Daily Sources 7/28

1. MAYER AND WOOD ARGUE THAT CHINA'S ENTRANCE INTO THE WORLD ECONOMY HAS NOT SIGNIFICANTLY DE-INDUSTRIALIZED REST OF DEVELOPING WORLD

Jörg Mayer and Adrian Wood at Vox EU argue that China's integration into the world's economy has not had the effect of substantially de-industrializing other developing nations.

"The biggest possible effect would be for a country which initially produced or exported equal amounts of manufactures and of primary products, where a 15% fall in the ratio would reduce the share of manufactures by 3.5 percentage points.

These estimates are imprecise and subject to error; the true answer may lie outside their range. But there is no plausible modification of the calculations that could make the true answer much larger. This is mainly because, despite its size, China’s opening had only a modest effect on world average endowments. The upper-limit estimates, obtained by simply adding China’s endowments to the rest of the world’s, are a 9% rise (from 0.43 to 0.47) in the share of the global workforce with a complete primary or secondary education, and a 17% fall in the average land/labour ratio, from 2.9 to 2.4 square kilometres of land per 100 workers ... . The average effect on the structure of output and trade in other countries is unlikely to have been larger than these world average endowment changes and was probably smaller.

The significance of the China effect varied widely among developing countries. This is partly because its size varied with the composition of each country’s manufacturing and primary production – how closely its industrial products competed with Chinese exports, and how much demand there was from China for its primary exports (more, say, for copper than for coffee). It is also because there were many other forces acting on sectoral structures--including changes in countries’ own trade policies--whose effects often outweighed those of China."

Worth reading in full.

2. NEPAL HARASSING TIBETAN REFUGEES

Gopal Sharma at Reuters reports that Nepal is responding to pressure from Beijing by cracking down on Tibetan refugees in the country.

"Nepali authorities have regularly broken up protests by Tibetan exiles and arrested them for protesting against China's crackdown on demonstrations in Tibet.

The Washington-based [International Campaign for Tibet] said Tibetan refugees were 'increasingly demoralized' as Nepal 'relinquishes its historic and sovereign interests in response to incentivized political pressure from Beijing and its sympathizers.'

ICT said 'pre-emptive arrests of Tibetans, ID checks and house searches' by authorities were contributing to a 'widespread sense of fear and insecurity' among the exiles.

'Nepal's political leadership is betting that the internal benefits of assuaging China in the cause of oppressing Tibetans will be greater... than the traditional legal and historical concepts,' Mary Beth Markey, Vice President at ICT said."

3. INDIA TO ANNOUNCE SOLAR POWER TARGETS OF 1/8TH TOTAL ELECTRICITY DEMAND, CENTRAL BANK LEAVES INTEREST RATE UNCHANGED ON INFLATION CONCERNS

Krittivas Mukherjee and David Fogarty at Reuters reports that India will announce its targets for solar power generation in September. The plan promises to

"boost output from near zero to 20 gigawatts (GW) by 2020 as it firms up its national plan to fight global warming, draft documents show.

The target, which would help India close the gap on solar front-runners like China, is part of an ambitious $19 billion, 30-year scheme that could could increase India's leverage in international talks for a new UN climate pact in December, one of several measures meant to help cut emissions.

If fully implemented, solar power would be equivalent to one-eighth of India's current installed power base, helping the world's fourth-largest emitter of planet-warming greenhouse gas emissions limit its heavy reliance on dirty coal and assuaging the nagging power deficit that has crimped its growth.

The 'National Solar Mission', yet to be formally adopted by Prime Minister Manmohan Singh's special panel on climate, envisages the creation of a statutory solar authority that would make it mandatory for states to buy some solar power, according to a draft of the plan, which provided detailed proposals for the first time, obtained by Reuters ... ."

Meanwhile, Cherian Thomas at Bloomberg reports that India's central bank decided today to leave its benchmark interest rate unchanged at 3.25%.

"The central bank raised its inflation forecast for the year to March 31 to 'around 5%' from an April estimate of 4%, citing 'elevated' food and commodity prices."

4. EU TO TRAIN SOMALI SECURITY FORCES TO POLICE PIRACY

BBC News reports that the EU has announced plans to train Somali security forces to tackle the piracy plaguing their coasts.

"It will send a planning team to the region next month. The training will take place in neighboring Djibouti, which has French and US military bases."

(h/t Joshua Keating at FP's Morning Brief.)

5. IMF AND LATVIA REACH ACCORD, MAY OPEN UP NEW FUNDING

Aaron Eglitis and Timothy R Homan at Bloomberg report that the IMF and Latvia have reached an accord paving the way for the country to receive its first financial assistance from the organization since December.

"The review may unlock about 195 million euros ($285 million), which the IMF withheld in March after the Baltic country failed to commit to budget cuts, the fund said in an e- mailed statement.

Latvia turned to a group led by the European Commission and the IMF for a 7.5 billion-euro stabilization loan in December after its second-biggest bank needed a state rescue. The IMF announcement followed a 1.2 billion-euro transfer by the European Commission yesterday, helping quell concern about a lats devaluation that may have destabilized currencies across the region."

6. MOUSAVI CALLS FOR NEW STREET PROTESTS NEXT WEEK IN IRAN

Borzou Daragahi at the LA Times reports that opposition candidate Mir-Hossein Mousavi has called for more street protests during religious festivals next week.

7. KENYA TO BUILD AFRICA'S LARGEST WIND FARM

Xan Rice at the UK Guardian reports that Kenya plans to build the largest wind farm in Africa.

"Some 365 giant wind turbines are to be installed in desert around Lake Turkana in northern Kenya – used as a backdrop for the film The Constant Gardener--creating the biggest wind farm on the continent. When complete in 2012, the £533m (~ $758.8 million) project will have a capacity of 300MW, a quarter of Kenya's current installed power and one of the highest proportions of wind energy to be fed in a national grid anywhere in the world."

8. FUEL OIL APPROACHING COST OF CRUDE, HURTS SHIPPING, CHINESE FUEL OIL IMPORTS ROCKET UPWARD (FROM LOW BASE), VIETNAMESE MAIDEN REFINERY TO TAKE SPOT GASOLINE DEMAND OFF MARKET, WALL OF ASIAN PACIFIC REFINING YET TO PLAY OUT

Christian Schmollinger and Alaric Nightingale at Bloomberg report that the price of fuel oil--bunker fuel, the bottom of the barrel, which is used to power ships in great part because it is cheap, generally trading at a considerable discount to crude, is approaching the price of light crude and may surpass it.

"Fuel oil may surpass crude 'for quite some time, six months is possible,' JPMorgan Chase & Co. vice president of energy strategy Vima Jayabalan said in a phone interview from Singapore."

This means that the effect of rising crude prices is having a more pronounced affect upon the cost of shipping than it did during the 2003-2008 run up in the price of crude.

"'It’s really hurting' ship owners, said Parul Bhambri, a Singapore-based analyst at Drewry.

Maersk said May 12 that falling demand for freight hobbled its ability to pass on fuel costs to customers in the first quarter, when its shipping line lost $559 million after taxes, compared with an $80 million profit a year earlier. The shares are down 40% in the past year in Copenhagen trading."

As the price of fuel oil rises, however, many simple refineries, which do not have the equipment to maximize gasoline and diesel output, can become profitable again, which may undergird a recovery in overall crude demand. That said, it still doesn't look like there's much demand for gasoline and diesel out there, which could push down the crack spread and thus the price of crude. Winnie Lee at Platts reports that Chinese fuel oil imports in June were up 6.26% from May and 45.94% from June 2008 to 13.7 kb/d. It's largest supplier was Venezuela. In that vein, Irene Tang at Platt's the Barrel blog reports that the commissioning of Vietnam's first refinery at Dung Quat is poised to erase about 30% of the country's product import demand, which will in turn erase its demand for spot gasoline purchases. The wall of new refining capacity in Asia has yet to fully be appreciated,

"China has now joined India in becoming a major swing exporter of gasoline. Apart from greenfield refineries coming onstream in the country, Beijing's decision to adopt a new products pricing formula for the domestic market and the resulting price revisions in tandem with the global benchmarks has encouraged more speculative buying at the wholesale level, causing wide fluctuations in refiner inventories.

This, in turn, has made Chinese gasoline export volumes unpredictable. The latest customs figures show gasoline exports hit a two-year high of 560,000 mt in June, a 273% surge from the corresponding month of last year. The previous high was in April 2007, at 590,000 mt.

The figures point to Chinese 'apparent' gasoline demand in June being just 1.8% higher than the same month a year ago, a contrast with on-year growth rates of 20.2% in May and 13% in April. The anomaly of the June figure, in the backdrop of staggering double-digit growth rates of automobile sales in China and a 7.7% on-year average gasoline demand growth in the first half of the year, can only be explained by wild swings in stock builds and draws."

"The full impact of the start-up of Reliance Industries' new 580,000 b/d refinery in Jamnagar should be apparent as early as August, as the company's older 660,000 b/d refinery is now restarting from a partial shutdown. Monthly gasoline exports from RIL are expected to more than double to well above 600,000 mt."

9. NIGERIAN REBELS IN SOUTH TARGET OIL MINISTER'S COMPANY, NORTHERN ISLAMISTS CONTINUE UNREST

Platts reports that the Nigerian Joint Revolutionary Council has issued a warning to UK-based independent producer Afren Resources to stop operating in the Niger Delta or risk attacks on its equipment and personnel.

"The Joint Revolutionary Council, which styles itself as a coalition of militant groups based in southern Rivers and Bayelsa states, said in a statement that its ultimatum to Afren was aimed at expressing the group's opposition to the policies of Nigeria's Oil Minister Rilwanu Lukman--policies the group sees as skewed against the Niger Delta region in the country's south.

Lukman was a co-founder of Afren and stepped down from his position as chairman of the company's board of directors once he was appointed oil minister for Nigeria in late 2008. His shares in the company were to be held in a blind trust, the company said in a statement at the time."

Lukman wants to site an oil university in his home state in the north--Kaduna. Meanwhile, Ibrahim Mshelizza at Reuters reports on the increasing Islamist inspired unrest in northern Nigeria.

"The violence was triggered when some members of the group called Boko Haram, which wants a wider adoption of Islamic sharia law across Africa's most populous nation, were arrested Sunday in Bauchi state.

Unrest spread to the northern states of Kano, Yobe and Borno, whose capital Maiduguri is home to the group's leader, Mohammed Yusuf, and has seen the worst violence.


'The situation has been contained in Bauchi and Yobe. The bad situation we have now is in Borno where the leader of the group is residing ... We are going to launch an operation, a main operation to flush them out,' [Nigerian President Umaru] Yar'Adua told reporters after meeting security chiefs and state governors."

10. PRESSURE TO CHANGE DRUG WAR STRATEGY BUILDING IN MEXICO, MEXICAN CRUDE PRODUCTION WAY DOWN

William Booth and Steve Fainaru at the Washington Post report on the growing pressure on Mexican President to change Mexico's "surge" strategy in dealing with its drug cartels.

"Dan Lund, president of the MUND Group polling organization, said public support for Calderón's strategy appears to be weakest in the places where the federal government needs it most. 'In a series of national surveys, polls consistently have found a reasonable but cautious level of support for using the military in the front lines against the cartels,' he said. 'But in all the states where the military is actually deployed, the support goes down, sometimes dramatically.'

The situation has been exacerbated by the global economic crisis, which has cast millions of Mexicans into poverty. José Luis Piñeyro, a Mexican military analyst who maintains close ties with the armed forces, said rising unemployment and poverty 'is creating what I call an "army in reserve,"' for the traffickers.

In Michoacan, La Familia has used the media to try to align itself with the disenfranchised. After the recent attacks, one of its leaders, Servando Gómez, called a local television station and told viewers: 'I want to say to all Michoacanans, we love them and respect them.'"

Meanwhile, there was plenty of stories on the decline in Mexican production last week. John Kingston at the Barrel notes:

"But here's the more stunning figure: what's happened in two years. In July 2007, Pemex reported crude output of 3.165 million b/d. That's a 20.4% decline in 23 months."

11. VATICAN AIMS AT FREE MARKETEERS, SAYING MARKETS WITHOUT ETHICS DESTROY WEALTH AND CREATE POVERTY

Flavia Krause-Jackson at Bloomberg reports that the Vatican has attacked free markets, saying that they have legitimized greed. On June 7, the pope published an encyclical which examined the financial crisis and means out of it, saying that once profit becomes the exclusive goal of business, it destroys wealth and creates poverty.

"Last November, Italian Finance Minister Giulio Tremonti said the pope had pronounced a 'prophecy' in a paper Benedict wrote when he was a cardinal.

In 1985, then-Cardinal Joseph Ratzinger presented a paper titled 'Market Economy and Ethics' at a Rome event on the Catholic Church and the economy. He said a decline in ethics 'can actually cause the laws of the market to collapse.'"

I think it is plain that markets cannot sustain themselves without a modicum of trust, engendered by ethics held in common.

12. CFTC MAY OR MAY NOT REVISE LAST YEAR'S REPORT EXONERATING SPECULATION IN PRICE VOLATILITY, LONDON'S FSA EXONERATES SPECULATORS

Ianthe Jeanne Dugan and Alistair MacDonald at the Wall Street Journal report that the CFTC

"plans to issue a report next month suggesting speculators played a significant role in driving wild swings in oil prices--a reversal of an earlier CFTC position that augurs intensifying scrutiny on investors."

However, I understand that the Chair of the CFTC indicated today that the story in the WSJ that the report will be redone and altered are premature and inaccurate. From the WSJ story,

"In the US, the CFTC begins public hearings Tuesday to determine whether to limit speculative investments in commodities. Congress also is weighing whether to give the CFTC the authority, under a broader proposal to revamp financial regulation, to regulate commodities investments that occur off traditional exchanges. Byron Dorgan, a North Dakota Democrat, has called on the CFTC to curb 'oil speculators looking for a quick buck at the expense of American consumers.'"

I suspect that the direction of these accusations is misdirected, given that commercials may choose to purchase futures to profit on price just as much as to hedge their obligations.



Positions net long and short for the week ended July 21 only comprised 1% of the market. Note that from 2008 open interest--or the total number of contracts--has been steadily falling for both futures and options--though the trend for options was up through February.



If you include options, the number of positions held by traders net long or short represent 3.17% of the market--not an especially large share. Meanwhile, Alistair MacDonald and Carolyn Cui at the Wall Street Journal report that the Financial Services Authority in London has found no evidence that speculators are behind the wild swings in oil price seen from 2008.

"One person familiar with the matter said the FSA had seen no evidence to suggest that speculators are driving up the price of oil.

'More than they ever were before, [investors] are looking to the global economic climate and nobody is sure on that, and that is perhaps driving the volatility,' he said.

Given that view, the FSA doesn't believe that limiting the size of trading positions would be 'beneficial' for the market, said a person familiar with the matter. Still, the FSA acknowledges it doesn't have a 'full explanation' as to why the market has moved the way it has, said a person familiar with the matter.

The FSA's conclusion contradicts British Prime Minister Gordon Brown, who has linked the recent rises in oil to speculation.
...
Politicians around the world are worried about the effect of rising oil prices on the recovery potential of their recession-hit economies. World leaders from French President Nicolas Sarkozy to the leaders of Asia's biggest oil-consuming nations have tied these rises to oil speculators."

"Speculation," of course, is sufficiently vague to represent a politically useful bogeyman, and it seems likely that someone will call financial protectionism. That said, I do think it is in the global economic interest to make the cost of energy--and in particular transportation fuels--more stable and predictable, I just don't think that attacking "speculation" is a particularly productive way of doing so.

13. TRUCKING VOLUMES IN US DOWN 13.6% IN JUNE YOY

The American Truckers Association yesterday announced that their

"advance seasonally adjusted (SA) For-Hire Truck Tonnage Index fell 2.4% in June. In May, SA tonnage jumped 3.2%. June’s decrease, which lowered the SA index to 99.8 (2000=100), wasn’t large enough to completely offset the robust gain in the previous month."

Over June 2008, tonnage fell 13.6%, which exceeded the year over year drop of 11%.



The ATA release warns:

"The sample includes an array of trucking companies, ranging from small fleets to multi-billion dollar carriers. When a company in the sample fails, we include its final month of operation and zero it out for the following month, with the assumption that the remaining carriers pick up that freight. As a result, it is close to a net wash and does not end up in a false increase. Nevertheless, some carriers are picking up freight from failures, and it may have boosted the index. Due to our correction mentioned above, however, it should be limited."

(h/t Barry Ritholtz at the Big Picture.)

14. HOME PRICE DECLINE SLOWING, CALIFORNIA FORECLOSURES DOUBLE NEW HOME SALES IN JUNE

Barry Ritholtz reports that home price declines are "slowly abating." Here is his graph:



Jake at Econopic picked up on the Big Picture's quote of the day of Mark M Hanson which notes that California foreclosures are more than double the national new home sales for June. His graph:



15. EPA MAY GIVE ALGAE BIG BOOST

Russell Gold at Environmental Capital notes that Blair Carter at the Renewable + Law Blog reports that "that the Environmental Protection Agency will count algae as an advanced biofuel under Renewable Fuel Standard rules being developed."

"Why do EPA’s steps towards including algae matter? Because when Congress created its mandate to blend advanced biofuel into the fuel pool, it created a big market for these fuels. By 2012, the law mandates that two billion gallons of these advanced biofuels be blended, a figure that rises by tenfold by 2022. It’s all in Section 202 of the Energy Independence and Security Act of 2007.

... For algae to be included, the law says it needs to have no more than 50% of the 'lifecycle greenhouse gas emissions' of gasoline and diesel. This could be tricky, says David Woodburn, an alternative energy analyst with ThinkEquity. 'The hard part for me is understanding how the EPA plans to calculate the GHG emissions of algae fuels, based on the variety of feedstocks (sugar, CO2, other), processes (open ponds, photobioreactors), and algae varieties being explored--especially before November,' he says, noting when the rules are supposed to be finished."

Blair Carter's post can be found here.

16. TEXAS DROUGHT GETS WORSE

Tom Benning at the Wall Street Jounral reports on the drought in Texas.

"Nearly 80 of Texas' 254 counties are in 'extreme' or 'exceptional' drought, the worst possible levels on the US Department of Agriculture's index. Though other states are experiencing drought, no counties in the continental U.S. outside Texas currently register worse than 'severe.' In late April, the USDA designated 70 Texas counties as primary natural-disaster areas because of drought, above-normal temperatures and associated wildfires."

The Journal carries an interactive graphic:

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 2/27

1. Agnes Lovasz at Bloomberg reports that The World Bank, the European Bank for Reconstruction and Development, and the European Investment Bank released a joint statement today stating that they will lend as much as €24.5 billion (~ $31 billion) to help central and eastern Europe weather the financial crisis.

"'We have a special responsibility for the region and because it makes economic sense,' EBRD President Thomas Mirow said in a joint statement issued by the international organizations today in London. 'For many years, the growing integration of Europe has been a source of prosperity and mutual benefit and we must not allow this process to be reversed.'

The EBRD will provide about €6 billion, the EIB about €11 billion and the World Bank about €7.5 billion, the statement said. The aid will take the form of equity and debt financing, credit lines and political risk insurance."

Meanwhile, Balazs Penz and Agnes Lovasz at Bloomberg report that the Hungarian Prime Minister Ferenc Gyurcsany is lobbying the EU to arrange an aid package of €180 billion (~ $230 billion) for eastern Europe.

2. Eurointelligence reports that French unemployment grew by 90,000 in one month.

3. Mark Landler at the New York Times reports that the US will hold regular three-way meetings with Afghanistan and Pakistan regarding the prosecution of the war against the Taliban. It is fairly amazing to me that this is a new process, though the Times assures us it is so:

"[T]his week’s meetings involved a much larger cross-section of military and government leaders — among them foreign ministers and the heads of the Afghan and Pakistani intelligence services.

'These were not just photo ops,' said Richard C. Holbrooke, the special representative for Afghanistan and Pakistan. 'Meetings in this configuration have not taken place.'"

From today's State Department press briefing:

"MR. WOOD: I think it’s pretty much understood by all parties that there is a link between Afghan and Pakistani security. The Taliban and al-Qaida are threats to both countries. And what we want to see is much closer cooperation between the United States, Pakistan, and Afghanistan, as we try to deal with these threats.

It was a good-–a good discussion. There were a number of issues that were dealt with at this trilateral meeting. There will be future meetings. I believe the Secretary said that probably either-–I think sometime in late April or May would probably be the next trilateral meeting. It was a very good forum for trying to deal with these very, very thorny issues of security. And you know, the Secretary thought it was very useful to have, you know, representatives from, you know, both Pakistan and Afghanistan here together so that we could really talk about this threat to regional security that’s posed by al-Qaida and the Taliban."

4. Taghreed el-Khodary and Isabel Kershner at the New York Times report that at a joint news conference in Cairo, "Ahmed Qurei of Fatah and Moussa Abu Marzouk of Hamas announced the establishment of committees to find formulas for a Palestinian unity government and new elections." Hamas and Fatah expect the organizations to complete their work by the end of March.

5. Richard Meade at Lloyd's List reports that EU legal teams are nearing a multilateral agreement which will provide a legal framework for the prosecution of pirates generally in the Gulf of Aden and off the Somalian littoral. Kenya, Tanzania, Ethiopia and Egypt all potentially could have jurisdiction under the agreement.

"According to [Rear Admiral Philip Jones, the British commander of EU naval forces operating in the region] an agreement with Kenya is now in its final stages, while separate negotiations with several other states are continuing.

The aim of the negotiations is to establish a legal mandate that will allow all EU forces operating off Somalia to detain pirates either on the high seas or within Somali territorial waters and subsequently land those suspects in a neighboring coastal state for trial and prosecution.

One key stumbling block has been a political desire within EU member states to avoid signing deals with countries that impose the death penalty."

6. Keith Johnson at Environmental Capital reports that Global Geo Services chief executive Knut Oversjoen told the media that a US company has expressed interest in purchasing its 'Persian Carpet' seismic study of Iran's offshore. "That data would be useful if US sanctions against Iran were dropped and US companies could bid for exploration leases."

7. Eric Watkins at the Oil & Gas Journal writes that Oil Movements reports that OPEC seaborne crude exports will fall to a five-year low by mid-March.

"However, the [consultancy] said that 'the reduction in sailings will (implicitly) still fall some way short' of the 4.2 million b/d in cuts that OPEC has decided upon in a bid to increase prices."

"'Over the next three months the normal seasonal direction for this series is northerly, and just holding on at current low levels would be a sizable departure from the normal pattern,' OM said.

Westbound sailings from the Middle East are 750 kb/d down on year ago at the furthest out date, and that difference will show up in arriving barrels heading into the second quarter.

But by implication, OM said, 'Hard volumetric evidence available from import and stock figures may not fully reflect supply changes that will still be working through the system by the time OPEC meets next month.'"

8. Platts reports that Abuja has announced it will fully deregulate the downstream sector, completely withdrawing the subsidy of petroleum imports.

"The government's decision is sure to elicit protests from labor unions and the public who see subsidized fuel as the only benefit they enjoy from the country's oil wealth.

The two powerful oil workers' unions, Pengassan and Nupeng, warned in 2008 that they would resist any attempt by the government to withdraw fuel subsidies."

As part of the same restructuring, Vincent Nwanma at Bloomberg reports that finance minister Mansur Muhtar and petroleum minister Rilwanu Lukman said on television last night that Nigeria will seek to sell its four refineries. The refineries have a total capacity of about 445 kb/d and are located in Kaduna, Warri and two at Port Harcourt. EIA estimates that Nigeria consumed about 271 kb/d in oil in 2007--the refineries, due to a variety of issues, have been running at about 214 kb/d.



9. Eliana Raszewski at Bloomberg reports that Buenos Aires is considering a plan to nationalize the grain trade in order to ensure that the domestic market requirements are met before basic foodstuffs are exported.

"Any such move would set back negotiations between the government and farm leaders, who are pressing for reductions in export taxes and fewer restrictions on shipping their produce abroad, said Nestor Roulet, vice president of the Argentine Rural Confederation. Last year, the country’s farm groups withheld grains and blocked highways during a four-month protest against planned tax increases and a ban on beef exports."

10. Catherine Rampell at the New York Times reports that the Bureau of Economic Analysis revised its GDP growth numbers for the fourth quarter down from a 3.8% decline to a 6.2% annual rate of decline. (For the initial estimates, which were widely regarded as way too optimistic at the time, see Daily Sources 1/30 #18.)

11. Margot Habiby at Bloomberg reports that the US rig count is down to the lowest seen since January 2005 to 1,243 according to Baker Hughes.

Daily Sources 1/28

1. Clifford J. Levy at the New York Times reports that a story carried by the Interfax news agency in Russia has sparked speculation that the Kremlin will scrap plans to place new nuclear armed missiles near the Polish border in a response to the initially more friendly approach toward Moscow by the Obama administration. Calls to the ministry of defense yielded no one who would confirm or comment on the speculation. However, ITAR-TASS published the remarks of an unnamed official as saying the news that Russia was pulling back from its new missile plans was nonsense. "Asked about the Interfax report, NATO said through a spokesman that if confirmed, 'It would be a positive step.'" Meanwhile, the Associated Press reports that Cuba's Raul Castro arrived in Moscow today for an eight day visit. (Typically a leader going on an overseas trip for a relatively long period of time--as in more than a few days--is a sign that he is extremely comfortable with their political position at home.)

2. Jane Morecroft at Platts reports the European Commission is expected to announce on Wednesday new plans to invest €3.5 (~$4.6) billion in European Union energy infrastructure over the course of 2009. The monies will be a part of the European Recovery Plan. Meanwhile, Nadia Rodova at Platts reports that Gazprom is considering expanding the planned capacity for the potential South Stream natural gas pipeline from 31 billion cubic meters/year (bcm/y) to 47 bcm/y.



The South stream pipeline plan is being developed in cooperation with ENI.

3. Marcus Hand at Lloyd's List reports that Neptune Orient Lines announced that from he period November 15-December 26 it saw a 24% drop in box container cargo volumes. It is a somewhat unusual time period to report on, but appears to be another confirmation of a general collapse in global trade. The Baltic Dry Index continues to show some sign of recovery, though there wasn't much room left to fall.



Meanwhile, Pete Harrison at Reuters reports that the EU will call for airline and shipping emissions regulations to be included in any successor treaty to Kyoto.

4. Yves Smith at Naked Capitalism reports that the Institute for International Finance has made the first forecast by an official international finance organization of a global economic contraction in 2009. The IIF's forecast now has the global economy contracting by 1.1% this year. Christopher Swann at Bloomberg reports that the IMF has revised downward its prediction for the global economy this year to 0.5% from 2.2% in a new publication.

"The reports signal that write downs and losses at banks totaling $1.1 trillion so far are only half of what’s to come and that contractions may deepen. Losses on that scale would leave banks needing at least $500 billion in fresh capital to restore confidence in their balance sheets ... ."

As Smith noted, official wisdom usually lags market indicators, and this is grim news.

5. Brad Setser at Follow the Money makes the point that large additional demand for sovereign debt and agencies brought on by growing receipts from export-led growth depressed yields on those instruments, thus pushing money looking for safe returns traditionally provided by sovereign debt and agencies elsewhere. Interesting read.

6. Jeff Stein at Spy Talk reports that the EU took the Mujahedin-e Khalq off its list of terrorist organizations on Monday. Having been taken off this list, assets previously frozen in Europe will become available again. This will prove a windfall to the organization, which is a darling of neocons in the US and was a pawn of Saddam Hussein in his struggle with the Islamic Republic of Iran.

7. Asif Ali Zardari, the President of Pakistan, has an opinion piece in the Washington Post where he congratulates Barrack Obama on his election and urges closer cooperation between Islamabad and DC. Zadari, known as Mr. 5% to his countrymen, urges the Administration to

"encourage Congress to pass the Enhanced Partnership with Pakistan Act. The multiyear, $1.5 billion annual commitment to social progress here would signal to our people that this is no longer a relationship of political convenience but, rather, of shared values and goals ...."

Pakistan is facing serious budgetary difficulties, and thus the call for aid is warranted, though Mr. Zadari is probably not the best messenger. He goes on to urge the Administration to focus on assisting the resolution of long-standing disputes with India:

"Much as the Palestinian issue remains the core obstacle to peace in the Middle East, the question of Kashmir must be addressed in some meaningful way to bring stability to this region. We hope that the special envoy will work with India and Pakistan not only to bring a just and reasonable resolution to the issues of Kashmir and Jammu but also to address critical economic and environmental concerns.

The water crisis in Pakistan is directly linked to relations with India. Resolution could prevent an environmental catastrophe in South Asia, but failure to do so could fuel the fires of discontent that lead to extremism and terrorism. We applaud the president's desire to engage our nation and India to defuse the tensions between us."

Zadari concludes with:

"Pakistan and the United States have much in common and should be partners in peace. This moment of crisis is an opportunity to recast our relationship. We are extending our hand in friendship."

Well worth reading.

8. Nazila Fathi and Aalan Cowell at the New York Times report that President Ahmadinejad urged President Obama to apologize to Iran for 60 years of its behavior toward Iran. The Iranian president suggested that the Administration's change could be a change in tactics as opposed to strategic ends, or even just a change in tone.

"'Change means that they should apologize to the Iranian nation and try to make up for their dark background and the crimes they have committed against the Iranian nation,' he said in the speech broadcast live on Iranian television.

The catalog of crimes, Mr. Ahmadinejad said, stretched back decades, beginning with American support for the 1953 coup that ousted the democratically elected government of Mohammed Mossadegh and installed Shah Mohammed Reza Pahlavi, who ruled until he was ousted in the 1979 Islamic revolution."

9. Emmanuel at International Political Economy Zone reports that the US has prevailed in suits in the WTO alleging intellectual property violations by China.

"# China backed down and agreed to a settlement before a case concerning export rebates given to exporters was formally investigated;
# China lost its appeal in the case concerning discrimination against foreign auto parts manufacturers;
# Now, reports suggest the US has chalked up another one against China regarding intellectual property violations. From the US Trade Representative's site -"

This has led to expressions of regret by Beijing. Worth reading.

10. Norimitsu Onishi and Mark McDonald at the New York Times report that Yasukazu Hamada, Japan's minister of defense, announced today that it would send ships to conduct anti-piracy operations off the Somalian littoral.

"'The pirates in the Gulf of Aden off the coast of Somalia pose threats to Japan and the international community and are an issue that should be dealt with swiftly,' Mr. Hamada said, according to Kyodo News. The deployment, which would be considered a police action, is not expected to be as politically sensitive as other missions in recent years."

However, a new law will still need to be passed in order to allow the ships to leave on the mission. It also was not clear from his remarks whether the Japanese ships would coordinate with the international flotilla already in the region on the same mission, though it seem awfully likely. On January 8, Lloyd's List reported that the Aso administration was considering changes to the Japanese Constitution in order to allow action against the Somali pirates. (see Daily Sources 1/8 #14.)

11. Fabiola Moura and Karla Palomo at Bloomberg report that Petrobras Chief Executive Officer Jose Sergio Gabrielli told journalists that the company would put off issuing new debt to finance its production and exploration plans, as the cost of borrowing on the international markets is too expensive. "'The market conditions nowadays in the secondary market for Petrobras are too expensive,' Gabrielli said. 'We don’t need more funds. We can wait as much as we need.'" Bloomberg posted a video of their interview of the CEO in Spanish--not Portuguese--here.

12. Michelle Boorstein at the Washington Post reports that the Pope made his first comments this morning regarding the controversy sparked by his decision to revoke the excommunication of a renegade order of Catholics, one of whom is a holocaust denier. In his remarks, he reiterated "'full and indisputable' solidarity with Jews and repudiating the idea of denying the Holocaust." He also said the Holocaust should "prompt humanity to reflect on the unpredictable power of evil when it conquers the hearts of men." Boorstein provides a fair summary of the controversy and its ideological background.

13. Sophia Kishkovsky at the New York Times reports that the Russian Orthodox Church has elected a new Patriarch, Metropolitan Kirill of Smolensk and Kaliningrad--who had also acted as interim Patriarch when Aleksy II died last month. Kirill was in charge of international affairs under Aleksy II, and has received some criticism for his ties to the Roman Catholic Church.

"As chairman of the external relations department, he oversaw the drafting of the 'social concept' of the Russian Orthodox Church, presented in 2000. It addresses church positions on social issues, including abortion, globalization and poverty. One of its most cited points allows for civil disobedience if the government violates Christian commandments."

Historically, the Russian Orthodox Church has been fairly establishmentarian, the legitimization of civil disobedience is a fairly significant move in a new direction for the church, if I understand correctly.

14. Justin Lahart at Real Time Economics reports that the conventional wisdom is that it is "all but assured" that the Fed will cut the federal funds rate to 0-0.25% in the FOMC meeting today. In a related post, Phil Izzo, also of Real Time Economics points out that since 2000 money supply growth has been negatively correlated to other economic indicators:



(Chart courtesy of the Wall Street Journal.)

15. Richard Cowan at Reuters reports that the US House of Representatives looks likely to pass President Obama's $825 billion stimulus plan today.

16. The EIA reported today that crude oil stocks for the week ended January 23 built by a whopping 6.2 million barrels to 338.9 million barrels. The amount in storage is getting close to the largest commercial stock holdings on record since 1998, which was 352.6 million barrels in July 2006. (1998 was the last time there was a super contango similar to the current strip.) That said, the historical data suggest that there should still be some storage capacity available. (And reportedly some crude is being offloaded from VLCCs which were chartered for storage purposes.)



According to a survey by Bloomberg, most analysts on Wall Street had expected a 2.8 million barrel build in crude stocks, a large build, but half of what in fact took place. Gasoline stocks fell by 100 kb, remain at the top of the historical range, and against analyst expectations of a 1.75 million barrel build. Distillate stocks also fell by 1 million barrels, but remain at the highest levels seen in recent history and well above the average. The draw down was consistent with analysts expectations of a 1.13 million barrel draw. Taken in isolation, this news should put downward pressure on the price of crude. However, at the time of this writing, the price of sweet light crude on NYMEX hasn't budget much from yesterday's close.

Meanwhile, Maher Chmaytelli reports that Abdalla el-Badri, the Secretary General of OPEC, is seeking rules to limit the number of participants in the US markets who purchase crude without any intention of using it--or "speculators.""'The speculators are still there,' el-Badri told reporters today as he arrived in Davos, Switzerland, where he is attending this week’s World Economic Forum. 'Before, they were playing a supply shortage, now they are playing too much supply. They are delaying a recovery in prices.'" And Edward Morse, managing director and chief economist at LCM Commodities and founder of the Energy Intelligence group of publications, has a piece exploring the validity of WTI as a benchmark for global sweet light crude prices at the Financial Times.

"The problem resides in the physical market of the mid-continent of the US, specifically at Cushing, Oklahoma, an obscure but crucial oil gathering hub and the pricing point for financially traded WTI on the Nymex. Often viewed as the global crude oil reference point, Cushing is really a regional, parochial crude market tenuously linked to international markets by bottlenecked pipelines from the Gulf coast. Cushing pulls oil from the Gulf coast, Canada or the mid-continent but, unless regional refiners process WTI, it becomes landlocked and decouples from global markets. As inventories build, WTI's price must fall until it sells, even if that means trucking oil south.

This physical situation is not new but the problem has worsened as Canada's tar sands production has grown nearly 500,000 b/d since 2002 and should rise another 200,000 b/d this year, most of it headed towards mid-continent, where refining capacity has fallen by 200,000 b/d. A new pipeline will soon increase flows into the region by another 100,000 b/d. WTI will continue to disconnect from world markets until new pipeline connections create a physical escape valve for oil to flow from the mid-continent to the Gulf coast.

Some believe the problem stems from market manipulation but it is the twin facts of higher storage capacity in the mid-continent and the bottleneck that provide a temptation for companies to trade around the storage, building it in weak markets and emptying it in strong markets. Weak markets discount spot sold oil to deferred oil, further encouraging storage and weakening WTI's spot price; the reverse happens when spot prices are at a premium to deferred prices, depleting storage rapidly.

Although what's happening to prices might suggest that some traders are manipulating the market, the more compelling explanation is that, because a peculiar inland market sets WTI's price, the incentive emerges to trade the WTI below its "waterborne" level in weak markets and above it in tight markets."

These are all fair points, but, in practice, as I understand it, the majority of term crude contracts actually use dated Brent or BWAVE as the reference price, not CL/WTI.

Daily Sources 1/16

1. James T. Areddy at the China Journal reports that Shanghai firm Data Driven Marketing Asia surveyed 4,500 people in five cities across China and found that 60% of middle class consumers have already cut spending or plan to this year.

"In Shanghai, 64% of respondents to DDM’s survey said yes to the statement 'my company is not as busy as before' and almost a third in China’s commercial capital said their employer has already laid off workers. Forty-two percent of Shanghai consumers furthermore predicted the economy would be 'bad' in the next 12 months, compared with 19% saying so in Beijing, where consumer sentiment remained the strongest in the survey. Over the next five years, 60% of Shanghai residents and 71% of Beijing people said, economic conditions will be good."

And in a Financial Times piece published Monday and reproduced by RGE Economonitor Micheal Pettis argues that US consumers must increase their savings by at least 6% of GDP to bring their balance sheets to the historical midpoint, and that Chinese consumption must grow by 25% in order to offset increased US savings. China has, under this take, considerable excess production capacity which it is likely going to continue to attempt to export--just as the US did in the 1930s. But, attempts to resurrect growth on foreign consumption is likely to result in protectionist measures. Well-worth reading in full.

Ambrose Evans-Pritchard at the UK Telegraph blogs that Albert Edwards--an analyst at Societe General who hews to the Austrian school of economics--recently published a note arguing that the Chinese economy is imploding, which will scare the regime in Beijing, pushing them to devalue the yuan to create export-based jobs, and lead to a trade war.

"Mr Edwards said investors have a "touching faith" that China's authorities are in control of events.

'Could the economic situation in China become so bad that it threatens the regime itself? Of course it could. But before being swept away in a tidal wave of worker unrest it has one key tool in its economic armoury it has used before. MEGA-DEVALUATION. China has a track record of such things. At the end of 1993 the authorities devalued the yuan by 33pc.'

A replay would be the surest route to a Smoot-Hawley II."

Uncharacteristically of Evans-Pritchard, he does not think this alarmist outlook likely, displaying a touching faith in the authorities in Beijing. And Brad Setser at Follow the Money gives a quick take on the just-released November treasury international capital (TIC) data, showing that Beijing has cut down on long term US debt (and cut out agencies altogether), but substantially increased their purchases of short-term US debt. The graph he drew up makes the point eloquently (courtesy of CFR):



Setser calculates that China's total US treasury holdings are up by $29.1 billion, but reallocated from long term to short term instruments. This may have had something with 3 month bills yielding zero for some time last month.

In a response to an analysis by Wang Toa at UBS that I noted at the time (see Daily Sources 1/8 #7), Victor Shih at RGE Economonitor thinks that unemployment will likely reach 50 million people in China by the end of 2009.

"Even if the unemployed force reaches 50 million, the Chinese government would only have to pay (50 million*100dollar*12 months) 60 billion USD (408 billion RMB). That is a substantial sum, but China can surely handle it for two to three years, suffering perhaps slightly lower credit ratings. However, the notion that migrant workers have less ability to act collectively is unfounded based on everything that we know about unrests in China. All of the rebellions in Chinese history were led and carried out by peasants, including the one that put the current regime in power. Besides 1989, the largest domestic disturbance took place in rural Renshou County in the mid 90s, which saw the deployment of tens of thousands of troops. Furthermore, unlike the layoffs in the 90s, which mostly affected middle-age or elderly SOE workers, the current wave of layoffs affects a young and vibrant cohort most capable of carrying violent collective action against the state. Without any systematic triggers, we at least will see a spike in localized riots which necessitate the mobilization of People's Armed Police (PAP) units all over China. The central government would also be compelled to (and they are doing so already) roll out generous unemployment benefits for migrant workers and college graduates (to the tune of 300-400 billion RMB). If a systematic trigger occurs and instability spreads to a sizable city, we will see the large scale mobilization of both PAP and army units and possibly substantial bloodshed. In most scenarios, the CCP regime would still survive a large scale, cross regional rebellion. However, "overall investor confidence" will be lost."

Well worth reading in full. And Li Yanping at Bloomberg reports that James McCormack, the Hong Kong-based head of Asian sovereign ratings for Fitch, said in a teleconference today that the Chinese economy likely will face a hard landing.

"'The 6 percent number is already what we would call a hard landing in China, meaning rising unemployment and the need for an aggressive policy response,' McCormack said. 'Social unrest is a big unknown.'"

McCormack thinks that exports might decline as much as 6% in 2009, down from growth of 17.2% in 2008. (h/t Yves Smith at naked capitalism.)

2. Platts reports that Vladimir Putin told the media that the volume of natural gas required to operate Ukraine's pipeline infrastructure would cost $730 million in the first quarter of 2009.

"Putin said Ukraine requested 140 million cubic meters of gas to fill the gas export pipelines and 21 million cu m/day to ensure gas compressing stations operations."

That's 2,030 million cubic meters altogether, or $359.60/thousand cubic meters (tcm) for the so-called "technical gas." Moscow is currently asking Ukraine to pay $450/tcm for natural gas not used to run the pipelines. Gazprom CEO Alexei Miller also told the media today that he was trying to put together a consortium of European companies to pay for the technical gas. Italy's ENI has already agreed to join the consortium, Germany's E.ON Ruhrgas and France's GDF Suez are "actively considering" it, and Austria's OMV, Germany's Wingas, and the Dutch company Gasterra have all been invited to join.

In the meantime, Platts reports that Yevgeniy Fedorov, the head of the State Duma committee for economic policy and enterprise, told journalists that the inauguration of President-elect Obama will likely bring an end to the gas dispute. The MP said,

"A political calculation shows that after January 20, when Obama and (incoming US secretary of state Hillary) Clinton take office, the US pressure will considerably ease and this will create conditions for solving the gas conflict."

Russians are evidently extremely suspicious of an agreement signed between DC and Kiev just as the gas negotiations were taking place. Reportedly France has declined to take part in the summit this weekend saying that sufficient conditions for negotiations were not there. Meanwhile, Alexander Medvedev, deputy chairman of Gazprom, has an opinion piece in the Wall Street Journal giving his case.

"What the world has witnessed recently is arguably the most serious breach of transit obligations ever, creating a stranglehold over the supply of gas to the whole of Europe."

Worth reading, but when all is said and done, Gazprom really did not do enough to try and affect the tenor of the narrative of the dispute in the American media, which was, I think, a grave miscalculation.

3. Joel Kurtzman of the Milken Institute has an op ed in the Wall Street Journal where he argues that Mexico is in danger of becoming a failed state as it loses its drug war. (This echoes a similar op ed in the Los Angeles Times which appeared yesterday by Denise Dresser.)

"But the path forward will be a difficult one. Not only must Mexico fight its drug lords, it must do so while putting its institutional house in order. That means firing government employees who are either corrupt or not willing to do the job required to root out corruption. It will also likely require putting hundreds, or even thousands, of police officers in jail."

Fair enough, but all this talk ignores the white elephant in the room: the root of the problem is US drug law itself, which targets providers and not consumers, and by refusing to come to terms with a failed policy of prohibition, the US is exporting instability to its neighbors.

4. Jens Erik Gould and Hugh Collins at Bloomberg report that the Banco de Mexico reduced the benchmark interest rate by 0.5% to 7.75%.

5. Richard Katz, the editor of the Oriental Economist Alert, has an opinion piece in Wall Street Journal Asia in which he argues that the Japanese stimulus program is far too small.

"Since September, two successive prime ministers have offered two small stimulus plans. The second package, just passed by the Lower House of the Diet on January 13, provides for an actual increase in deficit spending of a mere 1% of GDP. That's a drop in the bucket compared to Japan's downturn. Worse yet, the proposed fiscal 2009 budget -- to begin on April 1 -- provides no new stimulus. Talk of an increase in spending by 6.5% is misleading because it compares fiscal year 2009 to the initial budget for fiscal year 2008. The final budget for fiscal 2008, including the two supplementary budgets, is actually a bit higher than proposed spending in fiscal 2009."

Well worth reading in full.

6. Mark Shenk at Bloomberg reports that the IEA estimates consumption will shrink by 0.6% to 85.3 mb/d in 2009.

7. Glenn R. Simpson and Jay Solomon at the Wall Street Journal report that Iran is trying to import from China treated metals which can potentially be used in missile weapons systems. Among the metals sought are tungsten copper, titanium, and specialized aluminum sheets. The UAE have apparently intercepted more than one of these shipments and reported them to US officials. Given that Iran is one of the UAE's larger trade partners, this is very significant, perhaps showing that the Emirates are uncomfortable with Iran's nuclear program, or perhaps showing that they want to curry favor with Washington as they pursue a nuclear power deal with the US. There is no way to conclude from the metals themselves that they have the sole end use of weapons systems, they merely can be used for such.

8. Richard Meade at Lloyd's List reports that the United States and Kenya are nearing a deal where piracy suspects captured off Somalia would be delivered to Nairobi for prosecution.

9. Mary Jordan at the Washington Post reports that Americans abroad now have a new cachet with the election of Barack Obama, reversing hostility seen for a long time under the Bush Administration. In a way it's a silly piece, and popularity isn't necessarily a good in and of itself, however, it does mean that the US will have an easier time building international coalitions and political will for action dealing with international problems than it has in a long time. And that is a good in and of itself if you are primarily concerned with the national interest.

10. Reuters reports that US headline consumer price inflation fell by 0.7% in December. On a year over year basis they rose by 0.1%.

Daily Sources 1/8

1. Ralph Atkins at the Financial Times reports that the European Central Bank does not look set to cut the benchmark interest rate any further.

2. The Bank of England cut its benchmark lending rate by 0.5% to 1.5%. Real Time Economics carries the full text of the bank's statement. Excerpts:

"The world economy appears to be undergoing an unusually sharp and synchronised downturn. Measures of business and consumer confidence have fallen markedly. World trade growth this year is likely to be the weakest for some considerable time.
...
CPI inflation fell to 4.1% in November. Inflation is expected to fall further, reflecting waning contributions from retail energy and food prices and the direct impact of the temporary reduction in Value Added Tax.
...
[T]he Committee judged that, looking through the volatility in inflation associated with the movements in Value Added Tax, there remained a significant risk of undershooting the 2% CPI inflation target in the medium term at the existing level of Bank Rate."

3. Kevin Rudd, the Prime Minister of Australia, has an opinion piece in the Financial Times which argues that the need to coordinate monetary policy and fiscal stimulus internationally is unprecedented.

"The development of a global response to this crisis is a complex task. The good news is that the Group of 20 summits in Washington last November and in London this April will have created a mechanism for effective, co-ordinated action – bringing together for the first time the main developed and developing economies, which represent between them 85 per cent of gross domestic product, 80 per cent of world trade and two-thirds of the world’s population.

In the immediate period ahead, G20 governments will need to work out the quantum of stimulus necessary for 2009 to offset the anticipated contraction in the private economy and the consequential impact on unemployment; to agree on the optimal content of stimulus policies to balance short and long-term economic needs; to co-ordinate the implementation of these measures; and to develop a medium-term exit strategy to ensure that surviving this crisis does not shackle us with long-term inflation."

Well worth reading in full.

4. Jann Bettinga and Oliver Suess at Bloomberg report that Commerzbank will receive a second bailout from Berlin, less than three months after the first. The bank, Germany's second-largest, will receive €10 billion (~$13.7 billion) from the government in return for 25% of its shares, plus one. It received €8.2 billion last November (~$10.4 billion at that time.)

"The capital injection will boost the combined Commerzbank- Dresdner Bank’s core capital ratio, a key measure of solvency, to about 10 percent, Commerzbank said. Germany’s bank-rescue fund, called Soffin, will buy 1.8 billion euros of Commerzbank shares and provide the rest of the money as a loan."

5. Edward Hugh at Fistful of Euros reports that German exports in November fell "12% year on year, while imports fell 5.6% on the month and 0.9% from a year earlier."

"And problems with indutrial output, emplyment and exports are not the only difficulty facing Germany, since a sale of 10-year bunds yesterday lured the least demand in six months as investors began to show increasing nervousness in the face of the coming flood of government securities, raising the prospect of increased borrowing costs across the European economies.

Investors bid a total of 5.2 billion euros for the bonds on offer, illustrating a reluctance to purchase which prompted the Bundesbank to retain some 32 percent of the securities."

The problem of selling sovereign debt will not be unique to Germany, and likely more critical for emerging markets selling US dollar denominated debt. (see Daily Sources 12/31 #9) Hugh's analysis is helpful, as usual.

6. David Yong at Bloomberg reports that Pacific Investment Management Co. (PIMCO) managing director and co-head of emerging-market investment, Curtis Mewbourne, wrote in a note on the company's website that "Default probabilities for countries like Brazil, Korea, Mexico and Singapore remain very low." Yong summarizes the analysis thus:

"Debt sold by countries with large enough financial reserves to stimulate economic growth and access to support from the Federal Reserve’s $120 billion of currency swap lines will outperform ....
...
Pimco is most bullish on countries that have the resources or can borrow to stimulate their economies as exports slump, according to Mewbourne. He highlighted China’s $585 billion stimulus package and Russia’s $186 billion program."

Meanwhile, Lilian Karunungan and Kim Kyoungwha at Bloomberg report that Asian currencies are falling in the face of dropping US demand.

"'The export numbers were shockingly weak,' said Mitul Kotecha, Hong Kong-based head of global currency strategy at Calyon, the investment-banking unit of French bank Credit Agricole SA. 'In an environment where exports are under significant pressure, the authorities will be content to see some depreciation, as long as it’s not a rapid fall.'"

7. Brad Setser at Follow the Money believes that Chinese appetite for US debt has not disappeared but has shifted from a basket of Agencies and US Treasuries to just US Treasuries.

"Looking ahead, China’s official purchases of Treasuries will be function of three things:

1) The pace of China’s reserve growth. That will be determined by the evolution of China’s trade surplus, FDI flows and hot money flows. The World Bank expects China’s current account surplus to rise in dollar terms in 2009; I tend to agree. Oil will not average close to $100 a barrel in 09. The fall in commodity import prices will help to offset a (probably large) fall in exports. The fall in exports implies fewer imported components, and China’s domestic slowdown implies fewer imports too. But FDI inflows will slow and hot money flows clearly have reversed, so overall reserve growth (counting the increase in China’s hidden reserves) should slow.

2) The share of China’s reserves that are held in dollars. That is currently close to 70% best I can tell. I have no idea if China will want to continue to maintain that dollar share even as the US runs huge fiscal deficits. But now that China is pegging tightly to the dollar, I would guess that Europe would put a lot of pressure on China not to sell dollars for euros in a way that drives up the euro. That would be tantamount to driving the RMB down v the euro to support China’s exports to Europe. I consequently don’t expect a big change in the dollar share, but that is a huge assumption.

3) The share of China’s dollar reserves that are invested in Treasuries. That share is currently rising, big time. At some point though China will have brought its Agency portfolio down to an acceptable level and start to worry about the size of its Treasury holdings. So I wouldn’t expect it to rise forever.

Sum it all up and the pace of China’s Treasury purchases should fall from their recent monthly highs in 2009. But that is only because they currently are at such a high level. Even SAFE cannot sustain a close to $70b a month pace of Treasury purchases for all that long. Not unless it really plans to run its Agency portfolio down to zero."

Well worth reading in full. Meanwhile, Tao Wang of UBS argues that the unemployment situation facing China is unlikely to cause civil unrest, suggesting that it is hardly unprecedented.



Wang argues that these job losses are cyclical and not structural as they were in 1998 and that actual unemployment in the early 2000s was in excess of 10% in addition to an estimated 20 million migrant workers returning to the agricultural sector between 1998 and 2002, for lack of jobs elsewhere. He also thinks Beijing is more prepared to face the problem head on now.

Shanghai Stakes reports that vacancy levels for A-level commercial buildings in Shanghai have risen from 5% at the beginning of 2008 to 15.4% now.

"In Pudong, the percentage is as high as 25.6%, up to even 50% in some high-end commercial buildings. The vacancy ratio of commercial office space in Shanghai has been higher than 50% only once before, during the ‘97-‘98 Asian financial crisis.
...
Morgan Stanley has also sought to sell property in Shanghai over the last several months, but has yet to find a buyer."

Meanwhile, Nisha Gopalan at the Deal Journal reports that Hong Kong billionaire Li Ka-shing's charitable foundation sold 2/5s of its entire stake in the Bank of China Wednesday. This is just a few days after UBS sold its stake in the company and as the Royal Bank of Scotland looks set to sell its 4.3% holding. (h/t Sky Canaves at China Journal for these last three items.)

Meanwhile, Li Yanping at Bloomberg reports that Chinese exports probably fell by the most in a decade in December, dropping by 5.3% from a year earlier using the median prediction of a survey of economists carried out by the wire service.

8. Winnie Lee at Platts reports that China's Ministry and Land and Resources said that the country's dependence on oil imports is likely to rise to 60% by 2020. Currently imports account for about 50% of China's oil requirement. The ministry expects the country to consume about 500 million metric tonnes of oil annually by 2020, or 10 mb/d. Of that 300 million metric tonnes will need to be imported, or 6 mb/d.

"To enhance supply security, the country has set a goal of discovering about six oil fields with reserves of 100 million mt and between six and eight gas fields with reserves of 100 Bcm.
During the 2011-2015 period, China is targeting a discovery of another 10 oil fields with reserves of 100 million mt and eight to 10 gas fields with reserves of 100 Bcm, the ministry said in the forecast document."

The story also reports that the Ministry suggests the establishment of strategic oil reserves, by which it is likely meant that the Ministry suggests the establishment of more strategic oil reserves.

9. Shiva Lingam at Platts reports that the strike by India's Oil Sector Officers Association, a union of mid-level oil industry employees, is in its second day and having a significant effect upon petroleum product supply in the country, creating fuel shortages in southern India and for the airlines. Indian Oil Corp. has been forced to shut four out of its seven refineries and military personnel have been sent to "man major oil installations." Production is down 30% at IOC and 50% at Bharat Petroleum Corp. Ltd.--state-owned refiners. This is extremely interesting because India's energy supply security strategy is now fundamentally based on importing more crude than required to produce the domestic petroleum product requirement and then exporting the surplus product. India consumes about 2.5 mb/d of oil, and this strike, if it continues, could have a considerable effect upon global oil prices.

10. Tim Johnston at the Washington Post reports that Kaing Khek Iev, aka Duch--the head of the Khmer Rouge's Tuol Sleng torture center in Phnom Penh, will likely go on trial starting March. Other Khmer Rouge leaders are unlikely to be tried until 2010.

11. Graham Bowley at the New York Times reports that the UN has suspended food shipments to the Gaza strip after a delivery driver was killed in an Israeli attack. Also rockets were fired into northern Israel from Lebanon in response to the Gaza offensive. The UN Security Council is reportedly close to a resolution calling for a cease fire in the strip.

"The break-through was reached after a delegation of high-ranking Arab ministers overcame the reluctance of the United States, Britain and France in calling for the cease-fire, the diplomats said."

Israel welcomed international efforts to secure a "durable" cease fire.

12. The BBC reports that the president of the Vatican Council for Justice and Peace, Cardinal Renato Martino, "accused both sides [in the Gaza conflict] of only thinking of their own interests while innocent people paid the price." In remarks made online, the Cardinal said:

"Defenseless populations are always the ones who pay. ... Look at the conditions in Gaza: more and more, it resembles a big concentration camp."

Relations between the Vatican and Israel have reportedly been strained recently as the Pope has made clear that he wants to beatify Pope Pius XXII. Pius XXII was Pope during WWII and is widely accused of having turned a blind eye to the holocaust. Meanwhile, Sameer N. Yacoub at the Associated Press reports that Muqtada al-Sadr has called for reprisals on US forces in Iraq in response to the Israeli offensive in Gaza. Al-Sadr is a Shi'a Islamist populist which some link to Iran, though the cleric has explicitly rejected the Khomeini vision of "the guardianship of the Islamic jurist." I regard him as a real threat to the legitimacy of the Iranian government, as I have explained in Law and Revolution in Iran. (h/t Informed Comment for both of these stories)

Former US President Jimmy Carter has an opinion piece in the Washington Post entitled, "An Unnecessary War."An important excerpt:

"[In April 2008, w]e knew that the 1.5 million inhabitants of Gaza were being starved, as the U.N. special rapporteur on the right to food had found that acute malnutrition in Gaza was on the same scale as in the poorest nations in the southern Sahara, with more than half of all Palestinian families eating only one meal a day.
...
Palestinian leaders from Gaza were noncommittal on all issues, claiming that rockets were the only way to respond to their imprisonment and to dramatize their humanitarian plight.
...
We were unable to confirm [that a truce had been agreed upon in June] in Jerusalem because of Israel's unwillingness to admit to any negotiations with Hamas, but rocket firing was soon stopped and there was an increase in supplies of food, water, medicine and fuel. Yet the increase was to an average of about 20 percent of normal levels."

Well-worth reading in full.

13. Pamela Constable and Candace Rondeaux at the Washington Post report that Mahmud Ali Durrani, the Pakistani National Security Adviser, was fired by Islamabad after admitting in a CNN interview that the evidence provided seemed to show that all 10 gunmen in the Mumbai attacks had roots in Pakistan. Meanwhile, in an interview with Der Speigel,

"[Foreign Minister Shah Mahmood] Qureshi and Pakistan's intelligence chief, Lt. Gen. Ahmed Shuja Pasha, said Wednesday that the country's security forces are subservient to civilian authority and committed to supporting democratic rule. 'It is completely clear to the army chief and I that this government must succeed,' Pasha said of Zardari's administration. 'I report regularly to the president and take orders from him.'"

The intelligence chief had also said that Pakistan has no desire to fight a war with India, wants cooperation with New Delhi, and views terrorism as the real enemy of both. In Afghanistan, Pakistan's foreign minister unequivocally denied that Pakistani government agencies had been involved in the attacks on Mumbai. Well worth reading in full.

14. David Osler at Lloyd's List reports that the US Navy plans to dedicate a task force--to be known as Combined Task Force 151--to anti-piracy duty in the Gulf of Aden. Initially this should mean that some of the ships in Combined Task Force 150, which is part of "Operation Enduring Freedom" or the invasion of Afghanistan and later anti-terror efforts, will be redeployed to CTF 151. Osler quotes a CTF 150 spokesman as saying,

"The primary role of CTF 150 was not to chase pirates, in a nutshell... There are nations who would prefer to stick with CTF 150 and not step outside those paramaters, and there are other nations who would be happy to step outside those parameters, but cannot."

Keith Wallis, also at Lloyd's List, reports that the Aso Administration is working on legislation to change the Japanese Constitution so as to allow it's armed forces to join the anti-piracy effort off the Somalian littoral. The government plans to submit the language to Parliament by March. (Sadly, you need a subscription to read the entire article, but the big news is linked, or so I imagine, given that I have not subscribed.)

15. David Jolly at the New York Times reports that a tentative solution may have been found to the Russo-Ukrainian gas dispute. Alexei Miller, CEO of Gazprom, has agreed to a proposal whereby the company would begin supplying natural gas via the Ukrainian pipeline infrastructure once EU monitors were in place to independently verify the volumes so as to ensure that Ukraine would not siphon off supply. Naftogaz CEO Oleh Dubyna told Reuters, "Naftogaz guarantees it will pump in full the volumes received, on the condition that Gazprom will guarantee and supply technological gas for Ukraine’s gas transit system to function." A certain amount of gas is required to keep the pipeline compressors functioning. Jolly reports that EU monitors could be in place by Friday. José Manuel Barroso, the president of the European Commission, has said that both Prime Ministers Putin and Tymoshenko have agreed "in principle" to the deal and

"If both Russia and Ukraine behave as they say they are behaving, there should be no problem. So we hope that the Russians put the gas into the Ukrainian network and that the Ukrainians do not interrupt the gas from Russia to the EU."

16. Marianne Stigset at Bloomberg reports that Norway's Petroleum Directorate expects crude output to fall to 110.8 million cubic meters, or 1.9 mb/d, in 2009 from 122.7 million cubic meters, or 2.11 mb/d in 2008. Production is expected to fall to 94.4 million cubic meters in 2013, or roughly 1.63 mb/d.

"Norwegian fields 'have a robust economy at $50 to $70 a barrel of oil,” [Bente] Nyland, [head of the Directorate,] said in an interview. 'Should prices fall below $50, without production costs going down, projects may be postponed.'"

17. Ian James at the Associated Press reports that Citgo announced it would continue its program of donating heating oil to the poor in American urban centers Wednesday, after it was announced that the program would be suspended. (see Daily Sources 1/5 #8) I am certainly pleased to hear that Chavez has decided to use Venezuela's oil wealth to continue his aid program to the American poor, but have to wonder how the Venezuelan poor are taking the news.

18. Alexander Kwiatkowski and Alaric Nightingale at Bloomberg report that Citigroup's Phibro LLC has hired a one million barrel capacity tanker to sit off Scotland as storage in order to capture profits from the current giant contango in the oil futures markets.

19. Paula Dittrick at the Oil & Gas Journal reports that ExxonMobil's recent annual Outlook for Energy: A View to 2030 forecast global energy demand to increase at an annual rate of 1.2% through 2030. Two key findings include:

a) "Transportation, currently responsible for more than half of total oil demand, is expected to expand substantially globally. From 2005-30, demand in developed countries is expected to be relatively stable because efficiency improvements will offset demand from an increasing number of vehicles. In contrast, demand for transportation fuels in developing countries will likely more than double." and
b) Oil, natural gas, and coal will continue to provide about 80% of the world's energy needs through 2030 because of their abundance, affordability, and availability."

I must get myself a copy.

20. In other foreboding news about the global economy, Janet Porter at Lloyd's List reports that the shipping industry is still being bogged down by inability to secure letters of credit.

"A great deal of cargo is stuck on the quayside unable to move, according to Inchcape Shipping Services chief executive Claus Hyldager."

Worth reading in full, though the article isn't entirely convincing as to why banks would be so leery of something as fundamental as a letter of credit.

21. Jon Kamp and Jessica Hodgson at Real Time Economics have another gloomy indicator for the prospects of the global economy, Intel's second warning this quarter that it will have received $8.2 billion in the fourth quarter, a 20% drop from the third.

"'If you’re an individual or a corporation, chances are you’re an Intel customer,' BMO Capital Markets analyst Brian Piccioni said. 'The fact that they’re not doing well is a good indicator of broader economic weakness.' ... The fact that a company with the size and reach of Intel has been unable to predict the scale of its problems or to swerve the worst of the downturn, has prompted broader concern about the rest of the economy."

22. Stephanie Rosenbloom at the New York Times reports that December sales in stores that have been open for at least a year--known in the retail industry as "same-store sales"--were down at an annual rate of 0.9% according to Ken Perkins, president of Retail Metrics. (The story does not make explicit whether this is year over year or from the month previous percentage changes.) Retail chains experienced a 2.7% year over year decline in sales in November.

"Sales in November and December are closely watched because they account for 25 to 40 percent of many retailers’ annual sales, according to the National Retail Federation, an industry group."

23. The AP reported that the Labor Department announced that initial jobless claims fell by 24,000 to the seasonally-adjusted number of 467,000 for the week ended January 3. This was less than most economists had expected. However, the number of people who continued to claim jobless benefits grew 101,000, to 4.61 million--the highest number seen since 1982.

24. Nancy Trejos at the Washington Post writes that the American Bankers Association reported yesterday that delinquencies on auto loans and home equity lines of credit rose to 3.25% and 1.15%, respectively, in the third quarter.

"James Chessen, ABA chief economist, said. 'With one million jobs lost in the first three quarters and 2 1/2 million expected for the year, delinquencies of all types of consumer loans will likely increase in the coming quarters.'"

The Association also found that delinquencies on credit card debt dropped 0.34% to 4.2%, which might be because the credit card companies increased the amount of debt they have simply written off. (see Daily Sources 1/7 #17)

25. Andrew Taylor at the Associated Press reports that the Congressional Budget Office estimates the deficit for the 2009 budget will reach $1.2 trillion.

"The $1.19 trillion 2009 figure shatters the previous record of $455 billion, set only last year. It also represents more than 8 percent of the size of the economy, which is higher than the deficits of the 1980s. The 2009 budget year began last Oct. 1."

The CBO estimate does not price in Obama's stimulus proposals.