts in government spending. He said,

"Suppose we plan to base next year's budget on $30 per barrel of oil; we have to leave a major part of our projects behind. But we are obliged to set it on $30-$35 because we do not decide the price of oil on the global market."

2. Yesterday the UN Security Council announced that Resolution 1846 (2008) had passed unanimously, authorizing states and regional organizations to use all necessary force to suppress piracy off the Somalian coast. The resolution is only temporary, and not designed to establish customary international law. (Though the UK, for example, is in the forefront of an effort to alter the law of the sea to do just that. See Daily Sources 10/29 #9) The resolution was only authorized after the Security Council received a letter on November 20 from the Somali Transitional Federal Government (TFG) signaling their consent to the measure. (The resolution itself notes that the TFG had requested assistance from the international community for policing the pirates.) The resolution also urges member states to establish the judicial capacity to prosecute persons suspected of piracy.

In a related story, Jerry Frank at Lloyd's List reports that Africa experts at Exclusive Analysis expect the Ethiopian pull out of Somalia, signaled last week to take place by the end of the year, will likely lead to a civil war as well as the downfall of the TFG.

"The Islamist rebels tend to clamp down on pirates in areas under their control and have spoken out against the practice," [the] Africa analysts noted. "It is likely that any piracy activity based in areas under the Union of Islamic Courts (UIC) or al-Shabaab control will forcibly be stopped."

Al-Shabaab on November 12 gained control of the port of Merka, just south of Mogadishu, and Exclusive Analysts expects fighting between the two competing Islamic groups to intensify. They do not expect piracy to flourish as the civil war intensifies.

Below is the NATO Shipping Center's November 26 update on what were at the time the on-going piracy incidents off Somalia. Note the graph in the lower left hand corner, showing the spike in activity in September and November.



Steven Erlanger at the New York Times reports that NATO yesterday announced it would recommence, gradually and conditionally, engagement with Russia.

3. Luke Pachymuthu at Reuters reports that BP booked a very large crude carrier (VLCC), the Eagle Vienna, to load a cargo of 2 million barrels of crude in the North Sea for storage in the Gulf of Mexico. "BP's booking takes the total capacity booked for storage by oil firms and traders to at least 12 million barrels, nearly 15 percent of one day of world oil demand." Alaric Nightingale at Bloomberg reports that Johnny Plumbe at ACM Shipping Group Plc told her that as many as 12 VLCCs and four vessels half that size (ie, with a capacity of 1 million barrels) have been booked with an option for storage. That's potentially 28 million barrels worth of storage, or about 28.2% of daily world consumption. As a result, Persian Gulf tanker rates may climb. Rates for VLCC shipments from West Africa to the US rose 19%. (The article includes a decent explanation of World Scale, which is the pricing basis in shipping.)

4. Galrahn at Information Dissemination reports that following exercises off the Venezuelan coast Russia will send the RFS Admiral Chabanenko to replace the RFS Neustrashimy, which is fighting pirates off the Somalian littoral. The RFS Chabanenko is the largest surface warship built by Russia--a Udaloy Class II, or multipurpose, destroyer--in the last two decades.

5. Cherian Thomas at Bloomberg reports that in the wake of the Mumbai terror attacks, India may adopt a new stimulus plan which would establish a fund for investments in transportation and energy infrastructure, subsidies for housing and exports, and another cut in the central bank's benchmark lending rate, known in India as the repurchase rate. The notion that India, as well as China, are looking to maintaining exports or even seeding their growth to sustain their economics through the crisis is troubling. Brad Setser has a post today looking at what some think is going to be China's policy going forward--the depreciation of the renminbi. A policy of depreciation, of course, will fuel protectionist fire in the developed countries. Worth reading in full. Yesterday's post recorded that the one other nation analysts hope will consume has also rejected a large stimulus--Germany.

6. Nipa Piboontanasawat and James Peng at Bloomberg report that after losses totaling $6 billion in Morgan Stanley and Blackstone Group, Lou Jiwei, Chairman of China Investment Corp., said the sovereign wealth fund "wouldn't dare" invest in foreign financial firms. He said,

"The policies of the developed nations on these institutions are not clear. Until they are clear, I don’t dare to invest in them. What if they go bust? I will lose everything."

7. AFP reports that a US military official said yesterday that the Pakistanis have moved no ground or nuclear forces as tensions between it and India grow and that the Indian military posture shows great restraint as it is completely unchanged. (h/t Informed Comment) Eric Schmitt and Somini Sengupta at the New York Times report that Condoleeza Rice is in New Delhi holding meetings with Indian leaders while Admiral Mike Mullen, Chairman of the Joint Chiefs of Staff, is in Islamabad meeting with their Pakistani counterparts. Further, a bomb was discovered in Mumbai, set to go off at a train station. Also, a former Defense official told the reporters that American intelligence had determined that the Mumbai attackers were trained by former officers of Pakistan's Army and Inter-Services Intelligence. However, no direct tie between current government or military and the attackers has been discovered.

8. Eric Watkins at the Oil & Gas Journal reported yesterday that the Ecuadorian oil and mines ministry released a statement contradicting remarks by PdVSA Vice President Elogio Del Pino on November 29 which indicated that Venezuela was reassessing international refinery construction plans. (See Daily Sources 11/28 #13)

"Work on the joint-stock Refineria del Pacifico, held 51% by Ecuador's state-owned Petroecuador and 49% by PDVSA, is scheduled to start in 2010 and operations are expected to begin by 2013."

The 300 kb/d refinery is projected to cost between $6-10 billion to construct. PdVSA and Petroecuador are expected to finance 30% of the cost themselves. Chinese and Iranian national oil companies, as well as an English corporation, are allegedly interested in participating in the project.

9. Michael S. Derby at Real Time Economics reports that Federal Reserve Bank of Philadelphia President Charles Plosser wrote in prepared remarks for an event hosted by the University of Rochester's Business School that "economic growth will continue to be weak over the next several quarters before improving in the latter part of 2009 and then returning to near-trend growth in 2010 and 2011." Plosser indicated that he didn't think that deflation was a "serious threat." He also forecast that unemployment would reach 7% in 2009 before beginning a "gradual decline."

10. Ambrose Evans-Pritchard at the UK Telegraph writes that Kevin Norrish, commodities strategist at Barclay's Capital, published a report which shows that key industrial metals have fallen more in the past four months than during the worst years of the Great Depression. Norrish says that the average fall for copper, lead, and zinc since July of this year has been 60%.

"Prices for the three metals fell 40% from their highs in 1929 before touching bottom in 1933, with the bulk of the fall in 1930 as the slump spread worldwide. 'Lead and zinc have already lost more than they did in the 1930s,' Norrish said."

Copper lost 70% in the Great Depression, despite the electrification drive in the US and the Soviet Union, mostly because of an 85% fall in construction in the US.

11. Bob Willis at Bloomberg reports that ADP Employer Services published a report today showing that large corporate employers in the US cut 250,000 jobs in November. The number was higher than analysts had expected. The Labor Department will release new unemployment data on Friday.

12. Shobhana Chandra and Bob Willis at Bloomberg report that the Institute for Supply Management's service sector index fell to 37.3 from 44.4 the prior month. Anything below a 50 indicates a contraction. Analysts had expected a more modest decline to 42.

13. Bob Willis also reports that the Mortgage Bankers Association's

"index of applications to purchase a home or refinance a loan jumped 112 percent to 857.7, the highest level since March, from 404.4 the prior week. The group’s refinance index skyrocketed 203 percent, while the purchase index rose 38 percent."

14. John Kingston at The Barrel reports that MasterCard Adviser numbers show that US gasoline consumption declines have fallen from 8% year over year for the four week period ending October 24 to 2.1% year over year for the four week period ending November 28.

15. The EIA's This Week in Petroleum indicates that crude oil stocks fell by 400 kb, still at the high end of the historical average, but Wall Street analysts had expected a 1.1 million barrel build. Gasoline stocks fell by 1.6 million barrels versus expectations of a 1 million barrel build, and are well below historical averages. Distillate stocks also fell by 1.7 million barrels versus an expected build of 300 kb and are well below historical averages. (I understand that some of this draw was due to a build in diesel sales to Europe.)

Daily Sources 10/31

1. The AP reports that the US Commerce Department announced today that consumer spending dropped by 0.3% in September from August. Paul Krugman has an opinion piece in the New York Times analyzing the consequences of the fall in consumer spending (which was at an annual rate of 3.4% in the third quarter. In sum, the citizen can no longer count on growing equity via his home or his stock portfolio, and so has begun to squirrel money away. This comes at a bad time because as less people spend money, the economy will shrink and so too, eventually, will the peoples' incomes. If their incomes fall faster than their savings, you have a scenario known as "the paradox of thrift." The Fed would usually stimulate the economy by cutting interest rates, but there isn't much left of the federal funds rate to go. Therefore, the only way to keep the economy from shrinking given a reduction in consumer spending and no room for further interest rate stimulae is government spending. Worth reading in its entirety.

And it turns out that folks in Congress are getting upset that the bailout funds extended to the banking system aren't being used to make loans, and thus grease the wheels of the economy, but to finance the purchases of other banks. Jessica Holzer at Real Time Economics reports that Rep. Barney Frank (D-MA) and Sen. Christopher Dodd (D-CT), are arguing that funds used by the banks for purposes other than lending are in violation of the terms of the act.

Joellen Perry and Luca Di Leo at Real Time Economics report that Mario Draghi, European Bank board member and head of the Financial Stability Forum--one of the entities asked to play a part in the November 15 financial summit--urged governments to provide further economic stimulus by cutting taxes and/or increasing spending.

"'Given the minimum level reached by America’s official interest rates and the ample liquidity put in circulation by central banks, the room for monetary policy maneuver is reduced,' Mr. Draghi told a meeting of Italy’s top bankers in Rome, noting that EU rules allow for increased spending during tough times. 'To sustain demand on a global level, the anti-cyclical action of budget policy may be required.'"

It sounds as if central bankers are more worried about the prospects of deflation now than they are for inflation. In Forbes, Nouriel Roubini argues that this will be their main preoccupation in the next six months as "a sharp slack in goods, labor and commodity markets will lead to global deflationary trends over the next year." His piece is well-worth reading in its entirety. If his thesis is true, the fall in supply and investment in new supply should not be able to do much to stop the fall of oil prices. That said, they rose considerably today.

2. Barbara Kiviat at the Curious Capital reports that First American CoreLogic released data today showing that in the US 18.3% of homeowners now have mortgages more expensive than the market value of their homes--are "underwater"--and an additional 5% are on the cusp. CoreLogic put out a state-by-state breakdown--the states worst hit are Nevada (47.8%), Michigan (38.6%), Arizona (29.2%), Florida (29.2%), California (27.4%), Georgia (23.2%), Ohio (22.0%).

What's in a way scarier, though, is that First American is also seeing a third group of states emerging—those where a lot of new people moved in and bought houses and simply didn't have much time to build equity before prices started falling. That partly accounts for why Georgia is so high up on the list, as well as growing problems in Texas (16.5%), Arkansas (16.3%) and Tennessee (15.0%)

3. Martin Fackler at the New York Times reports that the Bank of Japan cut its benchmark interest rate 0.2% to 0.3%. This is the first time the BoJ has cut rates in seven years as it also reduced its forecast for growth this year to 0%, "citing higher energy prices and weakening export demand. ... The eight members of the policy board were evenly divided on the cut; the bank governor, Masaaki Shirakawa, cast the deciding vote in favor, the bank said." Most analysts thought the rate cut more of a sign of Tokyo's willingness to coordinate with fiscal authorities internationally than fiscal stimulus given the initial low rate.

4. Eurointelligence has the story that Denmark may decide to join the euro after all as a result of the financial crisis. This is because Denmark has been forced to raise benchmark interbank lending rates in defense of the krone, to 5.5%, which is 1.75% above the rate for the European Central Bank. (Denmark has opted out of the euro, but has pegged the krone to the euro.) The Danish people dislike the notion of being left out of the economic stimulus--and paying more for money than their neighbors--in order to maintain a national currency. There is some hope for the Europeanists in Copenhagen that a referendum to annul the opt out provisions might pass now as early as 2011.

Generally speaking, however, it seems as if the crisis will delay the accession of many of the Eastern European nations to the euro as it will be harder to meet the economic prerequisites to joining the currency. (For example, Hungary is not likely to meet the current account requirement any time soon.) On the other hand, Sweden may find it convenient to join. However, now might be a good time to relax some of the prerequisites to joining the euro given that being part of the eurozone will generally seem more appealing as the financial crisis wears on.

The same issue of Eurointelligence reports that German representatives in Brussels are blocking efforts by the European Commission to raise the maximum insurance for deposits to €100,000 (now about US$130,500 )from €20,000 (~ $26,100). Germany does not want to raise the limit of its own deposit guarantee.

5. Andrew E. Kramer at the New York Times reported yesterday that Russia's bailout plan favored Russia's richest businessmen. Putting aside that our bailout plan surely favored the rich and connected, it might be important to realize that what is meant here is major holders of corporations deemed strategic by the Kremlin. For the most part the folks known as the oligarchs were replaced with Kremlin (perhaps better put as FSB)-friendly personnel. Of the original oligarchs the ones who remain are the ones who have made plain to the Kremlin that they will stay out of politics. It may not ultimately make much of a difference in direction, but today Bloomberg reported that shares in the Russian bourse soared Thursday. Perhaps that is because the taxpayer funds are being used as intended?

Snarkiness aside, and I admit that the jingoistic approach to Russia so favored by the press and pols is a pet peeve of mine, Brad Setser points out that money is leaving the economy faster that it entered it--Russia's reserves fell by $30 billion in the third week of October. $15 billion of that reflects efforts by the Russian central bank to shore up the ruble and to provide credit to companies seeking to service foreign currency denominated debt.

"$15 billion is a result of the drop in value of the ruble versus the euro and dollar. $15 billion is as much as the IMF committed to lend Russia back in 1998. And the IMF actually only disbursed a third of that total.

The most the IMF ever actually lent out to a single country in the past was roughly $30 billion (to Brazil, in 2002-03). At the current rate, Russia will run through that much in two weeks."

Setser suggests that though Russia has its own specific financial weaknesses, their situation is probably similar to what is being seen in the rest of the emerging economies.

6. Insofar as likely action taken by the Chinese with their currency reserves, Vandana Hari at Platts reports that Sinopec has launched a $1.7 billion takeover bid for Canada's Tanganyika Oil, a producer of heavy oil in Syria. Given that there is a fairly large consensus that the world economy will start to percolate in the second half of 2009 and that oil prices will surely follow, it seems at this stage that China is likely to pursue the conservative policy of continuing to purchase a production sharing contracts overseas. Net production from the fields in the first half of 2008 averaged about 6 kb/d. Further news in that vein--Eric Watkins at the Oil & Gas Journal report that Indonesia and China will renegotiate the price of Tangguh LNG to CNOOC's terminal in Fujian. This is after the renegotiation of 2006, where the price was raised to $3.80/MMBtu for 2.6 million tonnes/year on a ceiling price of $38/b (of oil).

"Following this week's agreement in Beijing, [Indonesian President Susilo Bambang] Yudhoyono and [Chinese Premier] Hu [Jintao] said the concessionary loan program China had initiated for Indonesia would continue despite the current global financial crisis.

Yudhoyono wants cooperation with China stepped up in the field of energy, especially in the construction of power plants under China's concessionary loan program"

Jakarta's government is under pressure to use its natural gas production for domestic power plants and for re-injection into oil fields in order to boost production of the more lucrative export. Energy planners in Japan have been especially anxious at language suggesting that contracts will not be renewed once they expire.

7. Julia Werdigier at the New York Times reports that Barclays will seek $11.8 billion from Qatar and Dubai instead of from the UK stabilization program. This comes in the middle of UK Prime Minister Gordon Brown's visit to the Gulf nations in an effort to secure substantial support for expanded IMF loan programs.

8. Al Jazeera reported yesterday that the UN General Assembly on Wednesday approved 185-3 a non-binding resolution calling upon the United States to lift the embargo on Cuba. The US, Israel and Palau voted against. Micronesia and the Marshall Islands abstained. "New" Europe voted for. Noticeably, so did Iraq. From a legalistic perspective, the United States either must strike a security agreement with al-Maliki's government or convince the UN to extend the mandate to operate in Iraq past December 31 of this year or the United States forces will have no more legal standing to be there. Matthew Lee at the Associated Press reports that the Bush Administration is beginning to think that a deal will not be struck with Baghdad. Votes like these make me think it might be difficult to secure an extension to the UN mandate, especially since the US negotiating team would be of a lame duck Administration which is of a party that as of now appears unlikely to win any of the elected branches of government. Failure to do so, however, would put our troops in a difficult position.

Meanwhile, the Oil & Gas Journal reports that Petrobras--Brazil's national oil company--announced today details of its plans to explore block 37 off northwest Cuba.

9. Vandana Hari at Platts reports that Indian Oil Minister Murli Deora met with the Minister of Finance, P. Chidambaram, to seek an increase in the amount of oil bonds the government will issue to compensate the refiners for selling oil products at below-market prices. The refiners' losses due to astronomical oil prices in the third quarter was exacerbated by a rapidly depreciating rupee, as the companies had to purchase dollars on the markets in order to buy the crude. Furthermore, the volatility of the foreign exchange markets and high cost of money has made the refiners especially leery of taking on foreign currency debt.

10. Amanda Rayborn and Nadia Rodova report that Kazakhstan has reached a new agreement with the seven corporations operating the Kashagan field--the largest single oil concession in decades. The agreement doubled the government owned company's stake and stressed that if the companies do not begin producing oil by year end 2013, they will not be allowed to recoup their investments in the project.

"Commercial production at Kashagan will start at 75,000 b/d in December 2012 and gradually to rise to 370,000 b/d, KazMunaiGaz executive director Aman Maksimov was quoted by Russia's Prime-Tass as saying in Astana after the project partners signed the new agreements.

'The third stage -- in two-three years -- [will see output] at 450,000 b/d,' Maksimov said.
...
In early October, company officials told Platts the revamped development plan for Kashagan aims for commercial production to begin in the fourth quarter of 2013 with a rapid ramp-up to an initial maximum production capacity of 370,000 b/d within a year. By late 2016, the consortium plans to take production to 730,000 b/d."

11. Sam Fletcher at the Oil & Gas Journal provides further evidence that the drop in oil prices has put the kibosh on new Canadian oil sands production.

"Some analysts are anticipating a 10-15% drop in capital spending in western Canada next year as producers try to remain within their cash-flow expectations. To many observers, this is a sign that low oil prices are starting to discourage new investment. Projects that were feasible a year ago no longer seem economic in the current environment. Other companies, including the Nexen Inc.-OPTI Canada partnership and privately held BA Energy Inc., announced delays at smaller projects in recent weeks."

Daily Sources 10/27

1. In a delicious bit of irony I missed, al-Qaeda reportedly prefers a McCain Presidency, as per Nicholas D. Kristof at the New York Times.

2. Brian Blackstone at Real Time Economics reports that most analysts believe that the Federal Open Market Committee will reduce the federal funds rate by 50 basis points (0.5%) at its Tuesday-Wednesday meeting, bringing it down to 1%. The political will to reduce it even further allegedly exists. Also at Real Time Economics, Henry J. Pulizzi, Jeffrey McCracken and John D. Stoll report that White House Spokeswoman Dana Perino told journalists that the Administration has been "working 'as quickly as we possibly can' to release $25 billion in recently approved loans to the auto makers. But she declined to elaborate on other specifics steps that could be taken to help the ailing companies." Also, Jean-Claude Trichet told reporters in Madrid today that the ECB may cut interest rates again at its next meeting on November 6, as per Ben Sills and Gabi Thesing at Bloomberg. William Sim and Seyoon Kim, also of Bloomberg, report that the Bank of South Korea cut the benchmark lending rate 75 basis points (0.75%) to 4.25%.

"'More aggressive cuts are on the way,' said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul, who expects Korea's key rate will be slashed to around 3 percent by the first half of 2009. 'The government would need to expand tax cuts and increase fiscal spending to support the economy.'"

Chris Bryant at the Financial Times reports that Peer Steinbrück, the German finance minister, told the media on Sunday that "The danger of a collapse is far from over. Any attempt to give the all clear would be wrong."

3. There are a slew of articles on the crisis spreading to the emerging market countries, including this one from Credit Writedowns. The upshot is that European banks invested much more than their American counterparts in the emerging markets. Often loans and investments made by European banks were made in dollars, which means that if you want to cash out, you cash out in dollars, putting more upward pressure on the dollar. Laura Cochrane and Fabio Alves at Bloomberg report that emerging market markets were hit hard this morning. Margaret Coker and Chip Cummins at the Wall Street Journal report on the financial crisis as it hits the Persian Gulf states, hitherto deemed immune from the credit crunch. Investors are liquefying their assets in the region.



See Yves Smith's analysis and links at naked capitalism here, here, and here.

4. Carlos Caminada, Shruti Singh and Jeff Wilson at Bloomberg report that analysts are predicting that the credit squeeze--as well as falling commodities prices--is likely to reduce global production of staple foods worldwide.

"Global production of wheat, the most-consumed food crop, may drop 4.4 percent next year, said Dan Basse, president of AgResource Co. in Chicago ....
...
Futures contracts on the Chicago Board of Trade show wheat will jump 16 percent by the end of 2009, corn will rise 15 percent and soybeans will gain 3 percent.
...
'The net effect of the financial crisis may end up being lower planting, lower production,' [Abdolreza] Abbassian [secretary of the of the Intergovernmental Group on Grains at the UN Food and Agriculture Organization] said. 'More people will go hungry.'

In Brazil, the world's third-biggest exporter of corn after the U.S. and Argentina, production may fall more than 20 percent because farmers can't get loans to buy fertilizer, said Enori Barbieri, a National Corn Producers Association vice president. The nation's coffee harvest, the world's largest, may drop 25 percent for the same reason, said Lucio Araujo, commercial director at farmer cooperative Cooxupe, located in Guaxupe.
...
Minnetonka, Minnesota-based Cargill and Decatur, Illinois-based Archer Daniels, the world's largest grain processors, are among the crop buyers to halt financing for growers in Brazil, said Eduardo Dahe, who represents the companies as president of the National Association of Fertilizer Distributors.
...
In Russia, loan rates for farmers have jumped by half in some cases to more than 20 percent in the past few months, Arkady Zlochevsky, president of the Russian Grain Union, said in an interview earlier this month.
...
The value of the collateral farmers use to secure loans -- crops and land -- is diminishing. Lenders are demanding more equity for farm loans used to run operations or acquire land and equipment.

'We need two to three times the amount of money we used to need with the same collateral,' said Bo Stone, 37, a seventh- generation farmer in Rowland, North Carolina. 'It means we have way more risk than we've ever had. This is a time where one bad crop year, with the amount of money and input tied up, could potentially cost you your equipment, land and livelihood.'"

(h/t Gregor.us) In a related story, Javier Blas and Tim Johnston of the Financial Times report that Thai officials plan to barter rice for oil with Iran. The UNFAO believes that we should see more government-to-government deals like this going forward given the credit crunch and volatility in the commodities market.



5. Joshua Partlow at the Washington Post reports that President Luiz Inácio Lula da Silva's Party--the Workers' Party--lost the race for governor of the largest city in Brazil (and South America, for that matter), Sao Paulo. Sometimes it's bad to be king. That is, I'd expect a worldwide financial crisis to dim the hopes of incumbents everywhere.

6. Jeffrey Gettleman at the New York Times report that angry crowds in Congo are forming and throwing rocks at UN peacekeeping forces, apparently taking out frustration on them because they are unable to keep the peace as renegade general Laurent Nkunda's rebel forces advance Westwards. As far as I know, no one doubts that the constant warfare in the Congo is a humanitarian disaster, veering toward the genocidal. The problem is that there is no power sufficiently strong whose interests are threatened by it. It must be a pan-sub-Saharan-African solution, but who in the industrial world will pay for the inevitable political compromises (and thus human suffering) that would be required for a stable state to be incorporated? It's not an especially appetizing option, is it? If you don't have a dog in the fight, you aren't likely to want to force a settlement one way or another.

7. In a somewhat strange--to my eyes--development, I am seeing more and more suggestions as to what China should do to save the industrialized world from this financial crisis. The most recent is a piece by the editorial board of the New York Times. In a piece which I'm sure policymakers in Beijing were at pains to decipher, the Times suggested that Beijing's recent policy efforts were insufficient and misguided ... China should spend its cash reserves on converting from an export economy to an import economy! This follows on the suggestion by Brad Setser for Beijing to increase its purchases of Agency debt!--which, as the government has gone out of its way to publicize, are not backed by the full faith and credit of the US. And the other notion--almost wistful hope--that China should spend its cash on greening the energy infrastructure of Europe and the US! Being free with advice is considered by some to be an American trait, and I guess if you're a financial adviser, you advise those who happen to still have some cash. And maybe China's leaders are listening to the American punditocracy, who knows? But, were I Chinese, I would wait to see what happens to the dollar after this technical unwinding phase plays out before I would undertake something on that scale. In the meantime, Beijing appears to be using its cash in the traditional way overseas. The latest news is that it is working to provide a $1.5 million soft loan--ie, a loan with below market rates of interest--to Pakistan, after all.

8. Winnie Lee at Platts has a different read than the Bloomberg story of October 13 on what government statistics indicate in terms of crude imports, and thus demand. Ms. Lee reports that net crude imports for September were 14.45 million tonnes (3.53 mb/d), a 1.7% decline from imports of 15.25 million tonnes (3.59 mb/d) in August. Year-over-year net crude imports grew by 7.4% September. (On the 13th, Winnie Zhu and Wang Ying had suggested crude imports had surged 46% to 20 million tonnes in September.) China's apparent petroleum demand in September was 29.42 million tonnes (7.16 mb/d), 5.4% more than September 2007. However, demand growth numbers have been steadily been trending down, July saw 9.6% y-o-y growth and August saw 8.3% y-o-y growth as refiners draw down stocks built up to provide energy security for the Olympics.

9. Platts reports that Iran's OPEC governor Mohammad Ali Khatibi said on Sunday that OPEC is prepared to make further quota cuts in the December meeting, if the quota adjustment agreed to on Friday fail to stabilize the markets. Reuters reports that Qatari Prime Minister Sheikh Hamid bin Jasim told the media Monday that "The current prices are a bit low. We are talking about prices ranging from $70 to $90 which we think are fair for consumers and producers." Saudi Oil Minister Ali Naimi told reporters on Friday that the Khurais oil field will be operational--at 1.2 mb/d--in mid-2009. The field produces varieties of Arabian Light, a fairly high quality crude with between 33 and 36 API and with a sulfur content of 1.9% by weight.

10. Angela Moon at Reuters reported that SK Energy has dropped plans to build a refinery in China. SK had eyed the naphtha market in China given that the product is not as rigorously price-managed by the government as others. Evidently the losses seen by refiners in China over the last year caused SK to reconsider. (This is especially interesting because South Korea's energy security policy is to be a refining center. If you have more refining capacity than you need, and export the excess product, you are likely to have enough crude imports at any given time to weather a shortage. South Korea's policy has been copied in Singapore and is in the process of being instituted in India. Also, as Japanese refining capacity becomes more sophisticated and demand, due to an aging population structure, continues to decline, is also entering the market of product exports in Asia. Clearly the competition is stiff. Thus some, especially Saudi Arabia, some international oil companies, and, until now, South Korea decided that the best way to beat the competition is to actually produce "export" product inside the export destination country, ie China. That strategy might be especially difficult to pursue in a highly volatile international price environment while operating within the product prices market centrally managed by Beijing. Either way, the stakes involved are huge.)

11. Juan Cole has an analysis of some of the fighting in northwest Pakistan. He has some observations--and links--on the effectiveness of arming tribal levies against the Taliban in Pakistan and Pakistani armed forces proper efforts.

"Maulvi Faqir Muhammad and his Tehrik-i Taliban frontally attacked Pakistani military checkpoints and started a feud with the Pakistani army. The Tehrik-i Taliban has been blamed for the assassination of Benazir Bhutto last December, and it is said that as her widower, Asaf Ali Zardari, rose to the presidency, he pressured the military to destroy the movement, with which he now has a family feud."

Very interesting.

12. Patrick Ugeh at Nigeria's This Day reports that two major Nigerian oil unions called off proposed strikes after the government retracted a statement saying it planned to privatize the Nigerian Gas Company and Pipeline and Product Marketing Company.