Oil Rebuff

The Saudis rebuffed Bush's plea for increased oil production to ease prices (see Mark Silva's Saudis reject Bush oil plea, Jan 16, 2008, Chicago Tribune).

However, lack of production/inventory does not seem to be sourcing the rise in prices, as Alan Greenspan stated repeatedly, its oil speculation. For a historical look over the past decade, see the article What Is Driving Oil Prices? by Richard G. Anderson and Jason J. Buol on the Federal Reserve Bank of St. Louis' website, from January 2005 ... there's a nice graphic (from 2004) showing historical spot and future prices for oil. BusinessWeek from November 26, 2007 (A Hot Hand in Oil Speculation) references a Goldman Sachs analyst - Jeffrey Currie - who should be listened to, given his remarkable run at predictions in the oil market. Keith Fitz-Gerald reports on MondayMorning (Jan 10, 2008, Investors Will Benefit From New Plan to Have the United States and China Cooperate in Curbing Oil Speculation) about the future cooperation of the US and China on oil speculation.

Oil speculation is delved into by David Usher on TheReaganWing (June 10, 2007, Oil Price Gouging: From Enron With Love):

...Savvy investment firms and avaricious lawyers analyzed the Enron case – realizing they could turn a huge buck on oil futures – so long as they tacitly let oil companies constrain the oil supply without manipulating the supply directly themselves.

Giant speculative investment funds and oil companies now make tremendous profits raiding the oil spot-market, playing seemingly separate but implicitly cooperative roles serving up the same end-effect as Enron wreaked on California. But this time, the victim is the American consumer, not energy producers and distributors.

Federal and state politicians in both parties have failed to address this “Enroning of America” because government is on the take too. Taxes rise with gasoline prices, fattening political contributions while feeding slush budgets and pork barrels at both the state and federal levels....

...: “Investment banks from Morgan Stanley to Goldman Sachs are making so much money from oil futures that they’ve become a hot investment for all sorts of big-money players.” Ben Dell, an oil analyst and Sanford Bernstein calls it correctly, if not conservatively: “pension funds and other investors are buying oil to remove it from the market — which can help drive up demand — before selling it for a profit some months later”....

...Here is what we can take away from the above information:
(1) U.S. oil companies cut back U.S. distillation capacity substantially between 1980 and 2004. This seeded fears. Spot market prices rose tremendously, thus increasing profits to oil companies.

(2) U.S. oil companies decreased stateside production 40.3% between 1980 and 2004, driving fears about dependence on foreign oil, and creating an illusion that shortages were imminent.

(3) These two items, in conjunction with speculative manipulation of the spot market by banks and pension funds, caused oil company profits to soar. The world’s three largest oil companies netted profits of $172,000 per minute during the second quarter of 2006. Profits going forward look similarly bullish.(22) ....

...This problem is not limited to oil markets. In the name of “deregulation”, investors are now raiding electricity markets nationwide. This is driving up home energy costs for everyone, causing utility companies to defer lifecycle replacement of end-of-life equipment, resulting in massive power outages caused by wet or cold weather failures of antiquated step-down equipment never before experienced by customers....

Economic Apocalypse on Horizon?

Ambrose Evans-Pritchard at the Telegraph (UK) presents the case that the current credit crisis will make 1929's look like a "walk in the park":

... Twenty billion dollars here, $20bn there, and a lush half-trillion from the European Central Bank at give-away rates for Christmas. Buckets of liquidity are being splashed over the North Atlantic banking system, so far with meagre or fleeting effects.

As the credit paralysis stretches through its fifth month, a chorus of economists has begun to warn that the world's central banks are fighting the wrong war, and perhaps risk a policy error of epochal proportions.

"Liquidity doesn't do anything in this situation," says Anna Schwartz, the doyenne of US monetarism and life-time student (with Milton Friedman) of the Great Depression.

"It cannot deal with the underlying fear that lots of firms are going bankrupt. The banks and the hedge funds have not fully acknowledged who is in trouble. That is the critical issue," she adds.

Lenders are hoarding the cash, shunning peers as if all were sub-prime lepers. Spreads on three-month Euribor and Libor - the interbank rates used to price contracts and Club Med mortgages - are stuck at 80 basis points even after the latest blitz. The monetary screw has tightened by default.

York professor Peter Spencer, chief economist for the ITEM Club, says the global authorities have just weeks to get this right, or trigger disaster.

"The central banks are rapidly losing control. By not cutting interest rates nearly far enough or fast enough, they are allowing the money markets to dictate policy. We are long past worrying about moral hazard," he says.

"They still have another couple of months before this starts imploding. Things are very unstable and can move incredibly fast. I don't think the central banks are going to make a major policy error, but if they do, this could make 1929 look like a walk in the park," he adds.

The Bank of England knows the risk. Markets director Paul Tucker says the crisis has moved beyond the collapse of mortgage securities, and is now eating into the bedrock of banking capital. "We must try to avoid the vicious circle in which tighter liquidity conditions, lower asset values, impaired capital resources, reduced credit supply, and slower aggregate demand feed back on each other," he says.

New York's Federal Reserve chief Tim Geithner echoed the words, warning of an "adverse self-reinforcing dynamic", banker-speak for a downward spiral. The Fed has broken decades of practice by inviting all US depositary banks to its lending window, bringing dodgy mortgage securities as collateral.

Quietly, insiders are perusing an obscure paper by Fed staffers David Small and Jim Clouse. It explores what can be done under the Federal Reserve Act when all else fails.

Section 13 (3) allows the Fed to take emergency action when banks become "unwilling or very reluctant to provide credit". A vote by five governors can - in "exigent circumstances" - authorise the bank to lend money to anybody, and take upon itself the credit risk. This clause has not been evoked since the Slump....

...America's headline CPI screamed to 4.3 per cent in November. This may be a rogue figure, the tail effects of an oil, commodity, and food price spike. If so, the Fed missed its chance months ago to prepare the markets for such a case. It is now stymied.

This has eerie echoes of Japan in late-1990, when inflation rose to 4 per cent on a mini price-surge across Asia. As the Bank of Japan fretted about an inflation scare, the country's financial system tipped into the abyss.

In theory, Japan had ample ammo to fight a bust. Interest rates were 6 per cent in February 1990. In reality, the country was engulfed by the tsunami of debt deflation quicker than the bank dared to cut rates. In the end, rates fell to zero. Still it was not enough....

...Bernard Connolly, global strategist at Banque AIG, said the Fed and allies had scripted a Greek tragedy by under-pricing credit long ago and seem paralysed as post-bubble chickens now come home to roost. "The central banks are trying to dissociate financial problems from the real economy. They are pushing the world nearer and nearer to the edge of depression. We hope they will eventually be dragged kicking and screaming to do enough, but time is running out," he said.

Glance at the more or less healthy stock markets in New York, London, and Frankfurt, and you might never know that this debate is raging. Hopes that Middle Eastern and Asian wealth funds will plug every hole lifts spirits....

... "The kind of upheaval observed in the international money markets over the past few months has never been witnessed in history," says Thomas Jordan, a Swiss central bank governor.

"The sub-prime mortgage crisis hit a vital nerve of the international financial system," he says.The market for asset-backed commercial paper - where Europe's lenders from IKB to the German Doctors and Dentists borrowed through Irish-based "conduits" to play US housing debt - has shrunk for 18 weeks in a row. It has shed $404bn or 36pc. As lenders refuse to roll over credit, banks must take these wrecks back on their books. There lies the rub....

...Tim Congdon, a banking historian at the London School of Economics, said the rot had seeped through the foundations of British lending.

Average equity capital has fallen to 3.2 per cent (nearer 2.5 per cent sans "goodwill"), compared with 5 per cent seven years ago. "How on earth did the Financial Services Authority let this happen?" he asks.

Worse, changes pushed through by Gordon Brown in 1998 have caused the de facto cash and liquid assets ratio to collapse from post-war levels above 30 per cent to near zero. "Brown hadn't got a clue what he was doing," he says.

The risk for Britain - as property buckles - is a twin banking and fiscal squeeze. The UK budget deficit is already 3 per cent of GDP at the peak of the economic cycle, shockingly out of line with its peers. America looks frugal by comparison.

Maastricht rules may force the Government to raise taxes or slash spending into a recession. This way lies crucifixion. The UK current account deficit was 5.7 per cent of GDP in the second quarter, the highest in half a century. Gordon Brown has disarmed us on every front....

...The ECB's little secret is that it must never allow a Northern Rock failure in the eurozone because this would expose the reality that there is no EU treasury and no EU lender of last resort behind the system. Would German taxpayers foot the bill for a Spanish bail-out in the way that Kentish men and maids must foot the bill for Newcastle's Rock? Nobody knows. This is where eurozone solidarity stretches to snapping point. It is why the ECB has showered the system with liquidity from day one of this crisis.

Citigroup, Merrill Lynch, UBS, HSBC and others have stepped forward to reveal their losses. At some point, enough of the dirty linen will be on the line to let markets discern the shape of the debacle. We are not there yet....

From Luke Burgess at Energy & Capital, December 2006:

...The BIS confirms that Russia and members of OPEC have cut their dollar holdings from 67% in the first quarter to 65% in the second. A 2% cut may seem modest. But the move indicates crucial information for the USD outlook.

While dumping the dollar, the oil giants have increased their holdings in euros from 20% to 22% across the board. This shift has certainly added to the dollar's recent weakness, which has fallen to a 20-month low against the euro and a 14-year low against sterling.

From "Dollar vs EURO -- Weapons of mass destruction" on ThinkandAsk, May 2003:

...Economist commentator Sonja Ebron wrote, "An OPEC switch from the dollar to the euro would bring a quick and devastating dollar and Wall Street crash that would make 1929 look like a $50 casino bet." This prediction was understood by the Clinton administration, but the Bush administration took action to boost the petrodollar.

The greatest financial weapon against the United States is the EURO. It is the first currency to present a threat against the dollar. The EURO is a shared currency of 15 European nations centered upon Germany and France. The economies and populations of the euro countries are as large as that of the United States, and more tightly bound to the Middle East, said Ebron. As large as the European Union appears today, it continues to grow. The United States is landlocked. The world is suddenly too small for the dollar to grow.

Since 1945 the dollar has been the global oil transaction currency. These dollars are recycled from oil production to the US as Treasury Bills and assets in US stocks and real estate, which is a substantial portion of the financial market. The EURO becomes the alternative currency to nations wishing to switch.

Now for the difficult part... although the Asian Times writes a fairly "idiot-proof" description. In 2002, the US debt was $6 trillion against a gross domestic product of $9 trillion. Global economies have, since WWII, captured dollars to service foreign debts, and accumulated dollar reserves sustain the exchange value of their own currency. The world's central banks hold dollar reserves equal to their currency in circulation. The more pressure to devalue a currency, the more dollar reserves are required. This makes each economy dependent upon the US dollar, or known as dollar hegemony, constructed mainly by oil -- in other words, oil producing nations historically only accepted dollars, until the EURO. But with this currency game, the US essentially owns the world oil trading market for free, and allows the US to build its debt based upon credit assets they don't physically own. With The United States in control of Iraq, oil trade reverts to dollars.

With a strong dependency upon oil, and petrodollars secure, the White House hopes the EURO will slide. The EURO economy is currently $9.6 trillion. As more countries jump on to use EURO, their economy grows. The US either takes over the assets they trade, like Iraq, or convince the rest of the world to exchange their currency for dollars. The US is urging Tony Blair not to adopt the EURO for this purpose. The EURO is new, has little debt. The US dollar has a substantial debt, but is heavily used. The European Union itself is a larger consumer of oil than the US.

Is this flirtation with an economic apocalypse all in service to demonstrating - in no uncertain terms - to the oil producers, that with the Euro as the oil currency, they have set themselves up to use something with NO treasury and NO lender of last resort behind it?

Tough love time.

Iran stops accepting U.S. dollars for oil

RIA Novosti has the story from December 8 on Iran's decision to stop accepting U.S. dollars for oil:

..."In line with a policy of selling crude oil in currencies other than the
U.S. dollar, the sale of our country's oil in U.S. dollars has been completely
eliminated," ISNA reported Oil Minister Gholamhossein Nozari as saying.

He also said "the dollar is no longer a reliable currency."

Iran is the world's fourth-largest crude oil producer. At a November
summit of Organization of the Petroleum Exporting Countries heads of state, Iran
proposed that oil sales be carried for a variety of currencies, excluding
dollars, but was not supported by any other members except Venezuela....