Daily Sources 6/17

1. JAPAN TO FINANCE CLEAN ENERGY EXPORTS

Keith Johnson at Environmental Capital notes that Japan plans to underwrite the switch of other countries to clean energy, but only if they use Japanese technology. Johnson quotes from a report from Bloomberg:

"Japan plans to offer loans to power producers in the US and Australia that buy so-called clean coal generators from Japanese manufacturers, according to a government document obtained by Bloomberg News. Funding from state-owned Japan Bank for International Cooperation would help drive sales of the plants that cost about $3.1 billion apiece, said a senior trade ministry official involved in producing the 113-page draft plan, due to be released today."

2. RUSSIA & CHINA RELEASE JOINT STATEMENT EXPRESSING CONCERN RE: NORTH KOREA

Steve Gutterman at the Associated Press reports that Chinese President Hu Jintao and Russia's Dmitry Medvedev issued a joint statement today after meeting in Moscow:

"expressed serious concern in connection with the situation on the Korean peninsula."

"Hu and Medvedev called for the 'swiftest renewal' of the talks involving their countries as well as North and South Korea, Japan and the United States, which broke down months ago.

The statement included no new initiatives on the mounting problem and used language that appeared aimed at avoiding raise North Korea's ire further."

3. US EXPLORING RUSSIAN PARTICIPATION IN MISSILE SHIELD SCHEME

Walter Pincus at the Washington Post reports that Deputy Defense Secretary William J. Lynn III told Congress yesterday that the US is considering ways to incorporate Russia into a missile defense system for Europe.

"Lynn said that a radar installation in Armavir in southern Russia 'would provide helpful early-warning detection in the case of an Iranian ballistic missile attack.' [Lt. Gen. Patrick] O'Reilly [director of the Missile Defense Agency] told the panel that he had visited a Russian radar facility at Gabala, Azerbaijan, and that both Russian radars would be helpful in monitoring Iranian missile tests. The data gained 'would significantly help our development of our missile defenses,' O'Reilly added.

Overall, Lynn said, 'the involvement of Russian assets, particularly Russian radars, would enhance the capability of that kind of European-based system.'

He also suggested another potential advantage of including Moscow in the effort: 'A US-Russian collaboration would have an additional benefit of a diplomatic signaling to the Iranians that this is an unacceptable course for them to pursue and that they will face a concerted international front, should they proceed down that path.'"

Confirmation, as far as I'm concerned, that the Obama administration is putting the squeeze on Iran by pursuing a "reboot" in relations with Moscow.

4. BRIC SUMMIT ENDS WITH JOINT STATEMENT CALLING FOR LARGER SAY IN INTERNATIONAL FINANCIAL SYSTEM, RUSSIA AND CHINA AGREE TO EXPLORE MORE SETTLEMENT IN DOMESTIC CURRENCIES IN BILATERAL TRADE, BUT GAZPROM ANNOUNCES GAS PIPELINE TO CHINA DELAYED BY NO AGREEMENT ON PRICE, AND LUKOIL VP CALLS FOR MOSCOW TO JOIN OPEC

Andrew Osborne at the Wall Street Journal reports that the BRIC countries released a joint statement following their summit yesterday in Ekaterinburg saying:

"The emerging and developing economies must have greater voice and representation in international financial institutions. There is a strong need for a stable, predictable and more diversified international monetary system."

Meanwhile, Lyubov Pronina and Alex Nicholson at Bloomberg report that following their bilateral meeting in Moscow of President Hu Jintao said that they agreed to expand the use of the yuan and ruble in settling bilateral trade between the two countries. Medvedev told reporters:

"We agreed to take further steps in this direction, including, perhaps, by adjusting contracts and laws that already exist."

However, Vladimir Soldatkin at Reuters reports that Gazprom deputy chief executive Alexander Ananenkov told a news conference that construction on natural gas pipelines to China have been delayed, as "it still cannot reach a pricing deal with Beijing." Further differences in perceived interests between Russia and China were illustrated by the comments by Lukoil VP Leonid Fedun made in an interview with the Kommersant newspaper reported in Reuters,

"Russia should join OpEC and move to direct contracts. Then we will jointly control 51% of world output and we can dictate the price by directive."

5. ACCESS TO CHINESE STIMULUS PROGRAM MONIES REQUIRES PREFERENCE FOR CHINESE FIRMS

Ian Johnson at the Wall Street Journal reports that a recent directive issued by various central government agencies, including from the National Reform and Development Commission, seems to require that projects receiving stimulus-mandated funds give preference to Chinese companies.

"The notice, dated May 26 but only posted on the commission's Web site this month, is part of a broader buy-local push in recent months by authorities, who have quietly been indicating that most of the two-year four trillion yuan ($588 billion) in stimulus spending will be aimed at Chinese companies.

'Apart from engineering goods or service that cannot be obtained under reasonable business conditions inside China, domestic products should be purchased for the government investment program,' according to the official notice."

6. LACK OF INDEPENDENT JUDICIARY IN CHINA LEAVES JUSTICE SYSTEM MORE VULNERABLE TO MOB RULE

Sky Canaves at China Journal notes that the lack of an independent judiciary in China works both ways:

"But nowadays, courts also seem to take guidance from below.

Deng Yujiao, a young hotel worker charged with killing a local official (who she alleged tried to rape her), was set free yesterday after a brief trial and the murder charges against her dismissed, a result that is being cited as a 'significant victory of the Chinese Internet users and Chinese democracy.'

The unofficial precedents for the outcome of Deng’s case can be seen in a couple of other cases from last year that pitted the small guy against perceived official privilege. Xu Ting, a young migrant worker who took advantage of a faulty ATM to withdraw a load of cash and then ran away, was tried and sentenced to life in prison. But Internet users noted that officials charged with corruption involving similar sums (175,000 yuan) would face much lighter penalties, sparking a media outcry that resulted in a retrial and a much shorter sentence of five years for Xu."

The problem of course is that the law is supposed to act as a barrier to mob rule, not to simply preside over judgments made by rumor and innuendo.

7. IN CENTRAL ASIA FINANCIAL CRISIS MAY DRIVE IMMIGRATION

Erica Alini at Real Time Economics notes that in a recent report by the Central Asia-Caucasus institute, "anecdotal evidence suggests that since the world economy nose-dived last fall, 'a higher number of young men bought one-way tickets to Russian cities in November 2008 through January 2009.'"

"Russia is a prime destination for migrant laborers from Uzbekistan, Kyrgyzstan, and Tajikistan, where remittances account for between 8% and nearly 50% of the national income. Thus, as the Russian economy started contracting amidst the economic downturn last year, Central Asia felt the pinch.

When the downturn poked the Russian housing bubble, Central Asian migrants were hit particularly hard because many of them work in construction, Willem Van Eeghen, a migration expert at the World Bank, said.

By December 2008 remittances were down by nearly half in Tajikistan and Kyrgyzstan, according Ms. Marat.

Uncharacteristically, though, the plunge in remittances seems to be pushing even more Tajiks, Kyrgyzs and Uzbeks toward Russia. That’s because many of them seem to think that home offers no prospect, even as things get tough abroad. "

8. SOUTH KOREAN LNG IMPORTS DOWN 41% YOY

Jonty Rushforth at Platts reports that South Korean LNG imports are down 41% year on year in May to 1.26 million metric tons from 2.13 million metric tons.

"They were also down 28.6% from April this year, when the country imported 1.76 million mt."

Not a green shoot.

9. NIGERIAN NIGER DELTA MILITANT TO ACCEPT AMNESTY OFFER

The BBC reports that one of Nigeria's militant leaders of the Niger Delta, Ateke Tom, has accepted, with provisions, the offer of the President to extend amnesty to those militants who lay down their weapons.

"'If the government is sincere, we are ready to lay down our arms,' Mr Tom told the BBC's Network Africa program.

'If the government is not sincere, we will not lay down our arms and the struggle will continue.'

President Yar'Adua first made the offer of an amnesty several weeks ago.

'It will be a great pleasure for me to personally accept the first militant leader to take advantage of the amnesty,' he said."

11. IEA CHIEF ECONOMIST SUGGESTS THAT $70/B OIL LIKELY TO TRANSLATE INTO INTEREST RATE HIKES ON INFLATION, BUT CPI DOWN 1.3% IN MAY YOY

Eurointelligence reports that Fatih Birol, the chief economist at the IEA, suggested that $70/b oil will lead to inflationary pressures, which will force central banks to raise their benchmark interest rates and undermine any nascent recovery. In the meantime, Brian Blackstone at the Wall Street Journal reports that the Labor Department announced that the consumer price index rose 0.1% in May from April; core CPI, which excludes both energy and food prices, also rose from May by 0.1%.

"Consumer prices fell 1.3% compared to one year ago, the largest 12-month decline since April 1950. That's way below the 2% annual rate of inflation that most Fed officials think is consistent with their dual mandate of price stability and maximum employment.

Earlier this month, San Francisco Fed President Janet Yellen said that after once favoring 1.5% as an inflation objective, 'I think if I now had to write down a number, I'd probably write 2%.'"

Sarah-Jane Belfield at Platts reports that demand for jet fuel in April fell month over month by 1.67% to 1.418 billion gallons, per the Bureau of Transportation Statistics. The drop from a year previous was 6.96%. Not a green shoot.

12. EIA ANNOUNCES CRUDE STOCKS DOWN, BUT REFINERY UTILIZATION FLAT, ARE STOCKS AT SEA SIMPLY BEING RESTOCKED?

The EIA reported that commercial crude stocks fell by 3.9 million barrels in the week ended June 12 to 357.7 million barrels--well above the historical range for this time of year, but well down from previous highs. Gasoline stocks, on the other hand, built by 3.4 million barrels, and are just below the historical range for this time of year. Distillate stocks grew by 300,000 barrels, and remain at levels well above the historical range. Izabella Kaminska at FT Alphaville asks whether or not floating oil storage has been restocked, and not unloaded due to a shrinking contango.

"This certainly would explain the larger than expected crude draw in the face of unchanged refinery utilization, and only a small rise in imports."

13. DOE DECIDES ON COMPANIES TO RECEIVE $18.5 BILLION IN FEDERAL LOAN GUARANTEES TO BUILD FIRST NEW NUCLEAR REACTORS IN THE US IN 30 YEARS

Keith Johnson at Environmental Capital reports that the Department of Energy has settled on the first companies which will receive $18.5 billion in federal loan guarantees to help build four new nuclear reactors--the first to be built in the US in three decades. The winners are UniStar Nuclear Energy, NRG Energy Inc., Scana Corp and Southern Co.

"As the WSJ notes, 'Foreign partners that might be able to contribute loans or equity were also considered a plus.' For instance, UniStar hopes to get the French government to kick in $10 billion; NRG wants the Japanese government to underwrite one-third of its costs.

The $18.5 billion in loan guarantees is a small fraction of the $122 billion that nuclear companies had applied for."

Daily Sources 5/21

1. MOODY'S DOWNGRADES JAPAN'S CREDIT PROFILE

On the grim economic news from Japan yesterday, Scott Peterson at Japan Economy Watch reports that Moody's has downgraded the country's credit profile to Aa2 from AAA. Peterson comments:

"[The Japanese government's] net debt number is likely to exceed 100% of GDP in 2009. Moody's noted that very little of this debt is held by non-Japanese. Of course, one of the primary causes of this is the fact that much of this debt was issued at extremely low interest rates. So it was relatively unattractive to foreign investors. Japan's government debt amounts to the country's citizens avoiding taxation now with the expectation that the country's future productivity will be great enough support repayment of the debt in the future without ruinous taxation levels."

2. CHINALCO WILL ACCEPT SMALLER SHARE IN RIO TINTO TO SMOOTH DEAL

Brett Foley and Rebecca Keenan at Bloomberg report that Chinalco has indicated that it would accept a smaller share in Rio Tinto in an effort to overcome Australian government opposition to it proposed $19.5 billion investment in the company. Chinalco is reportedly open to reducing its proposed stake to 15%, and letting Rio sell convertible bonds to other potential shareholders.

"'There is one thing they want and that is a meaningful interest in the company,' said Ric Ronge, who helps manage the equivalent of $775 million, including Rio shares, at Pengana Capital Ltd. in Melbourne. 'Everything will be done to ensure that the deal does go through.'"

I suspect that a substantial amount of Chinese interest in taking a share in commodities corporations worldwide is based on the desire for better data.

3. RUSSIA WILL NOT ATTEND MAY OPEC MEETING, EXPENSIVE RUBLE ON EXPENSIVE OIL UNDERMINES NON-ENERGY BASED CORPORATIONS, RUSSIAN NUCLEAR RENAISSANCE WELL UNDERWAY

Mark Sweetman at Bloomberg writes that RIA Novosti quoted Russian Deputy Prime Minister Igor Sechin as saying Russia was unlikely to send a delegation to the May 28 OPEC meeting in Vienna. Meanwhile, Emma O’Brien at Bloomberg reports that Roland Nash, chief strategist at Renaissance Capital, has pointed out that the 15% rebound in the ruble-dollar exchange rate is undermining the competitiveness of non-energy businesses in the country.

"'They need to create a domestic capital market that’s able to absorb the excess value created by the commodity-producing sector,' Nash said. 'Russia needs huge investment in its infrastructure but at the moment all the money goes offshore into things like US Treasuries.'"

Meanwhile, Der Spiegel reports on the progress of the nuclear renaissance in Russia, whose nuclear energy chief, Sergei Kirienko, agreed to a "strategic alliance" with Peter Löscher, the CEO of German electronics giant Siemens.

"It is hard to believe, but German energy policy is up for debate in Russian classrooms. The students at Kuochkina's school pay rapt attention to a multimedia show in which a virtual professor praises the electricity generated by nuclear power. At the end of the film, a growing orange tree appears on the screen, symbolizing the growth of the Russian nuclear industry. The message is clear: Things are going uphill fast.

Nuclear power is back in vogue in Russia, as if the meltdown at the Chernobyl nuclear power plant had never happened. The giant country has plans to build 26 new domestic reactors by 2030, and 20 more abroad."

4. MORE DONOR MONEY FOR REFUGEES FROM SWAT VALLEY CONFLICT

Kamran Haider at Reuters reports that Minister of State for Finance Hina Rabbani Khar told journalists that "donors" had pledged $114 million to aid those displaced by the fighting in Swat Valley on top of the $110 million promised by the US as announced yesterday.

"That sum would go toward a flash appeal that the United Nations will launch on Friday in a bid to raise up to $600 million, she said."

5. TALIBAN IN UNCONFIRMED REPORTS ON NEGOTIATIONS WITH U.S. PUT EMPHASIS ON TIMETABLE FOR NATO WITHDRAWAL

Dexter Filkins at the New York Times reports that leaders of the Taliban and other forces fighting the NATO-Afghan coalition are negotiating with middlemen terms for a potential peace agreement, with a focus on a timetable for a pull out.

"The discussions have so far produced no agreements, since the insurgents appear to be insisting that any deal include an American promise to pull out — at the very time that the Obama administration is sending more combat troops to help reverse the deteriorating situation on the battlefield. Indeed, with 20,000 additional troops on the way, American commanders seem determined to inflict greater pain on the Taliban first, to push them into negotiations and extract better terms. And most of the initial demands are nonstarters for the Americans in any case.

Even so, the talks are significant because they suggest how a political settlement may be able to end the eight-year-old war, and how such negotiations may proceed. They also raise the prospect of potentially difficult decisions by President Hamid Karzai and President Obama, who may have to consider making deals with groups like the Taliban that are anathema to many Americans, and other leaders with brutal and bloody pasts. Some of the leaders in the current talks have been involved with Al Qaeda.

While the talks have been under way for months, they have accelerated since Mr. Obama took office and have produced more specific demands, the Afghan intermediaries said."

"'America cannot win this war, and the Taliban cannot win this war,' Mullah Abdul Salaam Zaeef, a former Taliban ambassador and one of the intermediaries, said in an interview. 'I have delivered this message to the Taliban.'

The talks under way now appear to be directed not at individual bands of antigovernment insurgents--the strategy suggested by President Obama--but at the leaders of the large movements.

American officials insist they are not participating in any talks."

A must read.

6. TURKEY NOT MAKING GOOD ON PROMISE TO DOUBLE QUOTA OF WATER FOR IRAQ FROM TIGRIS AND EUPHRATES, IRAQI FARMERS LEAVING FOR THE CITIES, IRAQI PARLIAMENTARIANS CALLING FOR OIL MINISTER'S RESIGNATION

AFP reports that experts are predicting an "agricultural disaster" in Iraq if Turkey continues to withhold waters from the Tigris and Euphrates, the sources of which are in Anatolia.

"The reserves of all Iraqi dams at the beginning of May totalled 11 billion cubic metres (388 billion cubic feet) of water, compared to over 40 billion three years ago, although rain has not been below normal levels this winter."

Iraqi agriculture depends on water from the two rivers for 90% of its irrigation farming.

"Turkish President Abdullah Gul promised in March to double the quota of water allocated to Iraq, during a historic visit to Baghdad, the first by a Turkish head of state in 33 years.

But the promise was not kept, according to Abdullah, who notes that the only bilateral treaty on water sharing came in 1946 when Iraq was hit by fears of flooding."

Prof. Juan Cole argued at the time of the promise that it was in return for the crackdown on Kurdish Workers Party guerrillas operating in Iraq just beyond the Turkish border--see Daily Sources 3/26 #14. The Kurdish Regional Government may be considered by Ankara the real negotiating party in terms of that conflict as of now. The water situation in the rivers gets worse further downstream. Ghassan Awad and Amer Hameed at Xinhua on May 6 reported that Iraqi farmers are migrating to the cities as the agricultural situation has deteriorated steadily since 1980 when Iraq was an agricultural exporter.

"Water shortage, high levels of salinization and desertification are affecting the once glorious agriculture sector in a country which currently imports almost 3 billion US dollars of food commodities annually, according to officials of the agriculture and water resources ministries.

Iraqi marketplaces are replete with fruit, vegetables and seeds imported in low prices especially from neighboring countries like Syria and Iran, a sign reflecting the agriculture deterioration and the consequent farmers immigration to cities."

(h/t Juan Cole at Informed Comment.) Meanwhile, Gina Chon at the Wall Street Journal reports that Iraqi parliamentarians are openly calling for the resignation of oil minister Hussein al-Shahristani. The parliament's energy committee has issued a summons for him to testify regarding the failures of the ministry, see Daily Sources 5/18 #4--but no date for the testimony has been scheduled as of yet. Helpful graph of Iraqi oil production since 2003 from the WSJ:



7. SEC CLINTON SAYS U.S. WANTS NO MORE SETTLEMENT CONSTRUCTION FROM ISRAEL, FORMER AIPAC EXECUTIVES CRITIQUE THE ORGANIZATION'S TAKE ON IRAN, ITALIAN FM ABRUPTLY CANCELS IRAN TRIP ON MISSILE TEST

Herb Keinon and Hilary Leila Kreiger at the Jerusalem Post report that Secretary of State Hillary Clinton told al-Jazeera that "We want to see a stop to settlement construction, additions, natural growth--any kind of settlement activity" following Israeli Prime Minister Binyamin Netanyahu's visit to the US.

"Senior officials in Netanyahu's office said the exact terms of a freeze would have to be worked out, since there had been a number of unwritten understandings on this matter with the previous administration.

For instance, Israel has been working on the assumption that, with tacit agreement from the US, it may build inside the lines of existing settlements in the large settlement blocs that it believes it will retain under any future diplomatic agreement.

It was telling that during his two-day visit to Washington, which concluded on Tuesday, Netanyahu made no commitments on settlements, despite the primacy the Obama administration has placed on the issue.

According to former US ambassador to Israel Martin Indyk, writing on The Daily Beast Web site, 'Netanyahu was completely silent on the settlements freeze in public; in private, I'm told, he said it would be difficult to do.'"

Worth reading in full. In the meantime, Daniel Luban at LobeLog reports that AIPAC's former top Iran analyst, Keith Weissman, was interviewed in the Jerusalem Post by former AIPAC chief lobbyist Douglas Bloomfield in which:

"Weissman said Israel’s worries about Iran getting a nuclear weapon are understandable, but despite some of the rhetoric coming out of Teheran, the Iranian leaders 'are not fanatics and they’re not suicidal. They know that Israel could make Iran glow for many years.'
...
Trying to separate the issues, even refusing to endorse the two-state approach, 'is part of the sophistry of people like [Binyamin] Netanyahu who want to avoid confronting the peace process,' he said. 'Iran’s ability to screw around in the Israel-Arab arena would be severely impaired by pressing ahead on the Palestinian and Syrian tracks instead of looking for excuses not to.'"

Also well worth reading in full. Meanwhile, Guy Dinmore at the Financial Times reported yesterday that the Italian foreign minister, Franco Frattini, abruptly canceled a trip to Iran.

"Italy’s foreign ministry said it called off the two-day trip because Mr Ahmadi-Nejad, who is campaigning for re-election next month, wanted to meet Mr Frattini in the city of Semnan where the Iranian president had just announced the successful launch of a medium-range missile capable of hitting Israel.

The Italian delegation was about to leave Rome but had not boarded its plane when the decision was made to cancel, one person present told the FT.

Mr Frattini, who would have been the most senior European government official to visit Iran since Mr Ahmadi-Nejad was elected in 2005, expressed his regret over a 'lost opportunity' to discuss Iran’s role in stabilizing Afghanistan and Pakistan."

Dinmore reports that the UK secretary of state called to try and dissuade Frattini from the trip on the news of the launch.

"European allies had expressed dismay that Italy was about to break with EU policy of shunning high-level contacts with Iran over its nuclear program."

8. OBAMA ENDORSES US-UAE NUCLEAR ACCORD

On the news yesterday that the US-UAE nuclear accord was under pressure after Congress was shown video of a member of the confederation's aristocracy beating a merchant, Jay Solomon at the Wall Street Journal reports that President Barack Obama gave official backing to the agreement under which the US would share nuclear technology to enable the construction of nuclear power plants there.

"The Obama administration touts the UAE agreement as a model for the peaceful development of nuclear power internationally. Abu Dhabi has agreed to extensive United Nations inspections of its nuclear facilities and says it will buy nuclear fuel from international suppliers.

The UAE has renounced its right to enrich uranium or reprocess plutonium, which minimizes the risk of nuclear materials being diverted for military purposes, according to US officials."

US officials have said on the record that they regard the issue of the video and the nuclear agreement to be separate issues.

9. NIGERIAN OIL MINISTER SAYS CONFLICT HAS SHUT IN OVER 1 MB/D CRUDE PRODUCTION

Platts reports that Nigerian oil minister Odein Ajumogobia told local papers today that over one million barrels a day of crude oil production has been shut in by the conflict with rebel groups.

"'The irony of it is that onshore is the cheapest to produce and therefore, the return on that investment is greater, but that is where we have most of the shut-ins,' the minister said."

A senior official with the Nigerian National Petroleum Corporation said yesterday that the country was producing 1.7 mb/d, somewhat under its OPEC quota of 1.74 mb/d.

10. SHIPPING EXPERT FORECASTS THAT HALF OF LISTED SHIPPING COMPANIES WILL GO UNDER IN NEXT 12 MONTHS, DEEMED "ALARMIST" BY SOME


Tony Gray and Rajesh Joshi at Lloyd's List report that Paul Slater, chairman and chief executive of First International, predicted that the next 12 months will be especially difficult for the three main shipping sectors--containerships, dry bulk and tankers--as their market valuations have halved and their cash reserves erode.

"'I feel that more than half of the public shipping companies will go into either bankruptcy or administration within 12 months,' Mr Slater said.

'For me to say that I think that these companies will run out of cash within a 12-month period is not an outrageous statement given the fact that where the markets are today is far worse than at the end of the 1990s.'"

Other experts responded to the forecast by calling it "alarmist." Worth reading in full.

11. ASIAN GDP CONTRACTIONS SHARP ON EXPORT DECLINES, REPORTS ON GLOBAL DISINFLATION

Rebecca Wilder's weekly summary of global economic data at News N Economics plots the GDP contractions due to the collapse in exports of five Asian economies:



She also notes that disinflationary pressures--deflationary in some--are strong across a wide spectrum of economies. Well worth a look.

12. MEXICAN GDP CONTRACTS AT ANNUALIZED RATE OF 21.5% IN Q1

Bob Davis at the Wall Street Journal reports that yesterday Mexico reported that its economy had shrunk by an annualized rate of 21.5% in the first quarter.

13. TOTAL NORTH AMERICAN RAIL TRAFFIC FOR YEAR ENDED MAY 16 DOWN 18.3%

Atlantic Systems Inc.'s weekly Railfax report is out, total rail traffic (in 13 week rolling averages for the US, Canada, and Mexico) is down about 20% year over year:



Total rail traffic for the year ended May 16, year over year, is down 18.3%, a bit lower than total rail traffic for the year ended May 9 of 18.1%. Cargo down the most are metals--down 47.2%--and autos, down 50.4%. The volume of coal transported by rail is down 8.2%.

14. MIDWESTERN FARMLAND VALUES DECLINING

Jeff Wilson at Bloomberg reports that Federal Reserve Bank of Chicago survey released today shows that the value of farmland in five midwestern states fell by 6% in the three months to April 1 on corn and soybean price declines from last year.

15. MIT UPDATES 2003 STUDY ON POTENTIAL ROLE OF NUCLEAR POWER IN U.S. ENERGY MIX, NEW TECHNICAL ANALYSIS SAYS OIL TO GO PAST $70/B

Keith Johnson at Environmental Capital reports that MIT has updated its 2003 study on the role nuclear power could play in the US energy mix going forward.

"Building nuclear plants is still a lot more expensive than building coal- or gas-fired plants, and nuclear-generated electricity is still more expensive than either fossil-fuel option: 8.8 cents a kilowatt for nuclear versus 6.2 cents for coal and 6.5 cents for gas, MIT figures.

There are two ways around that cost gap. A hefty price on carbon emissions of $25 a ton would narrow—though not close—the gap. If Congress passes a cap-and-trade bill to tackle climate change, there will be a price on carbon, though it won’t initially be anywhere near $25 a ton."

Nat Gas, on a BTU basis, traded (on NYMEX July contract over July contract) at a $38.27/b discount to oil. NYMEX oil July over ICE monthly gas contract for July, sells at a $36.29/b premium on a BTU basis to gas. Brent July over ICE nat gas July sells at a $34.84/b premium to gas on a BTU basis.

This appears to be due to a) large stockpiles of gas, b) large new supply of gas, and c) staggering industrial production declines globally ... and most importantly in exporting nations.

A 0.3 cent premium to coal seems a reasonable price to pay for lower emissions. Course, more demand = higher price, so the premium will grow--but the carbon taxes under consideration would certainly make natural gas more economic than coal for some time.

My suspicion is that $100/b oil or more will kill any export-based recovery--and thus industrial production recovery--but it's hard to say. (Obviously I haven't had time to read the MIT study, but it can be found here.) On the question of oil price, Mark Shenk at Bloomberg reports that Veronique Lashinski, a senior research analyst for Newedge USA LLC in Chicago, wrote in a client note that technical analysis indicates that having broke through the $60/b level, crude prices are to head to $73/b. This follows the analysis in early May by Jordan Kotick that crude may jump to $71.55/b if the June contract breaks through $56.10/b--see Daily Sources May 5/5 #5. Paul Horsnell, also at Barclays, also suggested on May 14 that inventories would start falling, meaning that it was a question of when, not if, prices go to $70/b--see Daily Sources 5/15 #9. This also followed the analysis by JBC Energy on May 5 that traders holding crude in storage in tankers offshore would start unloading them. Storage has indeed come down--though the inventories are so high, and demand so low, it still seems that fundamentals would argue for a lower price. Goldman Sachs in late April forecast that all available crude storage would be full by June. (These last two also at Daily Sources 5/5 #5.)

16. LARGE & DENSE CITIES PER CAPITA ENERGY CONSUMPTION SMALLER THAN SMALL CITIES IN SAME RATIO AS LARGE ANIMALS PER CELL CONSUMPTION IS LESS THAN SMALL ANIMALS

Finally, Free exchange has a fascinating post mentioning Steven Strogatz muse that naturally occurring mathematical phenomena may explain how much energy cities consume:

"For instance, if one city is 10 times as populous as another one, does it need 10 times as many gas stations? No. Bigger cities have more gas stations than smaller ones (of course), but not nearly in direct proportion to their size. The number of gas stations grows only in proportion to the 0.77 power of population. The crucial thing is that 0.77 is less than 1. This implies that the bigger a city is, the fewer gas stations it has per person. Put simply, bigger cities enjoy economies of scale. In this sense, bigger is greener."

"Now comes the spooky part. The same law is true for living things. That is, if you mentally replace cities by organisms and city size by body weight, the mathematical pattern remains the same.
...
[C]onsider the elephant or the mouse as an intact animal, a functioning agglomeration of billions of cells. Then, on a pound for pound basis, the cells of an elephant consume far less energy than those of a mouse. The relevant law of metabolism, called Kleiber’s law, states that the metabolic needs of a mammal grow in proportion to its body weight raised to the 0.74 power."

Social organisms, we are.

Daily Sources 5/14

1. JAPANESE OPPOSITION PLATFORM TO CONTINUE PURCHASING U.S. DEBT, BUT DENOMINATED IN YEN; ROUBINI SAYS DIFFICULT MEASURES MUST BE TAKEN IF THE DOLLAR IS NOT TO LOSE ITS POSITION AS RESERVE CURRENCY TO THE YUAN; FORMER TRANSLATOR FOR DENG XIAOPING SAYS CHINESE SENTIMENTAL ATTACHMENT TO THE DOLLAR IS ON THE WAY OUT

BBC reports that the chief finance spokesman for the main opposition party in Japan, the Democratic Party of Japan (DPJ), said in an interview with the broadcaster that Tokyo will only continue to purchase US debt if it is denominated in yen.

"However observers say that, while the move would be a remarkable policy shift, it was unlikely that Mr Nakagawa's party will win the forthcoming election, due before mid-September, despite the unpopularity of the ruling Liberal party."

Linda Sieg and Yoko Kubota at Reuters report that former DPJ leader Yukio Hatoyama announced his candidacy to lead the party after Ichiro Ozawa's resignation last week amidst a scandal in an effort to boost the party's chances of winning upcoming elections. The reporters enumerate some key elements of Hatoyama's background, including:

"Hatoyama is known less for economic policies than for his stance on security and diplomacy. He has advocated revising Japan's pacifist constitution to acknowledge the nation's right to defend itself and maintain a military for that purpose. He has also been critical of Japan's foreign and security policies for being too subservient to close ally the United States."

The so-called FACTBOX is worth consulting. Nouriel Roubini, professor at NYU made famous by his forecast accurate in many particulars of the current crisis, has an op ed in the New York Times where he dismisses arguments that the euro could replace the dollar as the world's reserve currency, instead suggesting that the renminbi is likely to take its place. Key excerpt:

"If China and other countries were to diversify their reserve holdings away from the dollar--and they eventually will--the United States would suffer. We have reaped significant financial benefits from having the dollar as the reserve currency. In particular, the strong market for the dollar allows Americans to borrow at better rates. We have thus been able to finance larger deficits for longer and at lower interest rates, as foreign demand has kept Treasury yields low. We have been able to issue debt in our own currency rather than a foreign one, thus shifting the losses of a fall in the value of the dollar to our creditors. Having commodities priced in dollars has also meant that a fall in the dollar’s value doesn’t lead to a rise in the price of imports.

Now, imagine a world in which China could borrow and lend internationally in its own currency. The renminbi, rather than the dollar, could eventually become a means of payment in trade and a unit of account in pricing imports and exports, as well as a store of value for wealth by international investors. Americans would pay the price. We would have to shell out more for imported goods, and interest rates on both private and public debt would rise. The higher private cost of borrowing could lead to weaker consumption and investment, and slower growth.

This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order."

Well worth reading in full. Victor Zhikai Gao--executive director of the Beijing Private Equity Association and a director of the China National Association of International Studies--also has an op ed in the New York Times which points out that many Chinese actually have a sentimental attachment to the US dollar, known by many as mei jin, or "American gold." The dollar had for many years cache simply because it was illegal to hold them--the law required that all private citizens convert dollar holdings into the renminbi, and thus the notion of the dollar being "gold" long outlasted Nixon's decision to delink the dollar from the yellow metal. Key excerpt:

"Beijing recently called for a greater role in international trade for the special drawing rights currency of the International Monetary Fund. But China is also fully aware that the United States can veto an IMF decision. China’s call was more meant to sound an alarm to the United States.

Many Chinese people increasingly fear the rapid erosion of the American dollar. The United States may want to consider offering inflation-protection measures for China’s existing investments in America, and offer additional security or collateral for its continued investments. America should also provide its largest creditor with greater transparency and information.

We still call the dollar American gold. But the United States should not assume that this will never change."

2. THE IEA SAYS CHINESE GDP DATA MAY WELL BE WRONG; KEY CHINESE STATISTICIAN OUTLINES PROBLEMS WITH CHINESE RETAIL SALES DATA

David Winning at the China Journal reports that the Paris-based IEA global energy report today cast doubt on Beijing's official 6.1% GDP growth number for the first quarter, saying it didn't quite reconcile with a 3.5% drop in oil consumption.

"'Admittedly, pinpointing China’s oil demand with accuracy is an exercise fraught with difficulties, given the lack of data and the underlying assumptions analysts must make regarding stocks and refinery output from independent producers,' the IEA said in its latest report on the global oil market.

'Still, one would have expected stronger, positive oil demand growth commensurate with the reported economic resilience, unless income elasticities had drastically changed.'

The IEA floated another possibility: Real GDP data aren’t accurate and shouldn’t be taken at face value."

The IEA also mentioned a fall in electricity generation, which I noted in yesterday's Daily Sources 5/13 #2 were supposed to have fallen by as much as 4% in April after experiencing year over year declines in power generation for the last seven months. Chinese statistics have been in for a lot of rubbishing recently Andrew Batson reports in China Journal: a new essay by Xu Xianchun, a top statistician at the National Bureau of Statistics tries to explain why "one can’t simply add up China’s monthly indicators of investment and spending to get an accurate picture of gross domestic product."

"Yet many economists have long felt that the retail sales figures are not a reliable guide to China’s household consumption. Mr. Xu himself notes these well-known gaps, pointing out that the official retail sales numbers include things that cannot be considered consumer spending.

The most important are retail sales to companies and institutions, which of course are not consumers at all, and sales of construction materials for housing, which should be counted as part of household investment. Retail sales also do not include spending on services like education or health care, or rural households’ consumption of produce they grow themselves, he notes.

'Compared with retail sales, using household consumption expenditure obtained from the rural and urban household surveys is closer to consumer spending,' Mr. Xu writes.

Those measures show much slower growth than the headline retail sales figure. Mr. Xu says the bureau’s household surveys put the real growth in urban household consumption in the first quarter at 9.6%, and 9.3% for rural households. That would mark somewhat faster growth than in the second half of 2008 but somewhat slower growth than in the first half, when food prices soared, according to figures previously released by the bureau."

Worth reading in full. The National Bureau of Statistics is attempting to overhaul its data collection and publication methodologies in the face of growing criticism regarding the accuracy of their data--see Daily Sources 5/7 #2 (near the bottom of the item.)

3. PLANS TO ALLOW MAINLAND CHINESE INVESTMENT FLOWS TO TAIWAN CAUSING IRRATIONAL EXUBERANCE IN TAIWANESE MARKETS

Jonathan Adams at the New York Times reports that after announcing plans late last month to sign accords providing for cross-strait exchange in banking, insurance and access to financial markets the Taipei stock markets and dollar have been posting strong gains in the face of horrible economic data.

"[S]ince Ma Ying-jeou was inaugurated as president nearly a year ago, Taiwan has moved rapidly to forge closer commercial links with China to lift its sagging economy. In the past year, it signed deals with China on tourism, airline flights and shipping.

Investment, however, has remained a one-way street, flowing from the island to the mainland. Taiwan has invested $150 billion in the mainland since the 1980s, according to one Taiwan government estimate. Mainland China has until now been barred from directly investing in Taiwan."

For now, Beijing is capping Taiwan-bound investment at 7.2 billion Taiwan dollars (~ $219 million) leading analysts to remark that the market is likely overreacting.

4. BANK OF ENGLAND WARNS THAT RECOVERY WILL BE PROTRACTED TO 2012, LONDON COMMERCIAL RENTALS AT PRICES LAST SEEN IN 1991

Julia Werdigier at the New York Times reports that Mervyn King, head of the Bank of England, warned yesterday that "Growth has just as much chance of being positive over the next 12 months as it has of being negative."

"The central bank predicted that inflation would slow to as low as 0.4% this year and then accelerate to 1.5% by the end of 2010, revising upward an earlier forecast. But inflation is still unlikely to hit 2% by 2012, the central bank said."

2012. Mr. King said the recovery would likely be "slow and protracted." Meanwhile, Chris Bourke at Bloomberg reports that commercial rent in the city of London, the UK's main financial district, has fallen to levels last seen in 1991.

"The City already has enough empty offices to hold two- thirds of Canary Wharf, the docklands area developed 1 1/2-miles east in the 1980s to lure investment bankers. About 9 million square feet (855,000 square meters) are available in the City and that may climb to 12 million by the end of 2009, according to CB Richard Ellis Group Inc., the biggest commercial property broker. Almost 19% of all City offices may be vacant next year, analysts at CB Richard Ellis estimate."

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

5. SPANISH GDP DOWN 1.8% IN Q1, RECOVERY COMPLICATED BY DEBT TO GDP RATIO

Edward Hugh at Fistful of Euros reports that Spanish GDP fell at a rate of 1.8% in the first quarter following a 1% contraction in the fourth quarter of 2008 which, annualized, results in a contraction of 7.2%.

"Over the first quarter of 2008 (that is year on year) GDP decreased by 2.9%, the sharpest decline recorded in almost 40 years. In fact you would need to go back to 1945 to find a year in which the Spanish economy contracted as strongly as it is likely to this year."

Hugh argues, in the very long post, that the crisis in Spain is mostly due to excessive bank lending--to get 4% annual GDP growth Spanish households and corporations were apparently increasing their borrowing by a rate of 20% per annum. Hugh concludes:

"So as I say, debt to GDP is most probably rising even now, but it is obviously going to have to come substantially down, which is why I insist on saying, this correction has hardly even gotten underway yet."

Long, but with substantial detail and worth reading given time.

6. RUSSIA PROPOSES RENEGOTIATING THE CONVENTIONAL FORCES IN EUROPE TREATY, BELARUSSIAN PRESIDENT COMPLAINS THAT RUSSIA HAS NOT WORKED FOR RENUNION, GEORGIAN OPPOSITION LEADER SAYS SAAKASHVILI IS TRYING TO CREATE AUTOCRATIC STATE

Vladimir Isachenkov at the Associated Press reports that Russian Foreign Ministry spokesman Andrei Nesterenko told the media that Moscow is proposing to renegotiate the Conventional Forces in Europe Treaty, and would honor the agreement if the changes were accepted by Washington and its NATO allies.

"The 1990 treaty limits the number of tanks, aircraft and other heavy non-nuclear weapons that could be deployed west of the Ural Mountains--the edge of European Russia. A new revised version was signed in 1999, but NATO countries have not ratified it and in 2007 Russia suspended its participation."

The West has insisted that Moscow remove troops from the breakaway regions of South Ossetia and Abkhazia as a prerequisite for reconsidering the CFE treaty. Meanwhile, Yevgeny Bendersky at the Compass reports that Belarussian President Aleksandr Lukashenko last week blamed Moscow for failing to reunite Russia with Belarus.

"'The fact that we have not progressed in constructing a federal partnership is not our fault. It is their (Russia's) fault... Who does not fulfill the contract on the construction of the Unified State? We had to hold a joint referendum on that. Why didn't we? Because the Russians did not want to,'--said Lukashenko, advising Moscow to 'look at the internal causes of turmoil in our relationship.'"

Although the Belarussian reunification with Russia would likely be regarded with serious alarm in the West, the standard take on this, if I recall correctly, is that United Russia, the party of Medvedev and Putin, doesn't particularly want Lukashenko as a political challenger for the presidency and that Moscow doesn't particularly want to bear the costs of reintegrating the Belarussian economy, which has been basically destroyed by Lukashenko.



Prime Minister Putin is, by the way, Chairman of the Council of Ministers of the Union of Russia and Belarus. Belarus was one of the nations explicitly targeted by the EU's "Eastern Partnership" initiative, which would offer better trade ties, relaxed visa rules and aid over four years for six countries neighboring Russia--see Daily Sources 5/7 #1. Meanwhile, Benjamin Bidder at Der Spiegel conducted an interview with Georgian opposition leader Salome Zurabishvili in which she calls President Sakaashvili "insane." Key excerpt:

"SPIEGEL ONLINE: But during the war between Russia and Georgia in August of 2008 you united the entire opposition in support of Saakashvili. You even forbade any criticism of the president.

Zurabishvili: That was following the national tragedy! We stood united so that we could prevent Russia from using the situation to their advantage after the war.

SPIEGEL ONLINE: Why is the opposition so set on seeing Saakashvili as the bogeyman?

Zurabishvili: There is simply no one to turn to in other state institutions because none of them have any power anymore. That's the situation in which we find ourselves. The situation is serious and very dangerous. Because if, after these peaceful protests, we don't get any results--not even a small concession--then things could get out of control, as they did on May 6th."

Zurabishvili also accuses the President of faking the mutiny at the Mukhrovani tank camp--see Daily Sources 5/5 #4--saying that he is attempting to intimidate the armed forces as opposition to his administration grows. In short, she accuses the President of trying to establish an autocratic state.

7. TURKISH CENTRAL BANK CUTS BENCHMARK RATE TO 9.25%, CONSUMER PRICES RISING AT SLOWEST RATE SINCE 1970

Steve Bryant at Bloomberg reports that the Turkish Central Bank has reduced its benchmark interest rate by 0.5% to 9.25%.

"Bank Governor Durmus Yilmaz has shaved 7.5 percentage points from the benchmark rate in seven months, joining policy makers worldwide in trying to pull economies out of recession as inflation slows. Turkish consumer prices rose an annual 6.1% in April, the slowest pace since July 1970."

Unemployment rose to 15.5% in January, the highest rate seen since records were inaugurated in 2005.

8. 735 CARGO SHIPS ANCHORED OFF SINGAPORE ON COLLAPSE IN GLOBAL TRADE, 300 OFF ROTTERDAM, 150 OFF GIBRALTAR

Keith Bradsher at the New York Times reports that as many as 735 cargo ships, some weighing as much as 300,000 dead weight tonnes, have anchored off the coast of Singapore in the Strait of Malacca on the global fall in international trade. Charles Pertwee captured a beautiful picture of the situation for the Times, illustrating the concern shipping lines have as the parked behemoths are creating an obstacle course in one of the busiest shipping channels in the world:

"The gathering of so many freighters 'is extraordinary,' said Christopher Pålsson, a senior consultant at Lloyd’s Register-Fairplay Research, the consulting division of Lloyd’s Register-Fairplay. 'We have probably not witnessed anything like this since the early 1980s,' during the last big bust in the global shipping industry.

The world’s fleet has nearly doubled since the early 1980s, so the tonnage of vessels in and around Singapore’s waters this spring may be the highest ever, he said, cautioning that detailed worldwide ship tracking data has been available only for the last five years."

Ships are anchoring off other ports too with about 300 off Rotterdam and 150 off the Strait of Gibraltar.

9. THE IEA CUTS GLOBAL OIL DEMAND FORECAST TO A 3% REDUCTION FROM 2008, WORST DEMAND REDUCTION SINCE THE OIL SHOCK OF 1981, BUT OIL INVENTORIES MAY HAVE STOPPED BUILDING

Mark Shenk at Bloomberg reports that the Paris-based IEA cut its estimate of global oil demand to 83.2 mb/d in 2009, down 3% from 2008 and the steepest fall since the oil shock of 1981. This is triple the decline forecast by the IMF in Global Financial Stability Report of a decline in oil use of 1.5%--see Daily Sources 4/22 #1. (The IMF records an oil use decline of 2.87% in 1982.) OPEC and the EIA also lowered their global demand forecasts this year. John Kingston at The Barrel gives three reasons why the global build in inventories that has happened over the last months has, in his view, probably come to an end. Key excerpt:

"Platts' Sheela Tobben reported that the volume of foreign crude sitting aboard floating storage in the US Gulf has declined to around 20 million barrels Wednesday, from 30-35 million barrels at the end of April, according to market sources. This follows sales that began last week by holders of that oil under pressure from a narrower NYMEX crude contango, a stronger WTI/Brent and the incentive provided by healthy gasoline margins, they said. 'Last count sweet and sour total about 20 million barrels in the USG but seems a little high given many stems moved last week,' said a trader with a major, referring to several sales of Russian Urals last week.

With the world markets seeing tighter inventories, the most visible sign of it is in the spread among different calendar months delivery of crude. Following the release of the API inventories, the spread between June and July crude had narrowed to 70 cts, with July about that much higher than June. At one point in mid-April, the front month to second month spread was more than $3. That sort of movement only occurs when inventories are being drawn down, and the numbers, and stories from the market, are beginning to confirm that."

Worth reading in full. Keith Johnson at Environmental Capital also notes that Barclays' Paul Horsnell thinks that inventories will now start drawing down, which means it is only a question of when, not if, oil goes back above $70/b. (JBC Energy predicted oil would start coming out of storage at sea on May 5th as Goldman Sachs predicted all available oil storage would be full by June, see Daily Sources 5/5 #5.) In the meantime, al-Hayat, a Saudi paper widely watched by the oil patch, reported that in a recent meeting with French Economy Minister Christine Lagarde Saudi King Abdullah and Oil Minister al-Naimi said factors other than supply and demand had pushed the price above $60/b in the first place, according to Reuters.

10. CARBON TAXES WILL MAKE SUPER-POLLUTING CANADIAN OIL SANDS LESS ECONOMICAL

It is an old story, but it bears repeating. Ben Casselman at Environmental Capital reports that carbon taxes will make oil sands production in Canada that much more difficult to make economical. Oil sands production releases huge amounts of carbon into the atmosphere via current technology, and the Canadian Energy Research Institute thinks that new emissions regulations would likely push the price of economically producing oil from oil sands to $105/b. "As a result, CERI expects growth in the oil sands to be as much as 40% lower in the coming years than previous projections." Oil sands represent a considerable portion of Canadian production--and Canada is the largest exporter of oil to the US.

11. OBAMA BLOCKS RELEASE OF ADDITIONAL PRISONER ABUSE IMAGES

Peter Wallsten and Janet Hook at the Los Angeles Times reports that the Obama Administration decided yesterday to block the release of additional images depicting the abuse of prisoners by US military personnel in Iraq. The decision, which may be reversed by the courts, will surely make some rethink their view that the administration represents a clear break with its predecessor. On the other hand, the visceral reaction that people have to pictures of people abusing captives is much more emotional, and potentially explosive, than to a decision to go back on campaign promises of transparency. I suspect that the decision is with the safety of US personnel overseas foremost in mind. That said, the decision begins the process of erosion of the Administration's credibility--perhaps inevitable, but ultimately the load-bearing pillar of soft power for any Administration.

12. S&P INDICATED EXPECTATION FOR BANKING CRISIS TO CONTINUE FOR 3 - 4 MORE YEARS, AIG TELLS CONGRESS IT WILL TAKE 3 - 5 YEARS TO COMPLETELY RESTRUCTURE, US SENATE OK'S 41% INTEREST RATES ON CREDIT CARDS

Jonathan Stempel at Reuters reports that Standard & Poor's Managing Director Tanya Azarchs said--though it did not mention via which medium--"There's nothing to say that this banking crisis can't go on for another three or four years."Stemple writes that the Managing Director indicated that the rating agency thinks the banking crisis has merely entered into a new phase, which should last some time. He writes:

"While efforts to spur lending, take bad assets off banks' balance sheets, and restart the market for packaging and selling securities may help the sector, S&P said banks will have a tough time surviving absent a bigger capital cushion than regulators require."

I'm not sure why anyone would pay attention to the ratings agencies given their total failure to warn the market prior to its meltdown, but, hey, you know what they say in the financial sector--"past performance is no indication of future performance"--so perhaps some credence ought to be extended to Ms. Azarchs. Meanwhile, Edmund L. Andrews at the New York Times reports that the Chairman of AIG, Edward M. Liddy, told the House Committee on Oversight and Government Reform that it would likely take the company three to five years to restructure and fully repay its obligations to the US taxpayer.

"'We must take the time and exercise the diligence to do this restructuring properly,' [Liddy] told lawmakers. 'Let me be clear: our plan is explicitly designed to avoid having to divest A.I.G. assets at fire-sale prices.'"

When pushed for more detail on the restructuring plan, Liddy reportedly "balked," but indicated he would do so under conditions more likely to preserve the plan's confidentiality. In the meantime, Carl Hulse at the New York Times reports that the US Senate has rejected a bill which would cap credit card interest rates at 15%, 33-60. Apparently the US Senate has determined that credit card companies must be allowed to charge its customers rates as high as 41% if they are to remain viable entities. Senator Bernie Sanders (I-VT) introduced the bill arguing that over a third of all credit card holders pay interest of over 20% on their debts to the companies.

13. SEASONALLY-ADJUSTED INITIAL JOBLESS CLAIMS UP TO 637,000 FOR WK ENDED MAY 9, CHRYSLER AND GM SENDS LETTERS LETTING GO THOUSANDS OF RETAIL FRANCHISES

Bob Willis and Shobhana Chandra at Bloomberg report that the Labor Department today released data showing that seasonally-adjusted initial jobless claims grew by 32,000 to 637,000 in the week ended May 9.

"The total number of people collecting unemployment insurance surged in the prior week to 6.56 million, setting a record for the 15th straight week and indicating companies are still not hiring. The lack of jobs may restrain consumer spending, the biggest part of the economy, and put off a return to growth that economists project for later this year."

The unadjusted for seasonality advance number of actual initial claims under state programs totaled 565,395, up 27,856 from the previous week. There were 325,480 initial claims in the comparable week in 2008. The previous week's initial unemployment claims number was revised slightly upwards to 605,000 from 601,000. Nick Bunkley at the New York Times reports that Chrysler filed a list of the car dealers it is cutting from roster in bankruptcy court today. 789 of its 3,200 dealers will lose their franchise with the company as of June 9.

"[S]ome dealerships could be saved by rulings from Chrysler’s bankruptcy judge or if other dealers decide to sell their franchises."

Tomorrow 1,000-1,200 dealers are expected to receive a similar letter from GM. The National Automobile Dealers Association are meeting today with members of the Obama Administration to urge them to reduce the letting as much as possible.

14. PRODUCER PRICES UP 0.3% IN APRIL FROM MARCH, DOWN 3.7% FROM A YEAR PREVIOUS

Jack Healy at the New York Times reports that the Labor Department released data today showing that producer prices rose by 0.3% in April from March, but down 3.7% from a year previous. Most of the price increase came from food prices--which rose by 1.5%--and oil prices. If you exclude energy and food prices from the index it rose 0.1% in April from March.

Daily Sources 5/6

1. THE PBOC THINKS QUANTITATIVE EASING BY OTHER CENTRAL BANKS MIGHT NOT BE IN CHINA'S INTERESTS, LET'S EVERYONE KNOW JUST IN ADVANCE OF ECB MEETING; THE ECB CHIEF ORDERS ALL GOVERNORS NOT TO DISCUSS THE BANK'S DIVISION OF OPINION PUBLICLY, BUT WE KNOW IT'S THERE

Sandy Hendry at Bloomberg records that the People's Bank of China said in its quarterly monetary policy report released today that the policy of quantitative easing pursued by some of the world's central banks risks spreading inflation around the world.

"'A policy mistake made by some major central bank may bring inflation risks to the whole world,' China’s central bank said in the report today. 'As more and more economies are adopting unconventional monetary policies, such as quantitative easing, major currencies’ devaluation risks may rise.'"

The language comes as the European Central Bank appears to be divided on how best to move going forward, with the open dispute between the governors having actually had to have been silenced by the bank's chief. Claus Vistesen at Fistful of Euros notes that the ECB does not appear, at this stage, to be ready to adopt the policy of "quantitative easing" that the Fed, Bank of England and Bank of Japan have adopted. Vistesen concludes:

"I think the ECB and indeed Eurozone policy makers have a responsibility towards on the one hand, the CEE; and on the other keeping the Eurozone in one piece. I think that this responsibility should be conveyed very clearly in speech and action. You can always argue that measures already have been taking, but I think there is good chance (risk) that the whole European economic system needs a serious re-boot on the back of this crisis. Such re-structuring need to be intimately tuned to these two challenges which means that we need to be able to speak openly about them and not narrate anything in the context of one set of aggregate inflation expectations measures. If it is not, then we will truly be all at sea."

Well worth reading in full. The ECB will be meeting tomorrow to decide on further measures.

2. UK ENERGY SECY SAYS BRITAIN TO TRANSFER CARBON CAPTURE TECHNOLOGY TO EMERGING NATIONS, THE UK ECONOMY IN SAME TRAJECTORY AS THE GREAT DEPRESSION (WHICH IS ACTUALLY GOOD NEWS, RELATIVELY SPEAKING), RATE OF SPANISH UNEMPLOYMENT GROWTH FALLING, AND ED HUGH SAYS GLOBAL MANUFACTURING STABILIZED IN APRIL

Jonathan Watts at the UK Guardian reports that the British Energy Secretary, Ed Miliband, suggested today that London would share the fruits of its R&D in carbon capture and other low carbon technology with Beijing and other developing countries.

"'We're approaching this from the mindset where we can co-operate more with China on things like carbon capture and storage,' Miliband said.

While not abandoning the industrial potential of being a leader in the field, he said Britain could benefit from transferring knowledge.

'Eventually we hope to see this technology across the world because coal is something that is used in many countries and the key to that is making it a clean fuel of the future.'"

Recently China, India, and South Africa called upon the developed world to contribute $200 billion (annually, I infer) to the emerging world to help them institute best carbon reduction practices--see Daily Sources 4/29 #1.

Meantime, Stephanie Flanders at Stephanomics reports that the National Institute of Economic and Social Research (NIESR) thinks the UK's economy is likely to follow mostly the same path it took during the Great Depression. That's bad, she notes, but the UK's economy contracted by much less than the rest of the world, and, in particular, the US, during the Great Depression, and so is good news, relatively speaking.

"Still, economically speaking, 1931 was not half as bad for the UK as it was for other parts of the world--notably the US, which shrank by more than 10% that year, and by around 30% between 1929 and 1933.

Where the UK is concerned, the year you really don't want to replicate is 1921, when the economy shrank by nearly 10%."

Victor Mallet at the Financial Times reports that the rate of the rise in Spanish unemployment is slowing.

"The number of unemployment benefit claimants in the labor ministry announcement are lower than the jobless figures released last month by the quarterly labor survey of the National Statistics Institute. Those showed Spanish unemployment exceeding 4 million by the end of March, equivalent to 17.4% of the workforce and double the European Union average."

Spain's consumer confidence index also registered a rise to 61.9 in April from 53.7 in March, according to the Official Credit Institute. Edward Hugh at Fistful of Euros has an extremely long piece showing that manufacturing has stabilized globally in April. His commentary:

"The global manufacturing recession continued in April, with rates of contraction for output, new orders and employment all showing what are effectively sharp contractions by historical standards. The rates of contraction however moderated almost universally, and this is now the fourth month where this moderation has been evident. Thus, while the contraction is far from over, it is reasonable to say the it has stabilized, and the big issue is at what rate it will hold in the months to come. The initial shock has now been absorbed, but that is a far cry from saying that we already have the worst behind us. The general deterioration in employment conditions raises the concern that as the impact of the government stimulus 'shocks' in their turn wane, and as national banking systems come under the impact of the additional loan defaults the growing unemployment and falling property values will cause, then we may see a series of second round effects, not as severe as the initial 'hit' last October, but certainly not to something to be taken lightly or 'factored out of the picture' at this point."

Worth a look.

3. IF TALIBAN REFUSES TO RECOGNIZE PAKISTANI CONSTITUTION, THEN THAT, IN AND OF ITSELF, WOULD BE IN VIOLATION OF ANY DEAL

Susanne Koelbl at Der Spiegel conducted an interview of Pakistan's President, Ali Zadari. Key excerpt:

"SPIEGEL: The chief Taliban negotiator in Swat, Sufi Mohammed, claims that democracy is opposed to Islam. So what are the foundations for a treaty?

Zardari: When he refuses to recognize Pakistan's constitution, he is breaking the terms of the peace deal. That gives our negotiators and the populace the support they need to take him on. If the deal doesn't work, then parliament will have to decide on it again. That's democracy and, as you can see, it works."

My emphasis. Well worth reading in full.

4. WORLD CLASS GIANT OIL FIELD FOUND IN KURDISH REGION OF IRAQ, QUESTION ON HOW BEST TO TRANSPORT IT TO MARKETS OPEN, HOWEVER

Heritage Oil Corp.--a UK independent oil and gas E&P firm--published a press release today announcing that they their initial test of the Miran West structure in Kurdistan indicates that it contains 2.3 to 4.2 billion barrels of oil. Not quite a super giant find (a field with at least 5 billion barrels), but a world class giant field, though Heritage expects recoverable oil to be about 50-70% "due to the highly fractured nature of the reservoirs."



The upper end of recoverable oil would be at about 35 days of global oil consumption (at 84 mb/d) with the lower end being 13.7 days of global oil consumption--a considerable find by any measure. Spencer Swartz at Environmental Capital comments:

"The only problem: there’s still no prospect of Heritage or any other firm being legally permitted to export crude discovered in Kurdish territory to world markets because Baghdad and Erbil, the capital of the autonomous region, remain at loggerheads over oil contracts. Iraq gets oil revenues from exports of crude that comes mainly from Southern Iraq fields.

Iraq oil minister Hussein al-Shahristani said last week in London that Baghdad still won’t recognize any of the oil drilling contracts Erbil has signed with 25 mostly small companies and, as a result, won’t provide export licenses to companies operating in Kurdish territory. DNO International of Norway was the first company ready to export oil--two years ago.

Baghdad and Erbil have made virtually no progress resolving their differences."

I would note that the so called Pars Pipeline recently proposed by Tehran could now potentially, logically even, go through the Kurdish Autonomous Region through Syria and on through the Mediterranean.

5. VENEZUELA TO PASS LAW MAKING EXPROPRIATIONS EASIER

Rachel Jones at the Associated Press reports that the Venezuelan National Assembly gave preliminary approval yesterday to a law which would simplify the legal procedure by which the Chávez Administration might seize control of oil and gas services operations.

"The draft law would let PDVSA impose control over some service businesses without further legal measures, while any disputes would be settled in court. Expropriations normally take effect only after the publication of a presidential decree in the Official Gazette or if the National Assembly approves a measure."

6. JATROPHA TREE--A MAJOR POTENTIAL SOURCE OF BIODIESEL--PROVES UNPRODUCTIVE IN WASTELANDS; NEW CALL TO DROP TARIFFS ON "GREEN" IMPORTS; ORGANIC FARMS IN THE US NOT DISTRIBUTED ACCORDING TO LAND AVAILABILITY BUT CULTURAL PREFERENCES

Jon R. Luoma at Environment 360 reports that research results for the jatropha tree show that although it will grow in arid and barren lands, its oil yield from such acreage is quite low and unlikely to result in a net energy addition. India, in particular, is one nation that had pinned some hopes on the jatropha tree, for which New Delhi created a subsidization program in "wastelands."

"According to the Indian environmental group, Navdanya, government foresters have drained rice paddies in order to plant jatropha in the poor and mostly tribal state of Chhattisgarh. As early as mid-2007, protests broke out in the mostly desert state of Rajasthan over a government scheme to reclassify village commons lands--widely used for grazing livestock--as 'wastelands' targeted for biofuel production, primarily jatropha."

Unrest over reduced food crop yields due to biodiesel programs via the jatropha tree have also broken out in the Philippines and Myanmar.

"Late in 2005, Myanmar’s military dictatorship--newly enamored with what’s been called 'the biofuel tree'--ordered all of that nation’s states and other political divisions to plant about a half-million acres each. In a predominantly agrarian country where child malnutrition is rampant, entire plantations have sprung up where food crops once grew. Under the threat of imprisonment, households have been forced to buy seed and plant jatropha in backyard gardens. Human rights groups report that teachers and their pupils, along with medical and government workers, have all been pressed into service to plant jatropha.

Yet according to scattered stories that have leaked out of a country generally closed to the foreign news media, the same government that infamously bungled its response to a devastating May 2008 typhoon did not have the foresight to build adequate infrastructure to mill the jatropha seeds or process them into biofuel. The seeds--grown at the expense of food crops--were left to simply rot on the ground."

Well worth reading in full. (And I suspect that the jatropha may provide part of the solution nonetheless. That said, crude palm oil futures tend to trade at about a $40/b premium to ultra low sulfur diesel.) Daniel M. Price has an opinion piece at the New York Times calling specifically for the reduction of import duties on green technologies and products.

"The United States should call on each of the major economies to choose any of the products from the World Bank’s list of 43 climate-friendly technologies--for example, solar and wind energy equipment--and end tariffs on them. The only requirement would be that each country reduce the tariffs collected on these 43 products in total by at least 20 percent.

This proposal is simple and easy to put into place, and need not await the outcome of drawn-out international trade negotiations. Countries merely need to choose the products on which they want to cut tariffs, and reduce those tariffs to zero."

I suspect the counter-argument will be something along the lines of protectionism doesn't only take the form of duties, but of subsidies as well.

In a related story, The New York Times has a short piece pointing out that the growth of organic farms appears to be closely correlated to cultural preferences, as opposed to standard food economics. Organic farm distribution:



All farms:



The full graph and commentary can be found here.

7. CRUDE STOCKS UP, BUT MARKETS SHRUG ... THE FOLKS LEFT WITH DISPOSABLE INCOME ARE SAVING IT

The EIA reports today that commercial stocks of crude oil were up 600,000 barrels for the week ended May 1 to 375.3 million barrels, the largest amount held in storage seen since 1990. A survey conducted by Bloomberg of analysts showed the median expectation for crude stocks was a 2.5 million barrel gain. Gasoline stocks fell 167,000 barrels versus Wall Street expectations of a 550,000 gain, though the stock level is still at the high end of the five year historical range for this time of year. Distillate stocks, by which the EIA primarily means diesel and heating oil held in storage, jumped by 2.4 million barrels, versus expectations of a 900,000 barrel gain, and totally disconnecting from the US distillate stocks cycle, as you can see from the EIA graph:



The news is slightly mixed, and contrary to expectations, but it should be bearish in terms of price. The traders don't appear to have thought so, however, with the price of WTI trading at over $56.31/b as I write. (You'll remember that yesterday Bloomberg reported that Barclays had published an analysis which suggested that were the price of the front month--June--contract move above $56.10/b, then the price will go to over $71/b, as a large number of folks try to exit their short positions--see Daily Sources 5/5 #5.)

Meantime, Joshua Schneyer and Rebekah Kebede at Reuters report that some expect the US to cut refinery runs this Summer as a result of the huge distillate surplus, which would be completely counter-cyclical because the Summer is "driving season," pushing consumption.

"A distillate surplus 'is screaming out, because it's far above any other recent (inventory) highs,' said Edward Morse, LCM Commodities director in New York."
...
"'This is the first time ever we've seen distillate being stored offshore,' Morse said."

However, this week's EIA Summary of Weekly Petroleum Data actually indicate that refinery runs have crept up by 2.7% to 85.3%. I suspect that this is because gasoline cracks appear to have stabilized after having gone to zero in the beginning of the year (I'm using front month WTI subtracted from that contract month for RBOB and HO as a proxy for the crack spread for gasoline and diesel.)



In terms of long-term fundamentals, the EIA also produced a useful graph illustrating how responsive US oil drilling is to price, with a large number of rigs coming off the market since the price peaked last July.



Also, Bruce Nichols at Reuters reports that the US Minerals and Mines Service reduced their forecast of how much oil will be produced in the Gulf of Mexico over the next ten years from an average of between 1.9 million and more than 2.2 mb/d to between 1.6 and 1.9 mb/d. "Oil output in the Gulf was more than 1.3 mb/d before Hurricane Ike hit in 2008."

In light of all the speculation above, Vinod Dar at Seeking Alpha asks why there are so many energy experts and so few energy billionaires. He concludes:

"Almost all energy experts are paid by people who have a vested interest in seeing forecasts of 'problem' and 'crisis' gain currency and credence. An energy problem or 'crisis' immediately creates opportunities for political, public policy and capital market deal making. Money and power gravitate to those who promise to 'do something' about the problem or crisis. Armies of analysts, planners, lobbyists, public policy and government agency bureaucrats, corporate managers, Capitol Hill staffers, consultants, and political operatives find tenure and lucrative living 'solving' the problem. Of course, their sole objective is to perpetuate the problem since there is no percentage in solving the problem. As soon as the problem of the moment or decade solves itself with no discernible contribution from these false legions, another energy “problem” invariably rises to take its place: bigger, better, more dangerous, requiring an ever expanding share of power, money and prestige to address. Only ordinary, working people and retail investors and tax payers suffer but then, since they don’t pay the experts, it hardly matters."

He concludes that only those who pursue ideas scorned by others and make money in the energy business are the true experts. Well, I might make the tiny objection that most folks, no matter how much they know, do not have the financial resources to make bets on technology or even the price fluctuations of commodities in a huge global and capital intensive business. However, I agree, if anyone truly knew how to predict where the price of oil was going to go, they would be obscenely rich. That might be evidence that no one does. In any case, I surely don't. (And take it from me, Vinod Dar doesn't either.)

Speaking of the rich, Rebecca Wilder at News N Economics notes that the rich in the US are saving, which means that they aren't consuming. Her graph:



Given the data yesterday which suggests that disposable income has been shrinking for the bottom 90% for some time now, that household consumption accounts for about 70% of the economy, the news that the only portion of society with spare cash is choosing to horde it is, well, not so good.

Daily Sources 4/29

1. CHINA, INDIA AND SOUTH AFRICA CALL FOR $200 BILLION IN CONTRIBUTIONS TO ADDRESS GLOBAL WARMING

Alex Morales at Bloomberg reports that China, India, and South Africa have called on the industrialized nations to contribute at least $200 billion to help them address global warming in a new proposal to the UN.

"'Economic and social development and poverty eradication are the first and overriding priorities of the developing countries,' China said. The statements reiterate demands China has previously made during 16 months of climate talks that most of the climate burden should be carried by the richest nations. Contributions should be additional to existing aid, China said."

$200 billion is about 0.5% of the industrialized world's economic production. The three also called upon the industrialized world to cut greenhouse emissions by at least 40% from 1990 by 2020, twice the cut the EU has agreed to make.

2. CHINESE PREMIERE SAYS GOOD RELATIONS WITH JAPAN IN ITS INTERESTS

Yoko Kubota at Reuters reports that Chinese Premier Wen Jiabao told Japanese Prime Minister Taro Aso during his visit to Beijing today that stable and friendly relations between the two countries "suits the fundamental interests of the people of both countries."

"In their remarks with reporters present, neither leader mentioned North Korea. But Japan's NHK television reported that the two were likely to discuss Pyongyang's threat.

Aso said earlier that swine flu was also likely to feature in his meetings with Chinese leaders."

(h/t Foreign Policy's Morning Brief.)

3. PIETRO GARIBALDI ARGUES THE CONSERVATIVISM OF THE ECB WILL MAKE EURO PREFERABLE TO THE DOLLAR AFTER THE CRISIS EASES

Eurointelligence reports that Pietro Garibaldi has an opinion piece in La Stampa which argues that the financial crisis will strengthen the euro's position relative to the dollar.

"One reason is the likely scenario of higher inflation in the US, post-recovery, as the Fed is unlikely to role back its monetary easing sufficiently fast, and since inflation is highly effective at reduce the real value of debt. Another reason is the European Central Bank’s relative conservativism, in particular its reluctance to cut interest rates to zero."

4. SWINE FLU SPREADS TO GERMANY

Der Spiegel reports that swine flu has spread to Germany.

"Meanwhile, in Spain, authorities have confirmed 10 cases of the disease--including one victim who has not recently visited Mexico. Suspected cases have also been reported in many other countries, including France, Belgium, Switzerland and Chile. In Austria, officials with the Health Ministry in Vienna confirmed that a 28-year-old woman had been infected with H1N1, and a total of five cases were confirmed in Great Britain."

5. RUSSIA SECURES TWO BIG ARMS DEALS WITH TURKEY AND VIETNAM

Yevgeny Bendersky at Real Clear World reports that Russia has recently concluded two major new defense exports deals with Turkey and Vietnam. "Turkey has recently decided to purchase Russia's latest and most advanced air defense system, the S-400." The estimated purchase price for the missile system ranges from $1 to $4 billion.

"Russia's 'Rosoboronexport' also recently announced that it will be building six 'Kilo' diesel-electric submarines for the Vietnamese Navy, to the tune of approximately $1.8 billion."

6. LITHUANIAN GDP FELL BY 12.6% IN Q1, BAD OMEN FOR THE BALTIC GENERALLY

Joel Sherwood and Katie Martin at the Wall Street Journal report that Statistics Lithuania said today that Lithuanian GDP fell by 12.6% in the first quarter from the year previous.

"Economists say that figure suggests expectations of a 10% slump in GDP across the Baltic region this year could be too optimistic. Latvia and Estonia are to release first-quarter GDP growth estimates in early May."

7. UAE PROPERTY MARKET PRICES FALL BY 41%; IPIC SEEKS MORE CAPITAL TO INVEST WITH AT THE BOTTOM


BBC News reports that Colliers International released a new report showing that property prices in Dubai fell 41% in the first quarter of 2009 from the first quarter of 2008. The fall followed the annual 8% decline seen in the fourth quarter of 2008 from 2007. Meanwhile, JGW at Frontier Markets reports that the Abu-Dhabi-based International Petroleum Investment Company (IPIC) announced on Monday that it had received a2/AA/AA long term credit ratings by Moody’s, Fitch Ratings and Standard and Poor’s, respectively, with a stable outlook.

"According to one analyst, the ratings are 'a signal that [state sovereign] funds are eager to keep spending and [are] willing to borrow to increase their buying power.'"

8. US GDP FELL BY 6.1% IN THE Q1, BUT PRODUCTIVITY IS FLAT, AND INVENTORY DRAWDOWNS ACCOUNTED FOR NEARLY HALF OF THAT FALL

Justin Fox at the Curious Capitalist reports that the Bureau of Economic Analysis released data today showing that US GDP fell by an annual rate of 6.1% in the first quarter. That follows the contraction seen in the fourth quarter of 2008 of 6.3%. (Though the data on the first quarter is still likely to be revised.) Fox comments:

"So the worse-than-expected GDP headline number is not going to discourage those economic forecasters who've been predicting a marked easing in the pace of the downturn, or even an end to it within a few months. In fact, the sharp decline in private inventories that accounted for 2.79 percentage points (almost half) of the GDP decline is actually extremely good news, because it means businesses may have already made most the inventory adjustment that's a part of every recession—clearing the way for an upturn."

Brian Blackstone at Real Time Economics notes that in addition nonfarm business value added fell by 8.2% in the first quarter. Evidently, nonfarm business value is used to estimate productivity.

"Still, nonfarm productivity, which is defined as output per hour of labor, will likely come in flat or down only slightly for a second-consecutive quarter — a heroic effort, given the extent of the economic contraction over the past six months.

Productivity shrank just 0.4% in the fourth quarter, at an annual rate, despite a 6.3% contraction in GDP and 8.8% drop in nonfarm value added.
...
To put that in perspective, the last time the U.S. had recessions approaching the current one in severity, in the mid 1970s and early 1980s, productivity posted quarterly drops of as much as 5%."

9. CRUDE IN STORAGE AT 18-YEAR HIGHS IN EUROPE AND US; MARKET SHRUGS

Alaric Nightingale at Bloomberg reports that Rotterdam--Europe's largest port--may be running out of spare storage capacity for crude and oil products.

"Rotterdam can store 11.9 million cubic meters of crude, port data from 2007 show. That’s equal to about 75 million barrels or enough to supply the 27-nation European Union for about five days.

Some on-shore storage tanks for oil products are either full or have no unreserved space available, Pieter Kulsen, a Rotterdam-based refined oils consultant at PJK International BV, said by phone yesterday."

Meanwhile, the EIA reported that US commercial crude stockpiles grew by 4.1 million barrels to 374.7 million barrels in the week ended April 24. The median expectation of a survey of analysts was for a 1.8 million barrel build, according to a Bloomberg survey. The total is the largest commercial crude stock holding seen since September 1990. Gasoline stocks, on the other hand, fell by a whopping 4.7 million barrels, though it is still at the high end of the five year historical range for this time of year and 1.5 million barrels up from a year ago. Analysts had expected a 200,000 barrel build. From Mark Shenk's Bloomberg article:

"'Nobody was looking for a gasoline decline of that size,' said Sean Brodrick, natural resource analyst with Weiss Research in Jupiter, Florida. 'This shows that refineries are keeping processing rates too low because there’s obviously some demand out there for gasoline.'"

Distillate stocks grew by 1.8 million barrels to 144.1 million barrels--38.3 million barrels more than were held a year ago, which is about 36.2% greater than what is historical at this time of year, moving counter-cyclically. Analysts had expected a 1 million barrel gain. From Shenk's article again:

"'The weekly numbers haven’t been kind to the market recently,' said Kyle Cooper, an analyst at energy consultant IAF Advisors in Houston. 'It’s hard to explain why prices aren’t lower because there is plenty of petroleum.'"

That is, taken in isolation, the data are mixed, but should be bearish on the price of oil. So far today the price of front month sweet light on NYMEX has risen by about a buck a barrel.