Daily Sources 7/23

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

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



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

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

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

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

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

2. ICELAND FORMALLY APPLIES FOR EU MEMBERSHIP

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dareini and Keath observe

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

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

9. MOODY'S UPGRADES PHILLIPINE SOVEREIGN DEBT

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

13. OCCIDENTAL FINDS SIZABLE NEW OIL FIELD IN CALIFORNIA

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

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

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

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

Daily Sources 7/22

1. DO COAL STOCKS INDICATE GLOBAL RECOVERY?; WTO SAYS GLOBAL TRADE TO CONTRACT 10% IN 2009

Thomas MacLeod yesterday at Seeking Alpha deduced from the performance of global coal ETF KOL, the US DOW Coal Index, and the global steel ETF SLX that energy consumption globally is up and thus is the global economy beginning a rebound.

"The commodity that we believe is more representative of pure changes in economic fundamentals is coal. It is difficult to manipulate, its supply is not so affected by political or natural events and it is comparatively difficult and expensive to store, which effectively weeds out speculators.

Moreover, coal is a genuine industrial commodity with over half of the world’s electricity generation being powered by coal fired power stations. It is integral in the production of steel and can be converted to produce crude and other industrial chemicals.

In order to analyze the behavior of coal we look at the movement of coal stocks relative to major market stock indices. This eliminates the impact of stock market movements so we can ascertain the movement due to changing expectations of coal demand and supply. In essence, outperformance of coal stocks suggests global economic expansion."

Of course, the performance of coal stocks does not represent a one-to-one ratio to consumption. The latest data on coal volumes shipped by train, for example, still shows 8% down year over year, which suggests that in North America, anyway, it is difficult to deduce a rebound on the basis of coal volumes. Meanwhile, Jonathan Lynn and Kazunori Takada at Reuters reports that the WTO has forecast that world trade will shrink by 10% in 2009.

"The WTO said however the contraction appeared to be slowing.

'Our figures showed that Asian countries may be leading a recovery in global trade,' [Director General Pascal] Lamy told a news conference in Singapore, where he was attending a two-day Asia Pacific Economic Cooperation (APEC) trade meeting."

2. IMF SAYS CHINA COULD STAND MORE STIMULUS IN CONTRAST TO WORLD BANK ASSESSMENT, CHINA INDICATING THAT IT WILL USE ITS FOREIGN CURRENCY RESERVES TO FUND CHINESE FIRM EXPANSION OVERSEAS, IN PARTICULAR RESOURCE PLAYS, CHINESE OIL IMPORTS IN JUNE WAY UP IN CONTRAST TO OFFICIAL COMMENT THAT STOCKPILING OVER

Timothy R Homan at the Bloomberg reports that the IMF has indicated in its first executive-level review of China in three years that there is scope for more fiscal stimulus in that country.

"The IMF’s assessment is a clash with the World Bank, the international development-aid agency also based in Washington, which last month advised China to delay until 2010 any additional stimulus. It also comes as China is already recording an acceleration in its expansion, and as its central bank takes steps to avert bubbles in stock and property markets."

In the April G-20 meeting in London, the Obama administration secured from the IMF a pledge to open up the selection process for the executive directorship of the organization in return for opening up the process for the head of the World Bank, traditionally an American. Some expect China to win the top spot when the next head of the World Bank is selected, but in order for Beijing to have had a real shot, it needed to open up the country to official review from the international financial institutions again. Meanwhile, Brad Setser has some remarks on the recent report that China intends to use its reserves to support the overseas acquisitions of Chinese firms.

"That of course is China’s right. China clearly has more reserves than it really needs, and thus can take some risks with its reserves.

But it also has consequences. If Chinese firms are explicitly backed by China;s reserves, it gets harder to argue that their expansion reflects a purely commercial calculus. China’s government presumably will deploy its assets to pursue China’s strategic as well as its commercial goals.

In some sense it is surprising that China has decided to be so explicit about its new desire to use its reserves to support Chinese state firms. China’s government could have achieved the same result by quietly putting more foreign currency on deposit in the state banks, and having the state banks lend those funds out to firms looking to expand abroad."

Kate MacKenzie at FT Energy Source notes,

"In an interview published in state-controlled media, the chairman of China Development Bank said Chinese outbound investment would accelerate but should focus on resource-rich developing economies.

'Everyone is saying we should go to the western markets to scoop up [underpriced assets],' said Chen Yuan. 'I think we should not go to America’s Wall Street, but should look more to places with natural and energy resources.'"

Meanwhile, Platts notes that Chinese apparent oil demand is up in June. I have reconfigured their data into a barrels per day format:



3. GERMAN ROLE AT ECB MAY BE ESPECIALLY PROBLEMATIC FOR COORDINATING GLOBAL RECOVERY, ECB ARGUES THAT ITALY'S ADOPTION OF THE EURO HAS CUSHIONED THE COUNTRY'S ECONOMY FROM ITS POLITICAL INSTABILITY

Jörg Bibow at the New America Foundation has an interesting piece on the German role in determining monetary policy for Europe and why it is presenting a serious obstacle to an effective global response to the financial crisis. Key excerpts:

"Within German 'stability culture' the Bundesbank's part was to enforce discipline, both budgetary discipline and wage discipline. The result was not only low inflation, but inflation lower than inflation of Germany's trading partners. And that is an important factor within any system of pegged nominal exchange rates: over time a country with relatively low inflation gains in competitiveness which is boosting its export performance. Stability policy worked well under the Bretton Woods regime, establishing both Germany's export-oriented growth strategy and the Bundesbank's claim to fame as inflation fighter."

"Exporting the German model to Europe through the Maastricht regime meant inflation would be low across Europe, while all countries would try to balance their budgets at the same time. When German stability policy was jointly applied across Europe in the early 1990s, the predictable result was domestic demand stagnation and rising unemployment. Even by 1996 it looked as though EMU was not going to fly because stagnation kept budget deficits above the 3% ceiling across the continent. Luckily, the US 'new economy' boom and strong US dollar came to the rescue, and eleven countries qualified in the spring of 1998 to launch the euro in January 1999. In other words, laboring under the Maastricht constraints, Europe failed to generate sufficient homemade demand growth, but benevolent external forces allowed the euro to get off the ground just on time."

"What does all this mean for the collective action problem which, as I said at the start, the world is facing today? Recovery from the ongoing global crisis requires everyone to pay their dues and pull their weight. Built into the German model is a strategy to rely on the recoveries of others to sponsor one's own. The German model has become the European model (pace the U.K). ECB president Jean-Claude Trichet said as much in 2004 when Euroland was last hoping for external sponsors of recovery: 'Growth starts with exports, then passes on to investment and then to consumption. That is the normal sequence for Europe in this phase of the cycle.' (FT 22 April 2004). The trouble is that Europe's economy is as large as America's or even larger, and the German model wholly unsuitable for a large economy. In addition, Europe has its hands full with its own homemade crises, crises which are largely the consequence of the German model as well. Recent statements made by key German policymakers clearly indicate that enlightenment is not a realistic prospect."

Bibow makes the especially uncharitable comment that perhaps Berlin needs to relearn the lessons of the Great Depression, but there he clearly misses the point. Perhaps Belin needs to unlearn the lesson, which clearly has as its main pivot the notion that hyperinflation led to the political instability which eventually ushered in the NAZIs to political ascendancy. That (nastiness) aside, the piece is worth reading. Meanwhile, the European Central Bank has published a working paper by Marcel Fratzscher and Livio Stracca which argues that the adoption of the euro has insulated Italy from its political instability.

"The paper focuses on political events in Italy over the past 35 years and asks whether the adoption of the euro in 1999 has helped insulate Italy’s financial markets from the adverse consequences of its traditionally unstable political system. We find that important political events have exerted a statistically and economically significant effect on Italy’s financial markets throughout the 1970s, 1980s and 1990s. The introduction of the euro appears to have indeed played a major role in insulating financial markets from such adverse shocks."

(I am obliged for both of these pieces to Eurointelligence.)

4. NETHERLANDS THREATENING TO BLOCK ICELAND ACCESSION TO THE EU IF IT DOES NOT COMPENSATE DUTCH SAVERS ON LOSSES

NRC Handelsblad reports that Dutch Foreign Minister Maxime Verhagen is threatening to block Iceland's bid to join the European Union, unless Reykjavik meets its obligations to compensate Dutch savers.

"According to the agreement Iceland has to repay €1.3 billion to the Netherlands and €2.3 billion to the UK. The British and Dutch governments spent that money to compensate savers for the €20,000 the Icelandic government had guaranteed for those saving with Icelandic banks. The Icelandic government agreed to repay those damages in the form of a loan, but parliament could block that deal, as some members of the Althing have threatened to do.

'A solution to the problems surrounding Icesave could speed up the handling of the Icelandic application for EU membership," Verhagen said. He added it is "absolutely necessary' that Iceland approves the agreement to 'show that Iceland takes EU guidelines seriously.'"

5. GEORGIA SEEKING AMERICAN ARMS

Philip P Pan at the Washington Post reports that Georgian President Mikheil Saakashvili yesterday indicated in an interview that Tblisi is seeking a weapons deal with the United States.

"In a wide-ranging interview, Saakashvili said that discussions about a weapons deal remained at 'very early stages' but that he planned to press Biden to speed up delivery of antiaircraft and antitank systems, saying such weaponry was 'purely defensive' and 'would make any hotheads think twice about further military adventures.'

'I think the decision to help us is there,' he added, noting recent meetings between Georgian and US defense officials. 'It's a matter of speeding up the process. . . . We want the country to still be around when those things start to arrive here. That's ultimately what's right now at stake.'

The United States has been working to train and modernize the Georgian military for more than a decade, but Russia has warned strongly against new arms shipments to the former Soviet republic, which it routed in a brief war last year."

6. PAKISTANI SUPREME COURT ASKS FOR MUSHARRAF REPRESENTATION ON CASE CONSIDERING WHETHER EMERGENCY MEASURES IN 2007 WERE CONSTITUTIONAL, ISLAMABAD OBJECTS TO CAMPAIGN IN AFGHANISTAN, GERMAN INVOLVEMENT HEATS UP, PAKISTAN ASKS FOR ADDITIONAL INTEL SUPPORT FROM US AND WARNS THAT DEAL WITH INDIA COULD START ARMS RACE

BBC News reports that Pakistan's Supreme Court has decided that former President Musharraf should be represented in a case before it over whether or not the emergency rule imposed in November 2007 was constitutional.

"'This is the first time in Pakistani history that the court has taken cognizance of such action. In the past, the courts have tended to condone military takeovers,' a former chief justice of Pakistan, Saeeduzzaman Siddiqui, told Dawn News TV.

The BBC's Ilyas Khan in Islamabad says that the court apparently issued the notice to Mr Musharraf following the refusal on Tuesday by the attorney-general, who represents the government, to defend the former president's position in the case."

Meanwhile, Eric Schmitt and Jane Perlez at the New York Times report that Pakistan is objecting to expanded combat plans in Afghanistan.

"Pakistani officials have told the Obama administration that the Marines fighting the Taliban in southern Afghanistan will force militants across the border into Pakistan, with the potential to further inflame the troubled province of Baluchistan, according to Pakistani intelligence officials.

Pakistan does not have enough troops to deploy to Baluchistan to take on the Taliban without denuding its border with its archenemy, India, the officials said. Dialogue with the Taliban, not more fighting, is in Pakistan’s national interest, they said."

Matthias Gebauer and Shoib Najafizada at Der Spiegel report on German forces increasing involvement in the fighting in Afghanistan:

"The Bundeswehr is supporting the Afghans with around 300 members of the Quick Reaction Force (QRF). Their primary role is to help secure the area around the fighting and provide reconnaissance.
...
[T]he Bundeswehr has also become considerably more assertive. For the first time, Marder tanks--which have heavy firepower and were only recently relocated from Mazar-e-Sharif to Kunduz--have been deployed.
...
According to SPIEGEL ONLINE sources, missiles are also being fired by German fighter jets in northern Afghanistan for the first time. Following a first deployment of fighter jets on June 15 in northern Afghanistan by the ISAF international security force, most supplied by the United States, Afghan forces requested so-called 'air support' for a second time on Sunday.

Such air support had long been considered taboo in northern Afghanistan."

Meanwhile, Joshua Partlow at the Washington Post reports that Pakistani Prime Minister Yusuf Raza Gilani today has called on the US to provide real-time intelligence and other military support for the Pakistani effort against the Taliban, without relying on attacks from US drones. Both American national papers mention that Islamabad is concerned about the recent end use monitoring deal made with India, suggesting that it could spark an arms race.

7. KURDISTAN COMMISSIONS NEW REFINERY

Eric Watkins at the Oil & Gas Journal reports that Kurdistan has commissioned a new refinery near Arbil which will originally process 20 kb/d, ramping up to 40 kb/d by the end of the year. The refinery is one of several planned for the area, with plans to have total throughput capacity of about 200 kb/d. "Refinery director Baz Karim said the new facility is operated by private Kurdish investors Kar Group, and will process crude from the Khurmala Dome oil field ... ."

8. IRANIAN CONSERVATIVES RESPOND TO RAFSANJANI LETTER, LOTR TELLS AHMADINEJAD THAT HE NEEDS TO WITHDRAW SON IN LAW AS VP PICK

The best round up on recent maneuvering between elites in the aftermath of the Iranian elections is at Juan Cole's Informed Comment. The Leader of the Revolution has warned against further civil disobedience on Monday and includes an excerpt of his speech as translated by the Open Source Center. A representative of the LOTR at the Revolutionary Guards has indicated that support for the LOTR has foiled the plots of outsiders--Cole includes an excerpt from his speech as translated by the OSC. He also includes an excerpt of conservative cleric Ayatollah Mohammad Yazdi's recent charges that Rafsanjani has undermined the revolution as translated by the OSC. Press TV--an English-language state media organ of Iran--on Tuesday reported that the LOTR has told Ahmadinejad that he must undo the selection of his son-in-law as Vice President.

9. HAGUE RULES ON NORTH-SOUTH SUDAN BORDER

Stephanie McCrummen at the Washington Post reports that the Hague has issued a ruling on the disputed south-north border in the Sudan, striking a compromise.

"The ruling by the Permanent Court of Arbitration awards control of a lucrative Chinese-run oil field in the region of Abyei to the Sudanese government but defines the region's boundaries in a way that is politically beneficial to the south.

Officials from the south and President Omar Hassan al-Bashir's ruling party quickly promised to respect the ruling, which analysts called a major test of the fragile 2005 peace deal that ended the bloody north-south civil war, one of Africa's longest-running conflicts.

'Both parties have agreed to accept the boundaries,' said Majok Guandong, Sudan's ambassador in Nairobi. 'We think there will be no maneuvering by either side.'"

The ruling leaves a smaller working oil field in the territory of the south and defines the territory as being mostly populated with the Ngok Dinka, a nomadic tribe which identifies itself with the south and will likely vote to join it in the referendum on independence from Khartoum in 2011.

10. NIGERIA SAYS NIGER DELTA UNREST CUTTING OFF 1 MB/D IN SUPPLY

Platts reports that Nigeria's Oil Minister Rilwanu Lukman yesterday told the media that the country is losing approximately 1 mb/d in production due to continuing strife in the Niger Delta.

"Lukman told leaders of the ruling People's Democratic Party in Abuja that Nigeria's oil production had dropped to between 1.4 million and 1.5 mb/d, well below its assigned OPEC quota and far off from the 2009 budget benchmark of 2.29 mb/d, according to a Thisday newspaper report Wednesday.

'We have production capacity of 2.3 mb/d but because of problems in the Niger Delta, we cannot meet our target. This year's budget is based on having 2.2 mb/d. So, we are short of a million barrels,' the minister was quoted as saying.

'Our target is 4 million barrels in 2010, presently we have 37 billion barrels in our reserve. The target for next year's production is 4 mb/d,' Lukman said."

11. BRAZIL TO SELL DOLLAR DENOMINATED BONDS, SIGNS NUCLEAR ENERGY MOU WITH MOSCOW

After all the hoopla about the replacement of the dollar as the reserve currency, Andre Soliani and Carla Simoes at Bloomberg report that Brazilian Treasury Secretary Arno Augustin has said that Brasilia plans to sell dollar denominated bonds on the overseas credit markets shortly.

"The country will tap the market more than once before yearend and look to sell securities maturing in more than 10 years, Augustin ... said in an interview with Bloomberg Television in Brasilia today.

'We will certainly issue foreign bonds more than once in the second half, seeking to lengthen the debt’s profile and create conditions' for companies to sell bonds, Augustin said. There is investor demand for bonds maturing in 30 years, he said.

Brazil plans to tap international credit markets as speculation the global recession is easing fuels demand for higher-yielding assets."

As a counterpoint, today the Latin American Herald Tribune notes that Russian media yesterday reported that Russia and Brazil have signed a MOU on nuclear energy cooperation.

"The pact calls for the development of uranium prospecting technology and the design of new reactors, as well as the design and construction of nuclear research reactors.

The agreement opens the way for the production of radioisotopes for use in agriculture and the pharmaceutical industry, as well as the training of nuclear energy experts.

Russia and Brazil agreed to create a working group for atomic research and development projects."

12. US PLANS TO INCREASE PRESENCE IN COLOMBIAN MILITARY BASES ROILING NEIGHBORS

Simon Romero at the New York Times reports that a plan to increase the American presence at three military bases in Colombia is drawing the ire Bogota's neighbors.

"Venezuela, Ecuador and Nicaragua, which are members of a leftist political alliance that is led by President Hugo Chávez of Venezuela and backed by his nation’s oil revenues, have all criticized the plan, saying it would broaden the military reach of the United States in the Andes and the Caribbean at a time when they are still wary of American influence in the region.

Despite a slight improvement in Venezuela’s relations with the United States in recent months, Mr. Chávez has been especially vocal in lashing out at the plan. Speaking on state television here Monday night, he put Venezuela’s diplomatic ties with Colombia under review, calling the plan a platform for 'new aggression against us.'

Colombia’s foreign minister, Jaime Bermúdez, on Tuesday defended the negotiations, which are expected to produce an agreement in August, asking neighboring countries not to interfere in Colombia’s affairs. 'We never expressed our opinion in what our neighbors do,' he said, pointing to Mr. Chávez’s attempts to strengthen ties with non-Western nations. 'Not even when the Russian presence became known in Venezuelan waters, or with relations with China,' he added."

13. EIA SAYS COMMERCIAL CRUDE STOCKS DOWN, GASOLINE AND DISTILLATE UP--REGULAR GASOLINE PRICES DOWN, REFINERY UTILIZATION DOWN

The EIA reports that commercial crude oil stocks were drawn down by 1.8 million barrels in the week ended July 17 to 342.7 million barrels. Inventories are still above the five year historical range for this time of year. The draw down was smaller than the 2.1 million barrel fall expected as per the median expectation of analysts in a Bloomberg survey. Bloomberg also notes:

"In contrast to the Energy Department supply report, the American Petroleum Institute said late yesterday that stockpiles rose 3.1 million barrels last week, the first gain since April."

Gasoline stocks grew by 800,000 barrels and are now at the top of the five year historical range for this time of year. Distillate stocks grew by 1.2 million barrels and there are 32.4 million barrels more distillate in storage than there was this time last year, about 25.3% more. Refining utilization fell to 85.84% from 87.87% in the week previous. The national average price of regular gasoline fell to $2.463/gallon in the week ended July 20, just below the range where driving demand begins to fall in response to the price.

Daily Sources 5/11

1. GLOBAL BUSINESS SERVICES INDICATORS SHOW SIGNS OF STABILIZATION

In a long and comprehensive post, Edward Hugh at Fistful of Euros reports that the rate of contraction in business services is stabilizing globally in parallel with production manufacturing index indicators.

"The JPMorgan Global Serices Report is based on the results of surveys covering around 3,500 executives in countries which taken together account for an estimated 60% of global service sector output."

Hugh notes that stabilization is not the same as recovery. His post gives some detail on the Eurozone, Spain, Italy, Germany, France, Russia, and the US, where the story is in outline fairly similar, though the devil is always in the details. For example, he touches on price indicators for Europe:

"All eurozone countries reported significant downward price pressures, and these are reflected in producer prices (which fell over 5% year on year in March, lead mainly by energy and commodities) and consumer price disinflation, where year on year price increases were only 0.6% in April, for the second month running."

Worth a look.

2. ICELAND LIKELY TO BEGIN PROCESS OF JOINING THE EU, SEEMINGLY CONFIRMING PREDICTIONS THAT THE CRISIS WILL BROADEN THE UNION

Eurointelligence reports that Iceland's new government has "formally decided to start a process leading to full EU accession, a decision to be backed up a parliamentary vote next Friday."

"The government wants to make a formal request for EU accession by July. The latest polls suggest that over 60% of the population is in favor of accession negotiations, with 27% against."

Given recent analysis which argues that the euro will end up benefiting most from the current debate over whether a new reserve currency is required as an alternative, at this stage it appears that Martin Feldstein's argument that the financial crisis will be a centrifugal force causing member nations to leave the European monetary union--see Daily Sources 1/5 #1--is proving less prescient than Wolfgang Münchau's that it is more likely to enlarge both the eurozone and the EU--see Daily Sources 11/13 #1.

3. POLLING SHOWS THAT MERKEL LIKELY TO HEAD WHICHEVER COALITION ENDS UP WINNING FUTURE GERMAN ELECTION; IN THE MEANTIME FRIDAY CONFERENCE HIGHLIGHTS HOW ABANDONING NUCLEAR WILL INCREASE GERMAN ENERGY DEPENDENCE

Eurointelligence also reports that the likely outcome of the elections in Germany this year will either be a coalition of the Christian Democratic Union and the Free Democratic Party--with a tiny majority--or a "grand coalition" of the CDU and the Social Democratic Party. Eurointelligence notes that Angela Merkel would remain Chancellor in either case. Meanwhile, on May 8 Mark Hibbs at Platts reported that

"Germany's planned phase-out of nuclear power generation will raise the country's natural gas demand between 12.6% and 23% by about 2023, according to a statement on energy security policy submitted to the EU summit in Prague on Friday by the co-ruling Christian Democrats."

The Russo-Ukrainian contract dispute which shut off natural gas supplies to much of Europe at the beginning of the year is expected by many to convince a majority of Germans that the decision to abandon nuclear power was a mistake. Lars Jossefson, CEO of Vattenfall--an electric utility which serves a number of states within Germany, told Reuters in January that he expected the discussion over nuclear to re-open shortly--see Daily Sources 1/15 #1. A global survey by Accenture published in March suggested that the general view of nuclear power was becoming more positive, with the exception of France, where it provides 80% of the country's nuclear power or thereabouts--see Daily Sources 3/17 #8.

4. NORWEGIAN OIL PRODUCTION DOWN 7% IN APRIL FROM MARCH; BRENT EXPORTS TO FALL 12% IN JUNE ON REPAIRS AND MAINTENANCE

Spencer Swartz at Environmental Capital reports that Norwegian oil production was down 7% in April to 1.99 mb/d from 2.15 mb/d in March. Meanwhile, Alexander Kwiatkowski at Bloomberg reports that Dated Brent crude exports will drop by 12% in June to 1.257 mb/d from 1.427 mb/d in May as field operators carry out maintenance and repairs.

5. IRANIAN, ALGERIAN AND KUWAITI OIL OFFICIALS INDICATE THAT THEY DO NOT THINK NEW OPEC CUTS LIKELY, SAUDI ARAMCO MAINTAINS SUPPLY CUTS TO ASIAN REFINERS, IRAN INDICATES IT WILL NEED WESTERN FINANCING IN ORDER TO MAINTAIN OIL EXPORT LEVELS GOING FORWARD, THE UAE EXPECTS GDP GROWTH ON OIL BTW $50-53/B, WHILE WESTERN ANALYSTS BECOME WORRIED ABOUT EFFECT OF COMMODITIES PRICE INCREASES ON RECOVERY

Tamsin Carlisle at the UAE's National reports that Iranian, Algerian, and Kuwaiti oil officials all have indicated in recent days that they expect OPEC not to opt for further supply cuts in the upcoming meeting. Christian Schmollinger at Bloomberg reports that refiners in Japan, Taiwan and South Korea told the journalist on condition of anonymity that Saudi Aramco was maintaining supply reductions to Asian refiners in June.

"Saudi Arabia produced 7.925 mb/d of crude in April, down 25 kb/d from March, according to a Bloomberg News survey of analysts, oil companies and producers. That’s 126 kb/d under its OPEC production target of 8.051 million barrels a day."

Upstream online reports that Seiffolah Jashnsaz, managing director of the National Iranian Oil Company, told a conference that Iran needed to increase its investment in oil and gas sector development if it is to maintain its status in OPEC through 2025. He indicated that investment requirements would run at about $25-30 billion per annum in order to do so and that Tehran would need to access financing from the West to carry out the required efforts, indicating that the country's earnings were not sufficient to cover the costs. Geoff King at Platts reports that department acting director Ahmad Abu Ghaida at the Abu Dhabi Department of Economic Planning told a conference that they expect economic growth to return to the UAE in the second half of 2009 on the back of oil prices of $50-53/b.

"Despite the ongoing global financial crisis causing 'economic turmoil and uncertainty worldwide,' Abu Ghaida said there are a number of factors providing a positive outlook for the UAE, including a 'relatively positive outlook for oil prices of 'around $50-$53/b in 2009 and around $60/b in 2010.' The UAE currently produces around 2.2 mb/d."

James Hamilton has a post at Econbrowser where he argues that the US Fed--and I'd expect other monetary authorities to be as well--is likely concerned about the rebound in commodities prices over the last couple months. He plots a graph of their prices from March 17:



And comments:

"Some increase in relative commodity prices is certainly to be expected if we are indeed about to see a recovery in real economic activity. But this is a trend the Fed needs to watch closely from here, and could prove to be a significant limiting factor on how much the Fed can hope to achieve from monetary stimulus.

Because I for one do not think it's a good idea to call for a replay of the 2008:H1 commodity market show."

Worth reading in full.

6. CHINESE OIL IMPORTS UP 13.6% IN APRIL YOY AND CONSUMER PRICES DOWN, MOSTLY ON FOOD, AND PORK, IN PARTICULAR

Eadie Chen and Tom Miles at Reuters report that China imported 16.17 million tonnes (3.93 mb/day) of crude oil in April, a 13.6% increase from the year prior.

"If confirmed, the daily rate would surpass last month's 3.85 mb/d and comes next only to a record import level of 4.07 mb/d in March 2008 when Beijing drummed up for the Beijing Olympics and would also be the first positive yearly growth this year."

Reuters provided a graph of oil imports from 2006:



Liu Li and Terrence Poon at the Wall Street Journal report that China's consumer price index fell at an annual rate of 1.5% in April, marking the third straight month in consumer price declines. "The producer price index was down 6.6% following March's 6.0% fall, the fifth straight month of deepening declines." Further, new loans extended in April fell to 591.8 billion yuan, down from 1.89 trillion yuan in March, but up 409 billion yuan from April 2008. In a related story, Shen Hong at China Journal reports that pork prices in major Chinese cities fell by 10% in April from a year previous.

"If prices continue to fall, farmers will start killing pigs because it makes no sense for them to buy the feed for hogs that are worth little when sold.

The TV report warned the government is already considering boosting the country’s pork reserves and offering subsidies to pig farmers, in a bid to ensure future supply.
...
Food constitutes nearly 33% of China’s CPI, and pork’s weight in the food category is estimated to be at least 10%."

With so many workers migrating back to the country, it makes intuitive sense that food in the major cities would be facing a decline in demand. The subsidies targeting the rural areas so far do not include food, as far as I understand.

7. CHINA AND KUWAIT TO BUILD 300 KB/D REFINING COMPLEX IN GUANGDONG

Joanna Hartley at Arabian Business.com reports that the Kuwaiti and Chinese governments signed yesterday five deals incorporating oil, gas and environmental sectors. John Duce and Eugene Tang at Bloomberg, on the other hand, report that the deal includes an agreement between Sinopec and the Kuwait national oil company to build a $9 billion refining complex in Guangdong province.

"[T]he Kuwaiti venture in Guangdong will have a refining capacity of 300 kb/d, Kuwait News Agency reported April 28, citing the country’s oil minister. No other details were available.

The project’s location may be moved to Zhanjiang from an earlier plan of Guangzhou, Zhang [Guobao, the head of China’s National Energy Administration] told reporters yesterday, adding talks between the companies are still continuing. The plant will include an oil refinery and an ethylene plant and the complex should be built away from 'big cities,' he said."

Mr. Zhang indicated that there will be a third investor in the project, and mentioned either BP or Shell. (There is some confusion about the deal, with some reporting that the complex is to be built in Kuwait, but I suspect that it would be built in China, as my guess is that Beijing wants to minimize products imports given an anti-colonialist ideology.)

8. ROXANA SABERI TO BE RELEASED TODAY

BBC reports that Roxana Saberi has had her sentence commuted and will be freed, and able to leave Iran, today. She has been banned from reporting in the country for five years.

9. CANADIAN NEW HOME PRICES FALLING, BUT NOT AT THE PRECIPITOUS RATE OF THE US

Rebecca Wilder at News N Economics reports that the Canadian new homes market is weakening slightly, but that this is a result of weakening economic fundamentals, not overly-indebted households. She plots a graph of Canadian vs US home prices from 1997:



10. HAS THE NEW SOMALI TRANSITIONAL FEDERAL GOVERNMENT GIVEN PIRATES WARNING THAT THEIR DAYS OF FREELY OPERATING ARE OVER?

Eagle1 at the Eagle Speak blog reports that:

"two leaders of Somali pirate groups (at least 30 hijacks between them, I am told) are under pressure from the Islamic courts to stop all hijacking by the end of this month, when the monsoon normally slows pirate activities anyway."

Further, mosque leaders in Puntland have reportedly been told to preach to their female parishioners that pirates bring shame to Somalia and are not good Muslims. It is an odd story, does "Islamic courts" refer to the ICU--Islamist Courts Union--defunct as an organization, as I understand it, but a former head of which is now putative President? They should have some more control in Puntland than al-Shabaab, which is the group which has international Islamist backing, though al-Shabaab, if memory serves, did threaten pirates operating out of Harardere, well north of Mogadishu, but they are not in charge there.

If "Islamic courts" refers to the "governing" coalition, that may well make sense ... and they could put an end to it, though they are much more moderate in their Islamist views (even though the US decided they were too Islamist once upon a time leading to the Ethiopian invasion) than al-Shabaab. (h/t Galrahn at Information Dissemination.) From a May 8 story at the New York Times by Jeffrey Gettleman also linked to in Galrahn's post:

"The new president [of Puntland, not the Transitional Federal Government], Mr. [Mohamed Mohamud] Abdirahman, is a technocrat who had been living in Australia and came back with many Western-educated advisers--and an ambition to be Somalia’s first leader to do something substantive about piracy. He formed an antipiracy commission and even issued a 'First 100 Days' report.

Yet, Puntland officials are doing precious little about the pirate kings under their noses00reluctant, perhaps, to provoke a war with crime lords backed by hundreds of gunmen. When asked why they weren’t arresting the big fish, Mr. Abdirahman said, 'Rumors are one thing, but we need evidence.'"

11. PIMCO LOWERS EXPOSURE TO US GOVERNMENT-RELATED DEBT

In what may be a leading indicator, Dakin Campbell at Bloomberg reports that Bill Gross, manager of Pacific Investment Management Co.’s [PIMCO] $150 billion Total Return Fund, has reduced the funds holdings of US government-related debt since March. In his May investment outlook, Gross wrote:

"The Obama cannon shot will have financial consequences. Investors should recognize that this grassroots trend signals--most importantly--an increasing uncertainty of cash flows from financial assets.
...
Do not be deceived by the euphoric sightings of ‘green shoots’ and the claims for the new bull markets in a multitude of asset classes."

Campbell reports that Gross concluded: "Investors should partner with the government but do so at the 'senior level of the balance sheet.'"

12. THE NEW FANGLED DERIVATIVES WERE MOSTLY USED BY FINANCIAL INSTITUTIONS, NOT BY THE BUSINESSES THEY WERE PRESUMABLY DESIGNED FOR

Adam S. Posen and Marc Hinterschweiger at Realtime Economic Issues Watch argue that the recent financial innovations in derivatives provided little, if any benefits, to any sector of the economy outside finance.

"Between 2003 and 2008, US gross fixed capital increased by about 25%, a reasonable number during an economic expansion, but hardly a boom. During the same five-year period, the global amount of over-the-counter (OTC) derivatives increased by 300%, while derivatives held by the 25 largest US commercial banks rose by 170%. Clearly, growth in new financial products has outpaced fixed capital formation both globally and in the United States by a large margin. This has been especially true since 2006, when investment stagnated, but derivatives continued to grow at a rapid rate. There only seems to be a weak link, if any, between the growth of the newest complex--and now proven dangerous if not toxic--financial products and real corporate investment."

Posen and Hinterschweiger further note that only 11% of the counterparties in OTC derivatives transactions were not financial institutions--meaning that the non-financial institutions for which the derivatives were presumably designed didn't, on the whole, use them. Worth reading in full.

13. HOTEL SECTOR BEING HIT HARD

Ed Harrison at Credit Writedowns reports that the hotel industry is being hit hard in conjunction with the commercial real estate market. Harrison remarks:

"[W]e should expect the cost cutting to continue unabated in terms of non-residential property investment--and this includes the travel & leisure sector as well as commercial real estate. Obviously, this will be a drag on GDP. Investment levels at least thirty percent below today’s investments are not an unreasonable expectation as I argued in a recent post (see the section on fixed investment)."

He notes that owners across the entire spectrum of the real estate market are cutting back on maintenance in order to meet cash flow requirements--which has economic cascading effects.

Daily Sources 3/4

1. Philip P. Pan at the Washington Post reports that Russian federal courts have ruled that they would try Russian oil oligarch Mikhail Khodorkovsky in Moscow, having previously ruled with prosecutors who resisted the motion.

"Prosecutors are calling Khodorkovsky's alleged crime the largest theft in the history of modern Russia. His supporters describe the accusations as preposterous and say the authorities are staging a second show trial intended to keep Khodorkovsky in prison indefinitely."

Politicos associated with President Dimitry Medvedev have indicated support for the move, saying the Khodorovsky story has seriously damaged Russia's image abroad. Mr. Medvedev had made a commitment to the "rule of law" and the rejection of "legal nihilism" one of his major campaign promises for office. Stephen Bierman at Bloomberg reports that Rosneft profits fell by 64% in the fourth quarter, to $775 million from $2.18 billion a year earlier. Rosneft had $21.3 billion in net debt at the close of 2008, and is obligated to repay $7 billion this year. A great portion of Rosneft's debt obligations are to China, and specifically CNPC, in return for financing the purchase of Khodorovsky's Yukos's outstanding assets.

2. China's recent use of its financial assets to continue with its strategy of taking stakes in overseas commodities producers and resource concessions has spurred renewed chattering class concerns regarding Beijing's intentions. Platts has a special feature on the recent acquisition and politically-influenced lending spree, saying:

"While governments and companies across the developed world are in a state of financial paralysis, fixated on the unfolding economic gloom and doom, Chinese leaders and company executives have been jetting through the Middle East, Africa, Latin America and Australia, checkbooks in hand."

According to the piece, which is worth reading in its entirety, the Politburo put the kibosh on overseas acquisitions in June last year due to concerns about the US housing crisis, but that Beijing reversed that decision in December. Platts includes in the piece two useful tables, one on loans and investments so far in 2009:



And one in metals M&As successfully carried out in 2009, which has caused so much concern in Australia:



Michael Pettis, professor of finance at Peking University's Guanghua School of Management, has an opinion piece in Wall Street Journal Asia which points out that the stimulus program in China so far has not boosted consumption.

"[Instead] of reducing China's export dependence, the opposite is happening. China's trade surplus has risen, from an already-high monthly trade surplus of just under $17 billion in the first half of 2008 to nearly $33 billion in the second half, with January figures this year clocking in at just over $39 billion. The stimulus isn't working because the money isn't going where it needs to go -- to household consumers and service industries, whose rising demand could absorb a greater share of Chinese production."

Prof. Pettis argues that the transition from an export-led growth model to a consumption-led one will be difficult, and impossible to do quickly without causing more trouble than its worth:

"China can and will eventually make the transition away from export-led growth, but no one should expect it to be quick or easy. China's development model was based on expanding investment rapidly and boosting savings while constraining consumption, and for this reason it never developed a significant service industry or a financial system capable of channeling funding into consumption through developed-world-style consumer finance. These flaws are embedded deeply into the economy. As much as Beijing would like to change its model, it cannot do so quickly except by tolerating a massive collapse in manufacturing output.

Obviously China does not want to do this, and it would certainly be harmful for the world over the medium- and long term if it did."

Well-worth reading in full. Sky Canaves and Juliet Ye at the China Journal report that today's meetings of the National People’s Congress and the National Committee of the Chinese People’s Political Consultative Conference are dominated by the government’s economic stimulus package, social security and corruption. "CPPCC delegate Liu Hanyuan wants to give everyone 4,000 yuan ($585) in shopping vouchers to stimulate consumption." The rumors of additional stimulus this morning spurred price increases in commodities. Justin Fox at The Curious Capitalist reports that the International Labor Organization compiled a compendium of economic stimulus packages globally, and it turns out that Beijing and DC are by far the largest players not just in absolute terms, but as a share of GDP as well.



Meanwhile, Nouriel Roubini's RGE Monitor's newsletter today included a long analysis of rising protectionist measures being taken internationally. (You can subscribe to their newsletter for free here.) Some key excerpts:

"Countries like Indonesia, India, Vietnam, Ukraine, Russia, Argentina, Ecuador and Turkey have raised import tariffs, duties or laid restrictions on import licenses or quotas. In their fiscal stimulus packages, several countries are also offering distortionary subsidies, and credit and other incentives for exporting firms to sustain trade flows, especially countries with high export dependence and low domestic demand. But trying to promote exports amid global demand and industrial activity slump might only add to the global excess capacity and deflation pressures. One of China’s first steps was to reinstate and then increase export rebates which create disincentives to sell goods at home, a move that might only increase the domestic imbalances, as might the government’s efforts to buy grain and metals to support prices. As WTO bound rates, especially for developing countries, have fallen significantly in recent years, governments have ample room to raise tariffs closer to the bound rate levels without violating WTO rules."

[Emphasis mine.]

"[To] prevent import leakages and promote production and jobs at local firms, fiscal stimulus in countries like US, Spain and France encourage spending on domestically produced goods at the expense of foreign-owned firms and nationals working at those firms. The US fiscal stimulus package limits sourcing infrastructure spending related goods from WTO signatories like EU, NAFTA and Japan while excluding non-signatories like China, Brazil, India, Russia, Ukraine, Turkey and many other developing countries. Since close to 55% of the infrastructure spending will take place after 2009-10, the impact of this measure on jobs and growth will be limited in the short-term. But this has nevertheless led other countries implementing fiscal stimulus and infrastructure spending to retaliate with similar measures to protect their own jobs and firms."

RGE also takes on financial protectionism like France's decision to establish a fund to prevent to foreign acquisition of strategic firms at distressed prices. I am more skeptical about the advantages of the unrestricted and unregulated flow of capital, but it remains worth reading in full.

3. Elizabeth Fry at the Financial Times reports that Australian GDP officially contracted by 0.5% in the fourth quarter from the third. Year over year, the economy grew by 0.3%.

4. Maria Danilova at the Associated Press reports that armed Ukrainian national security agents raided the offices of Naftogaz in masks today. "The national security service is controlled by President Viktor Yushchenko." The agents were reportedly seeking copies of the contract signed with Gazprom on January 19, effectively ending the gas supply shut off by Moscow. Naftogaz is apparently required to pay for February Ukrainian gas consumption by Saturday, March 7. The company has indicated that it has collected the necessary funds for payment, though it had earlier indicated on its website that it may well have trouble doing so (see Daily Sources 2/26 #3 and Daily Sources 2/19 #6.) President Yushchenko has characterized the January contract agreement as "capitulation" (see Daily Sources 1/23 #4) and talks with Moscow initiated by Prime Minister Yulia Tymoshenko to secure a loan to help plug the budget deficit as "a threat to Ukraine's national interests" (see Daily Sources 2/10 #8.)

"In an interview with the French newspaper Le Monde published Wednesday, Tymoshenko called for early presidential elections and indicated she would run and win. She said that her struggle with Yushchenko will end 'not in my destruction but in his political suicide.'"

Dmitry Zhdannikov at Reuters reports that Gazprom earlier this week agreed not to fine Naftogaz for taking less natural gas than it had contracted for and indicated today that it was concerned that Naftogaz was not going to be able to pay for supplies going forward. "'It seems that someone doesn't want Naftogaz to pay in time in order that we don't have problems,' Gazprom spokesman Sergei Kupriyanov told Reuters."

5. Eurointelligence reports that Icelandic popular support for joining the EU--which stood at 80% at one point in their crisis--now stands at about 40%.

6. Pamela Constable at the Washington Post reports that the Afghan Elections Commission today rejected President Karzai's choice of dates for the presidential election which Karzai had originally postponed.

"Karzai, who has led Afghanistan for seven years and hopes to win reelection, issued a decree last week that effectively ordered the polls held in April or May. The commission, which had previously ruled the election should not be held until August, defied his decree Wednesday and reaffirmed its earlier position."

The UN and NATO have both backed the August date.

7. Colum Lynch and Stephanie McCrummen at the Washington Post report that the International Criminal Court yesterday issued a warrant for the arrest of the president of Sudan, Omar Hassan al-Bashi.

"A three-judge panel upheld a request by the ICC's chief prosecutor, Luis Moreno-Ocampo of Argentina, to charge Bashir on seven counts of war crimes and crimes against humanity. But it ruled that prosecutors had not provided enough proof to charge Bashir with orchestrating a campaign of genocide. Moreno-Ocampo, the panel said, was free to pursue the genocide charge later if he obtained additional evidence."

The court stated that Bashir's status as a sitting head of state would not shield him from being called to task for criminal responsibility, though it remains rather unclear who will be able to bring the man to trial--especially now that he is very unlikely to travel anywhere which would carry out the arrest warrant. In an interview today, Sudan's ambassador to the UN Abdalmahmood Adalhaleem Mohamad said, predictably enough:

"For us, the ICC doesn't exist. We are not going to be bound by any decision they make against our leadership. We are in no way going to cooperate with it."

The Southern Sudanese leadership has had a mixed response to the move by the ICC. Salva Kiir, Vice President under the 2005 peace deal, said,

"The ICC issue has to be dealt with in many ways--legally, diplomatically, politically--and we should engage these fronts. We want to work with our partners in peace ... That does not mean support [for the ICC decision] and that does not mean condemnation. We want a solution to the conflict that brought about the ICC decision in the first place."

Alex De Waal, a Sudan expert and program director at the Social Science Research Council, said, "the indictment would likely complicate the internal politics of Bashir's ruling National Congress Party, saying that the Sudanese political process 'will get paralyzed or slow down, and that does not bode well for peace.'"

8. Bob Willis at Bloomberg reports that ADP Employer Services released data showing that companies cut 697,000 jobs in February, much more than most analysts had anticipated.

9. The EIA reports that crude stocks fell by 700,000 barrels to 350.6 million barrels in the week ended February 27. The stocks levels are well above the five year historical average range for this time of year, but are smaller than the most recent peak in 2007. According to a Bloomberg survey, analysts had expected a 1 million barrel build. Gasoline stocks built by 200,000 barrels versus Wall Street expectations of a 800,000 barrel decline, and are in the middle of the historical range. Distillate stocks built by 1.7 million barrels versus expectations of a million barrel draw, and are well above the five year historical average range for this time of year. Taken in isolation, the news is mixed, but high crude stocks levels should put downward pressure on crude prices. That said, gasoline cracks, as expressed by Apr delivery of RBOB over CL Apr 09, were awfully healthy at close yesterday at $13.76/b.

Daily Sources 11/6

1. Ashley Seager, Julia Finch and Jill Treanor at the UK Guardian report that the Bank of England has cut its benchmark lending rate by 1.5%, or 150 basis points, to 3%. Real Time Economics has posted a copy of the entire text of European Central Bank President Jean-Claude Trichet's statement announcing a cut in its benchmark lending rate by 0.5%, or 50 basis points, to 3.25%.

"Looking forward, recent sharp falls in commodity prices, as well as the ongoing weakening in demand, suggest that the annual HICP inflation rate will continue to decline in the coming months and reach a level in line with price stability during the course of 2009. Depending, in particular, on the future path of oil and other commodity prices, some even stronger downside movements in HICP inflation cannot be excluded around the middle of next year, particularly due to base effects. These movements would be short-lived and therefore not relevant from a monetary policy perspective. Looking through such volatility, however, upside risks to price stability at the policy-relevant horizon are alleviating. The remaining upside risks relate to an unexpected increase in commodity prices, as well as in indirect taxes and administered prices, and the emergence of broad-based second-round effects in price and wage-setting behavior, particularly in economies where nominal wages are indexed to consumer prices. The Governing Council calls for these schemes to be abolished. It is imperative to ensure that medium to longer-term inflation expectations remain firmly anchored at levels in line with price stability."

Elena Logutenkova and Joshua Gallu at Bloomberg report that the Swiss central bank cut its benchmark lending rate by 0.5%, or 50 basis points, to 2% from 2.5%.

2. Shannon D. Harrington and Abigail Moses at Bloomberg report that the DTCC data on the net institutional exposure to credit default swaps--which showed that several governments were among the most exposed--is incomplete. The report doesn't include privately-negotiated and tailored bilateral credit default swaps designed to guarantee specific collateralized debt obligations. I'm guessing that private institutions will be more exposed to bespoke CDSs than national governments.

3. Phillip Lane, Professor of International Macroeconomics at Trinity College Dublin and CEPR Research Fellow, at VoxEU argues that Iceland should leap at the chance to join the EU. Also, as I suggested as a possibility in an earlier post, he urges that the prerequisite economic criteria for monetary union be loosened in order to allow for its speedy accession:

"The current crisis also raises questions about the appropriateness of the 'exchange rate stability" criterion in determining whether a country is ready to join the euro area. Under the existing rules, a country must spend two years inside the ERM II mechanism before it can enter the EMU. Recent weeks have shown that even countries with excellent macroeconomic fundamentals are vulnerable to major currency shocks. In this new environment, it seems expensive to impose a two-year currency stability test on countries that wish to join the euro."

4. Jesse’s Café Américain has come commentary on an interview with Marc Faber conducted by swissinfo where he predicts that the United States will default. Faber is a fairly renowned Swiss investor who tends to a contrarian take on the world economy and whose predictions are usually only of the pay-per-view sort, and so all public comment should be viewed with some skepticism. Either way, worth reading.

5. Tom Barkley at Real Time Economics reports that the IMF predicts a global recession for 2009. The IMF expects the global economy to slow to 3.7% this year and 2.2% in the next. The organization defines anything below 4% global growth as recessionary.

"Forecasts for emerging and developing economies were adjusted even more sharply, with the 2008 growth estimate falling to 6.6% from 6.9% and the 2009 forecast dropping to 5.1% from 6.1%.

'Among the most affected are commodity exporters, given that commodity price projections have been marked down sharply, and countries with acute external financing and liquidity problems,' the report said, while noting that China and other countries in East Asia are generally in better financial and economic shape.

China’s 2008 forecast was left unchanged at growth of 9.7%, while the 2009 estimate was cut to 8.5% from 9.3%."

6. Brad Setser at Follow the Money argues that China is heading into a serious downturn.

"Absent the close to 3% contribution from net exports in the boom years, China’s growth would have been a (respectable) 9% rather than above 11%. With a negative 3% contribution to growth during the boom (as is often the case), growth would have been close to 6%. And if net exports turn negative now China’s growth clearly would slow sharply.

But the real key to forecasting China’s future growth consequently is determining whether domestic consumption and above all investment will continue to grow strongly in the absence of strong export demand.
...
The (likely) fall in construction is particularly worrisome. China’s new capital intensive export sectors haven’t been huge job generators. Building buildings by contrast employs lots of people – including a lot of migrants from rural areas."

Well-worth reading in full.

7. Edward Wong at the New York Times reports that the President of Taiwan, Ma Ying-jeou, decided to meet with the People's Republic of China's senior Taiwan negotiator, Chen Yunli, today. The meeting is one of the highest ranking meetings to take place since the end of the Chinese Civil War in 1949. Mr. Chen is in Taiwan for five days of talks and signed a slew of agreements increasing infrastructural links between the two countries yesterday. The meeting between Mr. Chen and the President lasted five minutes. Gifts were exchanged.

8. Nizam Ahmed at Reuters reports that Myanmar has halted oil and gas exploration in the disputed offshore areas which has precipitated a naval confrontation with Bangladesh. Today the Chinese government called upon both governments to solve the problem amicably. However, Myanmar has not ordered its vessels out of the area, saying that the area is in their exclusive economic zone and that exploration will resume shortly.

9. Grant Smith at Bloomberg reports that the IEA released the executive summary of its World Energy Outlook--due to be released on November 12--said that it expects oil prices to average $100/b between 2008 and 2015. The IEA urged the removal of subsidies:

"The removal of energy subsidies, which last year totaled $310 billion in the 20 largest industrializing countries, 'could make a major contribution to curbing energy demand and emissions growth.'"

Unfortunately, this is very difficult to do politically in some of the fastest growing and largest consumers, members of OPEC like Saudi Arabia and Iran. It is also an extremely painful action to take for countries like China and India to take, where small increases in petroleum product prices put the products out of reach for significant portions of the population. The organization also forecasts that Saudi Arabia will be producing over 15 mb/d of oil to the world in 2030, which is rather difficult to see happening. (It is often hard to decide what to make of IEA--or EIA or OPEC for that matter--pronouncements, given that one's wishes for oneself are often the best indicator of one's beliefs.)

10. Vladimir Soldatkin at Reuters reports that the Russian tariff agency has cleared a nearly 20% increase in prices for domestic sales of natural gas. Moscow's goal is to remove all subsidies on natural gas by the end of 2011.

11. Anna Driver at Reuters reports that bidding for the construction of the Saudi Aramco ConocoPhilips 400 kb/d capacity export refinery to be based in Yanbu has been halted today. The two companies have rescheduled bidding for the second quarter of 2009, by which time they expect the turmoil in the financial markets to have worked themselves out. This refinery will be built into what many analysts expect will be a glut of refinery capacity in Asia specifically. The Oil & Gas Journal reports that PetroSA--the South African refiner--has secured from the government the go ahead for its $11 billion, 400 kb/d, export refinery in Coega, just outside Port Elizabeth. However, the final decision on whether to construct the refinery is also being delayed until 2010. If it is, it is expected to come on line in 2014.

12. David Osler at Lloyd's List reports that Svitzer, a shipping company which is a subsidiary of Danish conglomerate Maersk, has become the first company to publicly announce it is refusing to sail through the Suez Canal due to pirating issues, sailing the Cape of Good Hope instead.

13. Jihadica provides a sampling of jihadist responses to the election of Barack Obama. An example:

"Al Hakim: "Brother Abu Ahmad al-Salafi, like you I believe that al-Qaeda wants the election of the Republican candidate McCain. But the organization has been quiet until now, when Obama has been elected. There can be only one reason for this: the organization is taking the next step after the success of its previous plan against the wildly stupid Republican Party. The new plan requires a massive effort from al-Qaeda and we are behind it. The Democratic Party is diplomatic and smart.'"

Well-worth reading in its entirety.

14. The Associated Press reports that Iranian President Mahmoud Ahmadinejad congratulated Barack Obama on his victory today, the first time that an Iranian leader has expressed well wishes to a president-elect in the history of the Islamic Republic of Iran. Ahmadinejad encouraged "an approach based on justice and respect, as well as lack of intervention in the affairs of others."

15. Candace Rondeaux at the Washington Post reports that Afghani President Hamid Karzai has called upon President-elect Obama to put an end to air strikes in Afghanistan, a practice held responsible for increased civilian deaths in that country recently.

16. There are several pieces out there recycling rumors on who Obama might choose to lead the President-elect's energy team. Platts mentions Pennsylvania Governor Ed Rendell, Kansas Governor Kathleen Sebelius, Arizona Governor Janet Napolitano, California Governor Arnold Schwarzenegger, "MIT Professor Ernie Moniz, a former undersecretary of energy from 1997 to January 2001; General Electric CEO Jeffrey Immelt; and Dan Reicher, a former assistant secretary of energy for energy efficiency and renewable energy in the Clinton administration who recently joined Google." Schwarzenegger is getting more press than most on the issue, and I suppose he makes sense, given that a Democratic governor would probably follow for California. Given the challenges the United States faces in terms of its energy future, it probably does make sense to put candidates capable of organizing and motivating large numbers of people to accept--and even embrace--uncomfortable changes. Whether or not Schwarzenneger could perform that task, I cannot say, but someone charismatic and politically-tested seems advisable. In a related story, Susan Davis and Greg Hitt at the Wall Street Journal reports that California Rep. Henry Waxman is challenging Rep. John Dingell of Michigan for the chair of the Energy and Commerce Committee. Well-worth reading in full.

Daily Sources 11/3

1. In an opinion piece in the Financial Times, Wolfgang Münchau argues that the financial crisis is likely to enlarge the eurozone as well as the EU. Münchau points out that the financial aid package given to Hungary by the European Union and the IMF last week has austerity measures that will ensure that Budapest meets the criteria for economic and monetary union. As I noted in an earlier post, Danes might now be rethinking the maintenance costs of a national currency as their benchmark lending rate is now 1.75% higher than the European Central Bank's. Countries which have banking systems too large to be defended by national authorities may decide to reverse their decisions to opt out of the eurozone, including Sweden and the Czech Republic. As for Iceland, which never joined the EU, the

"Reykjavik newspaper Frettabladid carried a poll last week showing approval for EU membership up from 48.9 per cent a year ago to 68.8 per cent now. The number in favour of adopting the euro is even higher."

Münchau also expects that support for eurozone membership will begin to grow in even the UK. That would be a tremendous sea change, to be sure, and might have some dampening effect, if not handled astutely by Washington, on the special relationship. The article is worth reading in full.

2. Andrew Batson at Real Time Economics has a translation of Premier Wen Jiabao's discussion of Chinese economic policy in a long piece published in the latest issue of the Communist Party Journal.

"Over the medium to long term, there is great market potential in expanding consumer spending. This is an advantage that our country has and also an important basis for resisting external shocks. We must make expanding domestic demand the fundamental basis of economic development."

Though there are obvious differences, my first response to reading this was China decides to turn inward, again. But there has been plenty of advice from the West that China do just that, including the recent editorial in the New York Times--which I was admittedly very snarky about. I think, therefore, you could read this as a sign of Beijing's determination to signal its desire to continue a policy of international financial cooperation at least for now. On the other hand, it is an important shift which also lays the groundwork, I think, for "decoupling"--or at least "an important basis for resisting external shocks."

3. Liz Sly at the Chicago Tribune reports that the al-Maliki government has announced plans to cut the salary of the sunni militias which had been central to the US strategy of increasing stability in Iraq from about $300/month to about $250/month. Sly's article does not mention whether this move is part of revamping the budget brought on by lower oil prices generally, but I imagine it likely a result of all public programs facing lower revenues. That said, it is obviously extremely divisive given the Shi'a government. The country is apparently in the middle of a political storm after Kurdish leader Massoud Barzani suggested that the Kurdish region might offer the US military bases if the Maliki government does not agree to a new status of forces agreement, per Juan Cole. It seems that the various political elements in Iraq are pursuing policies of division just as we are on the cusp of steep reductions in US forces, which at least arguably have been providing security. Not all that surprising, but still worth noting.

4. Cherian Thomas at Bloomberg reports that on November 1 the Reserve Bank of India lowered the repurchase rate--the rate at which the bank lends to commercial banks--by 0.5% (or 50 basis points) to 7.5%. The central bank also reduced the cash deposits reserve requirements for banks from 6.5% to 5.5% and in government debt from 25% to 24%. It also increased the amount of money commercial banks can borrow from the central bank to meet redemptions from mutual funds and non-banking financial companies from 0.5% of total deposits to 1.5%. "Citigroup Inc. economists Rohini Malkani and Anushka Shah estimate the steps will inject 1.2 trillion rupees ($24 billion) into the banking system."

5. Vipin V. Nair at Bloomberg reports that Tata Motors Ltd.'s sales dropped by 20% from a year ago in October. Tata is India's largest truck manufacturer.

"Maruti, the maker of half the cars sold in India, said sales fell 7 percent last month to 64,490. Bajaj Auto's sales of motorcycles, three-wheeled auto rickshaws and scooters plunged 31 percent to 191,840."

6. Seyoon Kim at Bloomberg reports that Finance Minister Kang Man Soo told the media that Seoul is planning a 14 trillion won ($10.8 billion) stimulus package for next year. About half of the money will be dedicated to infrastructure projects and tax breaks.

"An overseas trade report today highlights the risks to South Korea from the global financial turmoil. Exports, the main engine of growth, rose by the least in 13 months in October because shipments to China fell for the first time since 2002."

7. Edward Wong at the New York Times reports that the People's Republic of China's senior Taiwan negotiator Chen Yunli arrived in Taipei today for a five day of talks aimed at new economic and transportation deals. Chen is the highest ranking PRC representative to set foot in Taiwan since 1949 and follows the recent move by Taipei regulators to limit exposure to US agency debt. Pundits both on the island and in the mainland are allegedly wildly speculating as to whether Chen will meet with "President Ma Ying-jeou of Taiwan, who was elected last March after promising to improve both the economy and relations with the mainland."

8. Linda Gradstein at the Washington Post reports that Israel's director of domestic security told the outgoing Israeli cabinet that he was "very concerned" Israeli extremists would target for assassination government leaders pursuing a peaceful resolution with Palestine. Tel Aviv is worried about escalating vigilante violence from settler communities originally armed by the government.

"During Sunday's meeting, the cabinet decided to end government funding for infrastructure supporting outposts, which are Jewish homes in the West Bank that are not officially authorized by the Israeli government."

9. Reuters reports that the CEO of BP, Tony Hayward, told an industry conference: "According to our preliminary data, US demand was down 2 mb/d on the year over the last four weeks."

10. The Associated Press reports that Azeri officials announced that the first Kazakh shipment of oil has been put through the Baku-Ceyhan pipeline. "Oil from Tengiz, a Caspian field that is one of the world's largest, entered the Baku-Tbilisi-Ceyhan pipeline last week after being shipped across the Caspian Sea by ship, said Tamam Bayatli, a spokesman for pipeline operator BP." SOCAR officials have said that as much as 100 kb/d of Kazakh oil could eventually be sent via the pipeline.

11. Alan Johnston at BBC reports that naval vessels of Burma and Bangladesh are in a stand off at a disputed maritime boundary after Burma began exploration efforts in the area. "According to Bangladeshi sources, the dispute is taking place about 50 nautical miles south-west of an island called St Martin's."

12. Platts reports that on November 1 Russia cut its export duties on crude oil exports to $39.35/b on falling international crude prices had made exports unprofitable. Moscow also cut duties on exports of light oil products to $205.90/mt and $110.90/mt for heavy oil products.

13. Ellen Simon at the Associated Press reports that the Institute for Supply Management published their manufacturing index today showing that US manufacturing dropped sharply in October.

14. Nick Bunkley at the New York Times reports that US auto sales dropped sharply in October from a year ago. General Motors said sales were down 45% for that period. Ford said sales had dropped by 30.2% and Toyota reported an annual decline of 23%. Volkswagen reported a decline in sales of 7.9%. All categories of autos fell, but light trucks were hit the worst.