Daily Sources 10/10

1. Mark Landler and Edmund L. Andrews at the New York Times report that leaders worldwide, which will be in Washington for the IMF and World Bank meetings this weekend, are beginning to consider a wholeheartedly international approach to the financial crisis. The G7 meet today.

2. Nigel Lowry at LLoyd's List reports that industry representatives at a shipping conference last week acknowledged that they might not be able to meet their financial obligations to their creditors in a timely fashion. They urged the banks to be patient. In laymen's terms I believe that means they urged the banks not to foreclose. This comes on the news yesterday which send shockwaves through the shipping community that a bulk carrier booked a cargo from India to China at cost of fuel and docking fees. Sandra Tsui at Lloyds List reports that brokers expect more deals like this in coming months. That's a pretty big sign that demand for shipping--and thus exports--have dropped precipitously of late. Indeed, the AP reported that the US trade deficit was slightly down in August on the back of lower oil prices.

3. Alex Nicholson and Torrey Clark at Bloomberg report that Russia will expand its bailout to not only take equity in it banking system, but in other domestically based corporations.

4. Peter Finn at the Washington Post reports that Secretary Gates reached a compromised with NATO defense ministers which would allow NATO forces to target opium production in Afghanistan. Gates believes the industry needs to be targeted in order to break the back of the Taliban in that country. On the face of it that makes sense. As Cicero pointed out in the Philippics, "Endless money forms the sinews of war." The compromise allows some NATO members to opt out of the strategy. The compromise also requires a strike on a particular production area to be requested by the Afghan government.

5. Elaine Sciolino at the New York Times reports that the IAEA are investigating whether a rogue Russian scientist has assisted Iran with nuclear detonation technology which has no use consistent with conventional arms. The agency's suspicions were stoked by a document they recently acquired.

"The original, Farsi document is described by officials familiar with it as a detailed narrative of experiments aimed at creating a perfectly timed implosion of nuclear material. According to experts, the most difficult challenges in developing nuclear weapons are creating the bomb fuel and figuring out how to compress and detonate it."

The article makes clear that the scientist was not operating at the behest of Moscow.

6. In the midst of the avalanche of news, I missed the important news caught by ZAMIN on October 6th, that Iran's Ayatollah Yazdi met with Iraq's Ayatollah Sistani this week. Ayatollah Yazdi is considered a mentor of Iranian President Ahmadinejad, with strong ties, therefore, to the Iranian Revolutionary Guard. He is also on the Assembly of Experts, the organization in Iran which more or less vets candidates for the post of Leader of the Revolution aka Supreme Leader. Ayatollah Mohammad Taghi Mesbah Yazdi is possibly one of the most important clerics in Qom--the most important religious center in Iran. Ayatollah Sistani is the most important cleric in Iraq, based in Najaf, the most important religious center in Iraq and historically the base of Islamic clerics--like Ayatollah Khomeini--criticizing the regime in Tehran. Sistani has been critical of the Iranian theocratic model of the role of the "supreme jurisprudent;" Yazdi is one of the most important religious authorities which supported Khomeini's model during the course of the Iranian Revolution. It looks as if sovereignty in Iraq is in the process of being transferred to the local authorities--in this case the Shia parties. But the differences between the various Shia parties in Iraq and the government in Iran are many. I cannot speculate as to the actual substance of the conversation the two clerics might have had, but I think it is fair to conclude it was official government talks from the perspective of Tehran. It is fair to conclude that Tehran has something to fear from Sistani (I gave an analysis of this dynamic in an earlier post), who could present a politically potent rallying point against the regime there.

In a related piece of news, Barry Schweid at the Associated Press reports that formers Bush officials on Tuesday gave a summary of the strong support Tehran gave the US in its response to 9/11.

Iran was "comprehensively helpful" in the aftermath of the 9/11 attack in working to overthrow the Taliban and collaborating with the United States in installing the Karzai government in Kabul.

These remarks were made at the forum hosted by the New America Foundation. The notion of a "grand bargain" with Iran was aired again at the conference.

In a follow-up story to my snarky--I admit--commentary on the comments by the Managing Director of Qeshm Energy in Amsterdam yesterday, Roshanak Taghavi at Dow Jones reports that Iran has struck a deal with Crescent Petroleum of the Sharjah Emirate in the UAE to pipe gas there at the price of $5/MMBTU. At 5.8 MMBTU per barrel of crude, on a BTU basis that comes to about $29/b which may seem like a huge discrepancy but actually is a pretty high price for a natural gas deal of this sort. "The price offered by Crescent is almost four times what the U.A.E. pays for gas from Qatar. And it is more than five times the average weighted regional gas price for the Middle East and North Africa." (As a side note, just now the front month price for delivery of natural gas at Henry Hub--the delivery point for pricing on the NYMEX--is $6.825/MMBTU.) Corruption charges by Ahmadinejad in September might still scuttle the deal, but he has indicated that he would endorse it if it was at regional prices. Given that this deal is much better than seen elsewhere in the region, there is a chance it will go forward. First exports could begin in a few months.

7. David Jolly at the New York Times reports that the IEA (Paris-based International Energy Agency) has reduced its forecast for world demand in 2008 by 240 kb/d 86.5 mb/d, or an 0.5% increase from 2007. It also cut its demand forecast for 2009 by 440 kb/d to 87.2 mb/d or 0.9% demand growth from 2008. The EIA (US Energy Information Agency) on Tuesday released its new Short-Term Energy Outlook which forecast a 300 kb/d growth in energy demand in 2008, a reduction of their previous month's forecast by fully 350 kb/d. The forecast is now for 86.1 mb/d in 2008 and 86.9 mb/d in 2009. The EIA warned that:

"However, unless the global economy is weaker than anticipated, EIA expects that the call on Organization of the Petroleum Exporting Countries’ (OPEC) crude oil will exceed OPEC crude oil production over the next 6 months."

Still, taken in isolation, the new forecasts should put downward pressure on the price of oil. So far it looks like the front month light sweet NYMEX contract is down $9/b. On the other hand, in terms of future production, Martyn Wingrove at Lloyd's List has the story that offshore support vessel charter rates--rates for ships assisting offshore drilling operations, essentially--have shot up to their highest level this year in the North Sea to £160,000 ($272,500) a day. If prices remain stratospheric for non-OPEC production, it will, of course, simply stop. Interestingly, the IEA report also suggests that the reduction in supply from the Baku-Ceyan pipeline has been about equal in volume to the amount shut in by Hurricanes Ike and Gustav, as per Alexander Kwiatkowski of Bloomberg. That would seem to suggest that the run up was completely out of whack with fundamentals. Well, either that or that the current precipitous slide is completely out of whack with the fundamentals. Perhaps we ought to go with the Goldilocks theorum, ie, that the truth is a bit of both.

8. Platts reports that the Department of Agriculture on Friday reduced the amount of corn they forecast would be used for ethanol production in 2009 by 100 million bushels. The change is based on the reduction in gasoline demand.

Daily Sources 10/9

1. James R. Hagerty and Ruth Simon at the Wall Street Journal report that 1 in 6 homeowners are "under water"--the market value of their homes is less than their mortgage. Look at the interactive map on the Journal's site it seems the states hit hardest by this are California, Florida, Arizona, and Michigan. McCain's campaign just abandoned Michigan. Arizona is his home state. Florida is of course the key swing state. More evidence that Obama is likely to be the next President of the United States.

2. The Wall Street Journal's editorial board has a comment today entitled "Dmitry's Diatribe: Chavez, Ahmadinejad, Medvedev." It notes that yesterday in Evian, France, President Medvedev said that the US missed a chance to build a democratic world order after 9/11. It quotes him as saying, "Sovietology, like paranoia, is a very dangerous disease, and it is a pity that part of the U.S. Administration still suffers from it." Evidently the Wall Street Journal's editorial board does not think these are fair criticisms; the inferred critique is that Russia continues in its "defiance." I would note that the notion of defiance includes the notion of authority, which the US does not have in a legal, or sovereign, sense over the world. Indeed, it is standard American foreign policy to reject the--rather quixotic--notion of an international legal authority.

I would also point out that George Bush did squander America's moral authority after 9/11 with the foolish use of American power ... and that the Wall Street Journal led the cheer as he did it. Perhaps that is why the Wall Street Journal is so sensitive about the critique. Moreover, domestic critics of this stupid use of power were--and are--branded traitors. I guess you can't quite label Medvedev that. However, as an American, I think that there is a good argument that the cheerleaders of the Bush Administration and its war in Iraq themselves were traitors. The campaign to sell the Iraq war to the American public very clearly aided and abetted our enemy: al Qaeda. I personally am reluctant to go that far. But after all the inflammatory rhetoric coming from the right over the last 8 years, I really wouldn't be surprised if the argument surfaced elsewhere and if it had legs.

But, insofar as the question of Russia goes, the United States wins nothing if the Kremlin is demonized in the American political dialogue. It is not in America's national interest to subordinate our relationship with Moscow to the vagaries of the American political argument. Medvedev is right to argue that old Sovietologists represent the bulk of the analysis on Russia, because there is less status and money in understanding Russia than there was during the Cold War. Surely the Wall Street Journal editorial board can understand the economic underpinnings of rhetoric--that, after all, is their specialty. It should not be the ambition of the American press to push the country into decision trees similar to Ghadaffi's. It's rough seas for the papers, but even if alarmist language serves to sell papers in the short term, it ain't gonna help the balance sheets of the sector in the long term if the country becomes a banana republic as a result!

John Roberts, a Energy Security Analyst for Platts, has a decent summary of the question of energy security from the perspective of Europe. It seems more and more evident that some political elements in Europe are being tempted by Moscow's evident call for a realignment towards the East on the part of Brussels. Tara Bahrampour at the Washington Post reports that Russia removed its troops from positions in Georgia proper two days ahead of schedule. Tblisi says that the troop withdrawal is not yet complete. This deference to European opinion is taking place in stark contrast to the naval exercises taking place with Caracas.

As former Secretaries of State Kissinger and Schultz--both of whom could hardly be characterized as soft on Russia--argued just yesterday, now is the time to emphasize the shared interests of Washington, London, Brussels, Berlin and Moscow, not to invent bogeyman for short term political advantage. As it is, it is the G7 that meets this Friday to discuss the crisis, not the G8. Given the criticism of the US coming from the emerging markets on the cusp of the meeting reported by Blaine Harden at the Washington Post, this may actually be doing Russia the favor of disassociation while, at the same time, making it more difficult for us to persuade Moscow of our views. Neil Irwin at the Washington Post reports that in addition to the central banks mentioned yesterday, the total number of central banks that simultaneously cut benchmark lending rates came to 21. No roster of participating countries was provided. Today the central banks of South Korea, Taiwan and Hong Kong also cut their benchmark lending rates.

3. Reuters reports that the Managing Director of Iranian petrochemical company Qeshm Energy told an industry conference in Amsterdam today that Iran would likely favor Asian buyers of their gas to Europe. I only link to this because:

a) Just now, Iran isn't selling its natural gas to anyone ... but Turkey. It is simpler to expand the existing pipeline infrastructure towards the West than eastwards.

b) Given the financial requirements of any major natural gas project, just now neither Asia, Europe, nor the US are likely financiers of Iran's projects, because they never seem to go anywhere and money is tight. By dithering forever on South Pars and deliberately feeding the rhetorical fire over its nuclear program, Iran missed the low cost moment in terms of developing South Pars for the medium term, at least. Iran missed the boat and is trying to disguise this.

c) Iran knows, just as Russia knows, that tying Europe's economy to Iranian gas supplies increases their security vis-a-vis Europe. Just now Iran is not particularly concerned about military security issues coming from China or India, though this may change. The Iran-Pakistan-India pipeline is effectively dead right now, mostly because of Pakistan's dire situation and the never ending argument over price. (Will Iran provide Zadari with the $100 billion he is asking for? Short answer: no.)

d) Evidence that Iran is becoming a bit more compromising--even desperate--regarding natural gas projects ... Ladane Nasseri article in Bloomberg today reporting that Iran has offered to jointly develop the disputed Arash natural gas field with Saudi Arabia and Kuwait.

And thus this statement can be dismissed as diplomatic bluster and not an honest assessment of the political-economic possibilities of Iran's natural gas exports.

4. Bloomberg reports that Libya has stopped oil deliveries to its refining unit Tamoil in Switzerland. Tamoil's 50 kb/d capacity Collombey refinery provides about 20% of Switzerland's oil supply. The story is that this is in retaliation for the arrest in July of one of Ghaddafi's sons for misbehavior in a Geneva hotel. If so, it is a fine example of a nation behaving contrary to its national interest, either out of the simple emotional pique of a dictator or due to domestic political considerations. (That is the arrest if left unanswered might have been seen in Tripoli as a sign of weakness that could have undermined Ghadaffi's position.)

5. More evidence of an economic slow down in China: Weilyn Loo's Platts report that a gigantic jet fuel arbitrage trade from Asia to Europe is forming. Jet fuel is the only real petroleum product with a global market, because there are only two commercial specifications globally and they are very similar. (Specifications meaning legal requirements as to the quality and characteristics of the fuel.) So, were gasoline demand dropping, it would not necessarily be simply a matter of shipping it to Europe if stocks were overflowing, because specifications are different.

With the current steep contango in Asia, it does make sense to store jet fuel, but the fact that traders are sending barrels to Europe suggests tanks are full to the brim, sources said.

[Spot] demand from top consuming nation China has slumped post-Olympics. China's jet fuel import demand, which is closely tied to jet fuel produced by domestic refineries, is expected to come in around 1 million mt (~ 86 kb/d) for Q4 and could remain around this level going into Q1 2009, trade sources said.

6. The Associated Press reports that OPEC will meet ahead of schedule on November 18th to discuss a response to falling oil prices.

7. The World Bank released a report today entitled “Rising food and fuel prices: addressing the risks to future generations”. It states that high food and fuel prices will increase the number of malnourished people in the world by 44 millions, to 967 million.

8. Chika Amanze-Nwachuku and Ejiofor Alike at This Day report that the crippling of a feeder pipeline to the Kaduna Refinery may bring petroleum product production to zero in November, from running at 30% capacity. Petroleum product imports have already created a budget crisis of sorts in Nigeria.

9. Edmund L. Andrews and Mark Landler at the New York Times have the story that the Fed is considering using the funds entrusted to it by Congress to purchase equity shares in troubled banks, thus recapitalizing them. It seems that a fairly large share of the economist community are of the consensus that capitalization is the real problem facing the financial community, more so than a liquidity crisis.

10. Glenn Kessler at the Washington Post reports that North Korea banned IEAE inspectors from the Yongbyon nuclear complex today. This is in response to the US refusal to remove Pyongyang from the state sponsors of terrorism list.

Daily Sources 10/8

1. Nancy Trejos at the Washington Post reports that $2 trillion has been wiped out of retirement accounts in the US.

According to a survey released yesterday by AARP, 20 percent of baby boomers stopped contributing to their retirement plans in the past year because they have had trouble making ends meet.

This news makes me think I can predict with nearly complete confidence that Barack Obama will be the next President of the United States. In a previous blog I provided an analysis of how his election would affect America's geopolitical situation, but could not have expected that he would have been elected to the position on top of such a tremendous mess. Figuring out just how this crisis will play out geopolitically generally and in terms of specific nations is no small puzzle. But I do think that Obama would return some confidence to the markets worldwide, and as such, may do something to alleviate the situation we have found ourselves in. There was some good news today, AP reported that pending home sales rose 7.4% from July to August as per the National Association of Realtors. The index of pending sales reading is at the highest seen since July 2007.

2. Naked Capitalism has a post on Arvind Subramanian's proposal for a bail out of the American financial system by China published in the Financial Times yesterday. He suggests that the People's Bank of China could lend the US $500 billion (of its $1.8 billion cash reserves) on the condition that the money only be used to recapitalize the banks (as opposed to providing liquidity by purchasing toxic assets, as our current emergency financial stabilization fund is structured to do.) Yves Smith thinks the tongue in cheek plan makes a lot of sense. In today's Washington Post, Subramanian and C. Fred Bergsten have an op ed arguing that a globalized crisis "requires a globalized response." Well, just in time for ...

3. Carter Dougherty and Edmund L. Andrews at the New York Times report that the Fed, the European Central Bank, the Bank of England, and the central banks of Canada and Sweden all coordinated a cut in interest rates of a half percent. Switzerland also cut its benchmark rate and Japan publicly supported the move, though it left its benchmark rate of 0.5% (if I remember correctly.) (The yen is rapidly approaching the landmark 100 per dollar rate (interbank).) China also reduced its benchmark lending rate by 0.27%.

4. Nigel Morris, David Prosser and Sean Farrel at the Independent report that Downing Street has arranged a £50 billion rescue fund for the British banking system.

5. Denis Maternovsky at Bloomberg has the story that Russia, Indonesia and Ukraine shut down their stock markets today in the face of massive sell offs. Russia's RTS bourse will be shut indefinitely. MICEX will be closed until Friday. Jakarta's exchange will shut indefinitely, or so I have been led to believe.

Hungary headed for its worst daily decline since 1999 as the Budapest Stock Exchange fell 6.3 percent. Latvia's OMX Riga Index lost 6.5 percent to its lowest level since January 2004. India's Sensex index slid 2.6 percent and China's CSI 300 Index fell 3.8 percent, its third day of declines. South Korea's Kospi Index lost 5.8 percent.

6. From a panel discussion at the Council on Foreign Relations featuring Nouriel Roubini, Brad Setser, Benn Steil and Mort Zuckerman on September 25:

ROUBINI: So what you have to ask yourself is whether the sharp falling U.S. private consumption demand -- is there enough domestic private demand in the rest of the world in emerging markets that can grow to suspend global economic growth, and my answer is no because, you know, in U.S. the total consumption's about $9.5 trillion. Take the entire consumption of 1 billion Chinese, it's about $1 trillion. Take all of the consumption of almost 1 billion Indians, it's $600 billion. So the sum of the consumption of 2 billion Chindians is about one sixth of the U.S. consumption, right?

So if there's a shortfall U.S. consumption, can their consumption go up by 500 percent in order to compensate for the falling U.S.? The answer is no. The question in this country is whether we're relying especially China some parts of Asia some parts of Latin America on expert to the United States is the main engine of goods, and the rest of the demand is essentially production of investment goods that produce more exportables is the question of whether their policy stimulus in terms of monetary and fiscal policy can be aggressive enough to avoid a hard landing.

And for China -- by the way, a hard landing means a growth that's gone from 11 (percent) to 6 percent because China needs a growth rates of 10 percent in order to move about 15 million--(inaudible)--investment sector every year to maintain social and political stability. And my concern is that while now they're going to have a fiscal stimulus, they cannot so aggressively flow all of the infrastructural spending they want to do over the next five, 10 years over a year or two. And if that's the case actually, their policy response may not be aggressive enough to control the fall out coming from the collapse of demand in the United States and the recession and the rest of the advanced economy. And if China goes into essentially a hard landing, then the two main engines of global growth, that were U.S. and China, one on the consumption, the other one on the production are going to have a recession or a near recession, then you have real trouble for the global economy.

SETSER: If I could just make one small amendment to what Nouriel said which is that over the last two years, Europe has been a bigger engine of demand growth for most of them, the emerging world than the United States because our net exports have been contributing to growth and so for much of the emerging world, the economic trajectory of Europe over the next 12 months will matter as much if not more than that of the United States, which is a significant change from the world of, say, five years ago.

STEIL: And in terms of the so-called--very briefly, in terms of the so-called BRIC countries--Brazil, Russia, India, and China--I'm particularly concerned about Brazil and Russia. The reason is that we really haven't seen fundamental reforms in those economies, their boom has been very much based on the rise in commodities prices. If global demand really does take a deep hit, I think Brazil and Russia go down with it.

I'm pretty convinced by these remarks that we are likely to see a significant slowdown in China and India. Continuing in that vein, Steve Mufson at PostGlobal reports that Chinese gasoline demand fell 5.6% (470 kb/d) in August from July and 2.7% (or 200 kb/d) in July from June. Chinese gasoline prices averaged about $3.62/gallon in September, as compared to the US average of $3.72/gallon. Diesel prices are still 21% lower in China than the US (and China "dieselized"), but clearly these prices can be expected to put a damper on Chinese demand. Paul Cavey has an op ed in today's Wall Street Journal Asia which states that China's domestic real estate market has contracted by 50% over the last few months. Cavey, head of China economics at Macquarie Capital Securities, argues that domestic real estate and exports are the two central drivers of Chinese economic growth.

7. Isambard Wilkinson at the Telegraph reports that Pakistan has enough reserves to purchase about 30 days worth of food and fuel, after which the country faces bankruptcy.

Pakistani President Zardari told the Wall Street Journal that Pakistan needed a bail out worth $100 billion from the international community.

Evidently talks with Riyadh to defer payments on the daily delivery of 100,000 barrels of oil have not born any fruit at this stage. Islamabad has been unable to secure loans at favorable terms from friendly countries. The rupee has lost 21% of its value so far this year and Standard & Poor's rates Pakistani debt at CCC+. (Well, whatever else you think of governments, at least they are transparent enough that you can rate their debt with some accuracy!) The problem here is that Zadari is known in Pakistan as "Mr. 10%." The government of Musharraf fell, from what I can tell, in great part as a result of the "lawyers revolt" there, caused by the removal by Musharraf of Supreme Court Justice Chaudhry. Even though the lawyers' movement brought down the general, Zadari has refused so far to reinstate the Justice--who presided over the corruption trials brought against the President. It might be difficult to go around the world, hat in hand, asking for $100 billion--no matter how genuine Pakistan's need is--if the general response is going to be how much of that money is actually going to be "... um ... and so what's your cut?" I know I'd be pretty reluctant. But then we have to consider that Pakistan is a nuclear power where food and fuel shortages could create serious unrest and even potentially a total state failure. Is the US about to be subjected to nuclear blackmail by their key ally in the war against terror?

8. Kelly Zang at Xinhua reports that Russia did not include the Altai gas pipeline project in its recently published blueprint for gas sector development to 2030. The Altai pipeline would have shipped 30 billion cubic meters of natural gas from Western Siberia to China. China was hoping for first shipments in 2011. There are plenty of customers vying for Russian gas. In the east, Tokyo offered a $14 billion subsidy for a pipeline to the Pacific. (Japan is looking at cuts in supply from traditional suppliers Indonesia and Malaysia.) Europe also is likely to want more gas going forward. It would be significant if Moscow decided not to integrate their energy complex too tightly to Beijing, choosing a line to Japan or more to Europe.

9. Henry Kissinger and George Schultz have an important and thoughtful op-ed in the Washington Post today which argues, much as I have in my own little way, that:

We believe that the fundamental interests of the United States, Europe and Russia are more aligned today -- or can be made so -- even in the wake of the Georgian crisis, than at any point in recent history. We must not waste that opportunity.

Though perhaps it was necessary to do given military exercises with Venezuela--and though I believe Secretary Gates is a pragmatic realist--Peter Finn in the Washington Post reports that he re-emphasized American support for Kosovan independence in a visit to the province today.

10. Peter Finn at the Washington Post reports that Secretary Gates in Macedonia asked Europe for 10 - 12,000 more troops for action in Afghanistan.

11. Platts reports that the Iraqi oil minister Hussain Al-Shahristani told reporters in Turkey that OPEC was ready to convene an emergency meeting should oil fall much below $90/b. Their next meeting is currently scheduled for December 17 in Oran, Algeria.

12. Nick Tattersall and Thomas Grove at Reuters report that the Nigerian Oil Minister Odein Ajumogobia has expressed concern about the drop in oil, suggesting that OPEC should consider production cuts.

13. Sabrina Tavernise at the Washington Post reported that the Turkish Parliament voted by 497 to 18 to reauthorize projection of force by the Turkish military against Kurdish separatists in Iraq.

14. Dan Scotto told Energytechstocks.com that,

"At best, the Wall Street meltdown has probably set back the timetable for constructing a new generation of nuclear power plants in the U.S. by three years."

Nuclear is difficult to provide security for, but it does burn clean.

15. Dorothy Kosich at Mineweb reports that the US emergency financial stability fund bill (HR 1424) included a fair amount of concessions to the coal lobby.

H.R. 1424 and the short-term budget bill Congress also contained the following provisions supported by National Mining Association (NMA):
- Extension of the mine safety equipment and training tax credit;
- Additional tax credits for advanced coal electricity projects and coal gasification, including gasification in Coal-to-Liquid (CTL) production;
- New tax credits for carbon capture and storage or reuse in enhanced oil recovery
- An extension of the alternative fuels credit applicable to CTL;
- Funding to support the Department of Defense's ongoing CTL testing.

Coal is probably part of the solution to America's energy security, but why such provisions needed to be added as pork to an emergency financial stabilization bill is beyond me. It should be added that of all the fossil fuels, coal is by far the dirtiest to extract and to burn. Coal-to-liquid processes have potential, but just now the climate costs of CTL production are prohibitive. We have Sens. Max Baucus (D-Montana), Mitch McConnell (R-Kentucky), and Jay Rockefeller (D-West Virginia) and Reps. Roy Blunt (R-Missouri--the Minority Whip) and Artur David (D-Alabama) to thank for this particular piece of pork, as per the NMA.

16. Frank Ahrens at the Washington Post reports that the NY Fed will borrow $37.8 billion in investment grade securities from AIG in return for cash. This comes on top of reports that following the government's $85 billion bailout of the insurance company top execs went on a week-long stay at a California spa resort. The new CEO defended this action, saying it was de riguer in the insurance industry. Yeah, maybe, but it ain't de riguer in the government industry, which is what AIG is nowadays.

17. Norval Scott in yesterday's Globe and Mail has a story on how the credit crisis is killing plans for new oil sands upgrading plants in Canada. The story says that an upgrader--essentially a refinery that upgrades the tar in the sands into synthetic crude which can then be refined by another refinery into oil products--now requires $90/b oil to be profitable. Just three years ago I heard prices ranging from $40-$60/b. Given the reader comments, apparently much of the price increase is coming from a scarcity of skilled labor as much as the cost of money.

18. Claire Leow and Yoga Rusmana at Bloomberg reported that government estimates in Jakarta are that palm oil exports will likely drop by as much as 1.5 million tonnes next year due to the biodiesel mandate which came into force late September. The regulations stipulate that all transportation diesel sold in the country must be 1% biodiesel. The country is expected to produce more than 19 million tonnes of palm oil next year and as much as 20 million tonnes in 2010.

Indonesia's biofuel industry can produce between 1.3 million [tonnes] to 1.5 million [tonnes] annually. Capacity may double to 3 million [tonnes] by 2010.

19. The EIA's Week in Petroleum reported that crude stocks built by 8.1 million barrels last week against analyst expectations (as per the Platts survey) of a 1 million barrel draw. (Crude stocks are now a bit above the historical average.) Gasoline stocks increased by 7.2 million barrels versus the 2 million barrel build expected on Wall Street. Stocks are still well below the historical average, but that is a big build against the lowest levels seen since 1967. Distillates saw a 0.5 million barrel draw down against the 1 million barrel increase expected by most Wall Street analysts. Some of this is continuing fall out from the refinery closures caused by Hurricanes Ike and Gustav. I think, even given the shortages, that it is a signal of more demand destruction, and thus, taken in isolation, lower crude prices.

Because it's Right On!

A bit far afield from the usual focus of this blog, but Anne Applebaum has an editorial at the Washington Post skewering the populist skapegoating of the metaphor: Washington, DC. Even anchors on CNN are fond of mouthing their scorn for the inside the beltway set. Well, as Ms. Applebaum points out, the folks everyone claims they are so pissed off at are the very same folksy grifters they sent from their rural beacons on the hill to the Hill. What we need now are folks who understand the issues facing the country, not demagogues who make an asset of their ignorance of how things really work. That is, what is needed is not a dose of reality from Main Street Wasilla to Washington, DC, but a dose of reality from Pennsylvania Avenue DC to Wasilla.

Daily Souces 10/7

1. Edmund L. Andrews and Michael M. Grynbaum at the New York Times report that the Fed announced that it will begin purchasing large amounts of short term debt today in an effort to jumpstart the credit markets. Real Time Economics reprinted the Fed's official statement in total.

2. Ambrose Evans-Pritchard at the UK Telegraph has another analysis piece more or less accusing Germany and the European Central Bank of taking the same approach to the current financial crisis that Europe took in 1930. He argues that good allies of the US would have moved in parallel to the US Fed when it cut the fed funds rate to 2% in Spring. He says the consequence of keeping European rates high was a soaring Euro, which "set off an oil shock as crude metamorphosed into an anti-dollar with leverage." He goes on to point out:

"[T]he risk of a dollar collapse is one for the distant future. Right now the world faces the opposite problem. There is a wild scramble for dollars as a $10 trillion pyramid of global lending based on dollar balance sheets “delevers” with a vengeance.

This is a “short squeeze” on those who have used the dollar for a vast global carry trade. International banks are facing margin calls on their dollar leverage. It is why the Fed is having to provide $1.25 trillion in dollar liquidity for the entire global system, according to estimates by Brad Setser from the Center for Geoeconomic Studies.

The crisis engulfing Europe, Asia and emerging markets, makes life easier for Washington. The United States is becoming a safe-haven again.

The Fed can now hope to pursue monetary stimulus “a l’outrance” without being slapped down by the currency, debt, and commodity markets. Take comfort where you can."

The national approach to the financial system seems outdated--even if politics remain just so--given reports that the contagion has spread to the emerging markets. (See, for example the story in today's New York Times by Alexei Barrionuevo, Keith Bradsher, and Vinod Sreeharsha.) Edward Cody and Kevin Sullivan at the Washington Post report that 15 European Ministers (representing Euro-using nations) meeting in Luxembourg today doubled the guarantee on retail banking deposits to €50,000 ($68,000). Russia announced it would extend a $4 billion loan to Iceland to help stabilize the banking system there. Yesterday Craig Whitlock at the Washington Post had the story on Germany's go-it-alone strategy with a "massive intervention plan." The Wall Street Journal seems convinced that a unified approach is necessary, at least, as it followed yesterday's call for it with another by Ulrich Volz today entitled, "Europe Needs A United Approach To the Credit Crunch: National governments cannot stop the erosion of confidence on their own." Richard Baldwin has a post on Freeexchange which gives a short explanation of the credit default swaps (CDS) problem facing the global financial system. Evidently, several dozen trillion dollars worth of these financial instruments have been purchased. I am unclear on why a single bond default would precipitate a collapse of all (or even a considerable percentage of) several dozen trillion dollar's worth of CDSs, but given that it is the case, managing the problem would clearly call upon the resources of more than one central bank.

3. Edward Hugh's Russia Economy Watch reports that a key adviser to Russian President Medvedev has told the Financial Times that Moscow is now actively working to mend fences with the West. The adviser, Igor Yurgens, argues that the deal signed between EOn and Gazprom last week and other megadeals are evidence of the new strategy. I suspect that this strategy is aimed more at Europe than at the US, given the remarks at the Petersburger Dialog Friday.

4. Following remarks yesterday by the OPEC President and Ecuadorian Oil Minister, Maher Chmaytelli at Bloomberg reports that the Libyan Oil Minister (who is also head of the Libyan National Oil Company and the Libyan OPEC Governor) said in an interview that OPEC should cut production given the fall in the oil price due to the credit crisis. Simon Webb at Reuters interviewed the Iranian OPEC Governor, Muhamad Ali Khatibi today. He echoed the the concerns reported by other members:

"We are worried about demand," Khatibi said. "The financial crisis is deeper than we expected and this is definitely influencing world oil demand."

Ayesha Daya at Bloomberg also reports that the Qatari Oil Minister said in an interview today that Qatar was reducing their production down to their OPEC quota.Of course, Qatar was never the major quota breaker, that has reportedly been Iran and Saudi Arabia. And the real "decider" remains Saudi Arabia. But, in an interesting development given their prominent participation in the upcoming December OPEC meeting, Lucian Kim and Ellen Pinchuk at Bloomberg report that Gazprom "expects" OPEC to prevent a substantial fall in the price of oil. I would say that it is fairly safe to say that the views of Gazprom, when it comes to oil pricing, are pretty much those of Moscow. Political pressure is building on Riyadh from oil producers, and likely domestically, to cut production.

5. Platts has the interesting story that Kazakhstan's national oil company, KazMunaiGaz, is considering oil and gas asset acquisitions in Turkmenistan, Iran, and Russia. This follows Secretary Condeleeza Rice's visit to Almaty yesterday and, given the economic calculus involved in investments especially liable to nationalization, probably primarily a political decision.

6. In Juan Cole's round up for today on Informed Comment, he reported the following:

"Prime Minister Nuri al-Maliki has decided to seek a strong "united" government, offending Kurds who are committed to the soft partition of Iraq or even eventual Kurdish statehood. Al-Maliki's stance puts him at odds with Joe Biden, who argues for a weak federal Iraq."

In a related story, the Iraq Oil Report has a link to the announcement by Dana Gas and Crescent that they are now producing gas for power generation in Kurdish Iraq.

7. Xinhua reports that the city of Beijing has imposed increases on gasoline and diesel costs there as part of their effort to better the air quality in that city. Beijing represents a considerable portion of the Chinese vehicle fleet and this should produce a significant, if small, dent in demand.

8. MIT announced the completion of a new report which shows that the new power capacity being added in China is relatively modern. The emissions can theoretically, therefore, be relatively low. But as coal prices increase, the Chinese power companies turn to lower quality coal, which significantly increases dirty emissions.

9. Noah Shachtman at Wired has the story that the US Army is seeking to build the largest solar power plant in the world--500 MWe at Fort Irwin, California, in the Mojave Desert. What happened to the Axis Powers in WWII is a good demonstration of what happens to modern armies when they run out of fuel. The considerable extent to which the US is a net importer of transportation fuels is a potential Achilles heel to the US Armed Forces. I am all in favor of the construction of renewable and green energy generation by the US armed forces, but power generation will not solve the potential strategic problem of transportation fuel imports.