State’s unusually lax laws allow corruption to thrive: Prosecutors
14 December 2008
NEW YORK: As much as politicians in Illinois have had a tradition of graft, the people of the state have had a tradition of accepting it - even expecting it - and long before Governor Rod Blagojevich was accused of trying to put a Senate seat up to the highest bidder.
Otto Kerner, who was governor in the 1960s, was found to have accepted bribes in the form of racetrack stock but only after the track owner deducted it on her taxes as a cost of doing business.
After Paul Powell, an Illinois secretary of state, long-time state legislator and infamous dealmaker, died in 1970, associates found US$800,000 in undocumented cash in shoeboxes, briefcases and strongboxes in his closet, a considerable cache for a man who had never earned a salary of more than US$30,000.
Powell had emerged unscathed from a Grand Jury investigation into accusations that he bought stock in a harness racing company. As he said: ‘It wound up with the grand jurors wanting to know from me where they could buy racetrack stock.’
The state’s unusually lax laws have allowed corruption to flourish, prosecutors say, adding that it was the threat of a new campaign finance law that takes effect next month that set Blagojevich off on one last spree of pay-to-play.
The tradition was set by the immigrants who settled the state in the 19th century and nurtured by a stubborn system of machine politics that other states eradicated long ago.
‘There is this attitude among politicians, and frankly among citizens, that this is the way things are,’ said political science professor Kent Redfield at the University of Illinois. ‘Politics is for professionals.’
The surprise for many Illinoisans last week was not that their governor was arrested, but that he could be brazen enough to try to sell a US Senate seat when he was already under federal investigation.
Now the culture of his adopted home state threatens to dog President-elect Barack Obama, whose vacated seat in the Senate Blagojevich is accused of putting up for auction, much as swampy Arkansas politics dogged the last young Democrat politician elected on a platform of change, Mr. Bill Clinton.
Prosecutors say Mr. Obama is not a subject of the inquiry. And he has been a champion of ethics reform in the Illinois Legislature and Senate.
But some Republicans have seized the opportunity to try to tie him to the worst side of Illinois politics.
As he faced questions at a news conference in Chicago last week, Mr. Obama argued that there were two Illinoises - and that he came from the one not represented in the criminal complaint against Blagojevich.
Ms. Cindi Canary, director of the Illinois Campaign for Political Reform, said: ‘It’s as if we have a good angel on one shoulder and a bad angel on the other.’
‘We have produced some real leaders,’ she added, mentioning ex-senator Paul Simon, former federal judge Abner Mikva and, of course, Abraham Lincoln.
‘At the same time, for historic and systemic reasons, we have real institutional corruption.’
Certainly other states have their problems. The Corporate Crime Reporter ranked Illinois a mere sixth on a list of the most corrupt states last year, based on federal public corruption convictions per 100,000 residents. It was beaten by Louisiana, Mississippi, Kentucky, Alabama and Ohio; it was slightly ahead of New Jersey and New York.
Oil glut leaves 50m barrels in supertankers Options
By Carola Hoyos in Paris and Javier Blas in London December 16 2008
Oil companies and traders are storing at least 50m barrels of oil in supertankers - the equivalent of France's oil imports for a month - in a clear sign of supply outstripping demand as the global economy slows.
The surge in floating storage, the biggest since late 2001, is likely to push the Opec oil cartel, which meets tomorrow in Oran, Algeria, to make a deeper production cut to reduce inventories. Storing oil in tankers is unusual as it is significantly more expensive than inland.
"Stocks are very high," Abdullah al-Badri, Opec's secretary general, said yesterday. "We have to act. We see a very size-able reduction [in production]."
Chakib Khelil, Opec president, agreed: "Everybody is supporting a cut."
Oil prices yesterday rose briefly above $50 a barrel, recovering from a four-year low of $40.50 set this month. Oil later traded $1.30 down at $44.95 barrel on concerns Opec cuts will not stop further inventory building.
Several Opec officials have suggested a 2m barrels-a-day cut, the biggest in recent history, and were also hoping to persuade Russia - the world's largest oil producer outside the cartel - to make a reduction. But with Russia's oil output already declining because of a lack of investment, any commitment is likely to be seen as a political gesture rather than an actual reduction.
Whatever the size of Opec's cut, the floating storage surge is a clear sign the cartel is losing its battle to cut supplies more quickly than demand falls.
Jens Martin Jensens, managing director at Bermuda-based Frontline, the world's largest operator of supertankers, told the Financial Times that as many as 25 supertankers - each holding about 2m barrels - were being used as floating storage. Other traders suggested a similar number, pointing to companies such as BP and Royal Dutch Shell and traders such as Vitol and Koch as the holders of oil.
Big Oil Projects Put in Jeopardy by Fall in Prices
By JAD MOUAWAD December 15, 2008
From the plains of North Dakota to the deep waters of Brazil, dozens of major oil and gas projects have been suspended or canceled in recent weeks as companies scramble to adjust to the collapse in energy markets.
In the short run, falling oil prices are leading to welcome relief at the pump for American families ahead of the holidays, with gasoline down from its summer record of just over $4 to an average of $1.66 a gallon, and still falling.
But the project delays are likely to reduce future energy supplies — and analysts believe they may set the stage for another surge in oil prices once the global economy recovers.
Oil markets have had their sharpest-ever spikes and their steepest drops this year, all within a few months. Now, with a global recession at hand and oil consumption falling, the market’s extreme volatility is making it harder for energy executives to plan ahead. As a result, exploration spending, which had risen to a record this year, is being slashed.
The precipitous drop in oil prices since the summer, coming on the heels of a dizzying seven-year rise, was a reminder that the oil business, like those of most commodities, is cyclical. When demand drops and prices fall, companies curb their investments, leading to lower supplies. When demand recovers, prices rise again and companies start to invest in new production, starting another cycle.
As familiar as the pattern may be, the changes this time are taking place at record speed. In June, some analysts were forecasting oil at $200 a barrel and companies were scouring the earth for new places to drill; now, no one knows how low prices may fall.
“It’s a classic — if extraordinarily dramatic — cycle,” said Daniel Yergin, chairman of Cambridge Energy Research Associates and author of “The Prize,” a history of the oil business. “Prices have come down so far and so fast, it’s become a shock to the supply system.”
The list of projects delayed is growing by the week. Wells are being shut down across the United States; new refineries have been postponed in Saudi Arabia, Kuwait and India; and ambitious plans for drilling off the coast of Africa are being reconsidered.
Investment in alternative energy sources like biofuels that had flourished in recent years could dry up if prices stay low for the next few years, analysts said. Banks have become reluctant lenders, especially to renewable energy projects that may prove unprofitable in an era of low oil and gas prices.
These delays could curb future global fuel supplies by the equivalent of four million barrels a day within the next five years, according to Peter Jackson, an energy analyst at Cambridge Energy Research Associates. That is equal to 5 percent of current oil supplies.
One reason projects are being shut down so fast is that costs throughout the industry, which had surged in recent years, are still elevated despite the drop in oil prices. Many companies are waiting for those costs to come down before deciding whether to go forward with new projects.
“The global market has been turned upside down since the summer,” the International Energy Agency, a leading energy forecaster, said in a recent report.
In today’s uncertain environment, a slowdown in spending is inevitable, according to energy executives who are devising their budgets for next year. Last year, spending on exploration and production amounted to $329 billion, according to PFC Energy, a consulting firm. That figure is certain to fall.
“We’re in remission right now,” said Marvin E. Odum, the vice president for exploration and production for Royal Dutch Shell in the Americas. But once the economy picks up, he said, “the energy challenge will come back with a vengeance.”
Oil demand growth has weakened throughout the industrial world. The International Energy Agency projects that worldwide demand will actually fall this year, for the first time since 1983.
So much surplus oil is sloshing around the world right now that some companies, including Shell, are using oil tankers for storage.
Oil prices have declined by more than $100 a barrel since July, returning to levels last seen more than four years ago. They settled at $44.51 a barrel, down $1.77, on Monday in New York, as concerns about the economy outweighed efforts by oil producers to stem the slide in prices.
Prices could drop below $30 a barrel, according to Merrill Lynch and other forecasters, if the Chinese economy slows drastically next year, which looks increasingly likely.
Different companies have different price thresholds for going forward with drilling projects. But across the industry, a price drop this big has “a dampening effect,” according to Mr. Odum of Shell. “The big uncertainty is how long this economic environment is going to last.”
The biggest cutbacks so far have been in heavy oil projects in Canada, where some of the world’s highest-cost production is concentrated. Some operators there need oil prices above $90 a barrel to turn a profit.
StatoilHydro, a large Norwegian company, recently pulled out of a $12 billion project in Canada because of falling prices. Similarly, Shell, Nexen and Petro-Canada have all canceled or postponed new ventures in the province of Alberta in recent weeks.
Producers are bracing for a painful contraction, and the drop in prices could crimp investments even in places where production costs are low. The Saudi monarch, King Abdullah, recently said he considered $75 a barrel to be a “fair price.”
The kingdom, which has invested tens of billions of dollars in recent years to increase production, recently announced that two new refineries, with ConocoPhillips and Total of France, were being frozen until costs go down. In neighboring Kuwait, the government recently shelved a $15 billion project to build the country’s fourth refinery because of concerns about slowing growth in oil demand.
The list goes on: South Africa’s national oil company, PetroSA, on Thursday dropped plans to build a plant that would have converted coal to liquid fuel. The British-Russian giant TNK-BP slashed its capital expenditure budget for next year by $1 billion, for a 25 percent reduction from this year.
In North Dakota, oil drillers are scaling back exploration of the Bakken Shale, a geological formation recently seen as promising, where production is more expensive than in conventional fields.
“People are dropping rigs up there in a pretty significant way already,” Mark G. Papa, the chief executive of EOG Resources, a small natural gas producer, recently told an energy conference.
Another domestic producer, Callon Petroleum, suspended a major deepwater project in the Gulf of Mexico, called Entrada, weeks before completion because of what it described as a “serious decline in project economics.”
According to research analysts at the brokerage firm Raymond James, domestic drilling could drop by 41 percent next year as companies scale back.
“We expect operators to significantly cut their activity in the coming weeks due to the holiday season, and many of these rigs will not come back to work,” the report said.
As scores of small wells are shut down, analysts at Bernstein Research have calculated that oil production in North America could decline by 1.3 million barrels a day through 2010, or 17 percent, to 6.14 million barrels a day. This decline, rather than cuts by members of the Organization of the Petroleum Exporting Countries, “will be the catalyst needed for oil prices to rebound,” Neil McMahon, an analyst at Bernstein Research, said in a conference call this month. The United States remains the world’s largest oil consumer.
The drop in energy consumption could afford some breathing room for producers, which had been straining in recent years to match fast-rising demand. But analysts warn the world can ill afford a lengthy drop in investment in energy supplies. To meet the growth in global population and the rising affluence expected in the future, the world will need to invest $12 trillion in order to increase its oil and natural gas supplies, according to the International Energy Agency.
“If we cut back dramatically on investments, we could end up in a situation where supply growth goes flat when the economy starts to recover,” said Mr. Jackson, the analyst. “The steeper the decline, the steeper the response.”
Dow gains 360 points after Fed lowers target for key interest rate
Dec. 16, 2008
NEW YORK - A surprised Wall Street bolted higher Tuesday after the Federal Reserve's historic decision to further slash interest rates and pledge broad support to revive the troubled economy.
The Dow Jones industrials surged nearly 360 points, or 4.2 percent, and broader indexes jumped more than 5 percent after the central bank said it will use "all available tools" to jump-start the economy. It also set its target for the rate at which banks lend to each other to a range of zero to 0.25 percent, the lowest level on record.
Demand for long-term government bonds increased and pushed yields to record lows.
The promise of further government action and a Swiss-army-knife approach for mending the economy damped concerns that policymakers were running low on tools to fan the economy by further lowering interest rates.
The idea that the Fed will likely proceed with plans to snap up government and mortgage debt made it easier for investors to place bets that the central bank will do what is necessary to help bring an end to the longest recession in a quarter-century.
"Today was a reminder that the Fed was on the case," said Jim McDonald, director of equity research at Northern Trust in Chicago. "It was a reaffirmation of their willingness to be very aggressive."
"What we heard today was not revolutionarily different but it was a reminder that they are committed to using their balance sheet to the fullest extent to repair the financial markets and stimulate the economy."
The Fed's unprecedented move to lower its fed funds target rate to a range of zero to 0.25 percent rather than a fixed point was a surprise. The move is an acknowledgment that rates in the marketplace had been well below the Fed's 1 percent target, which it set at its previous meeting on Oct. 29. The central bank also cut the lending rate for loans directly to banks.
Many analysts had expected the Fed would cut its fed funds rate to 0.5 percent from 1 percent.
"In some senses the whole point of this meeting was to say quit watching interest rates, watch the other things that we can and will do," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland.
Jack A. Ablin, chief investment officer at Harris Private Bank, said the fact that the Fed targeted a range for its fed fund rate indicates that policy makers did not want to bring the rate all the way to zero. Such a move could have had problematic implications for money market funds, whose fees could then outpace yields.
The Dow rose 359.61, or 4.20 percent, to 8,924.14 after having been up about 100 in subdued trading ahead of the Fed's announcement.
Broader stock indicators also rose. The Standard & Poor's 500 index advanced 44.61, or 5.14 percent, to 913.18, and the Nasdaq composite index rose 81.55, or 5.41 percent, to 1,589.89.
The Russell 2000 index of smaller companies rose 30.28, or 6.69 percent, to 482.85.
The number of stocks advancing outnumbered those declining by 5-to-1 on the New York Stock Exchange, where volume came to 1.54 billion.
Demand for government bonds surged. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 2.28 percent from 2.53 percent late Monday. The yield on the 30-year fell to a record low 2.75 from 2.99 percent late Monday.
Meanwhile, the yield on the popular three-month T-bill — whose yield has at times gone negative due to frenzied buying — was at 0.03 percent up from 0.02 percent late Monday.
The rate decision came on a day when investors received two more pieces of evidence on Tuesday that the economy was worsening: The Commerce Department reported a 18.9 percent drop in new home construction in November, while the Labor Department said consumer prices sank by 1.7 percent.
Richard E. Cripps, chief market strategist for Stifel Nicolaus, said the recent string of downbeat economic readings could eventually convince Wall Street that the economy has hit a bottom and could be poised for a modest recovery. In past downturns, the data remain weak long after the economy has began to recover.
"The idea is it's so bad that maybe it doesn't take much to go up from here," he said.
Wall Street remained nervous about the growing list of firms and individual investors affected by investment manager Bernard Madoff, who is accused of scamming investors.
Madoff, former chairman of the Nasdaq stock market, was arrested Thursday in what the Securities and Exchange Commission is calling one of the biggest pyramid scams on record. Investors of all sizes — from major banks to small charities — may record losses of more than $50 billion.
U.S. Nov. housing starts plunge 18.9% to record low
By Rex Nutting Dec. 16, 2008
WASHINGTON - U.S. home builders slashed construction of new homes in November, driving housing starts far below the worst levels seen in 50 years, the Commerce Department reported Tuesday. New starts dropped an eye-popping 18.9% to a seasonally adjusted annual rate of 625,000, the lowest rate since the Commerce Department began keeping records in 1959. Starts were far lower than the 740,000 expected by economists surveyed by MarketWatch. Building permits fell 15.6% in November to a seasonally adjusted annual rate of 616,000, also a record low. Permits for single-family homes fell 12.3% to a seasonally adjusted annual rate of 412,000, a 27-year low.
ASIAN governments need to re-balance their economies as they are currently too dependent on the West, according to a study commissioned by DHL and undertaken by the Economist Intelligence Unit.
“Much of Asia has grown up on the back of vibrant trade with the West,” said Justin Wood, a director at the Economist Intelligence Unit and South-East Asia expert.
“But with the economies of North America and Europe forecast to perform poorly next year, the impact on Asia’s trade-dependent economies could be serious indeed.”
The study, entitled: Fuelling Global Trade: How GDP growth and oil prices affect international trade flows, also revealed the slowing Asian growth story and the need to re-balance their economies, said Frank Appel, the CEO of Deutsche Post World Net, the parent company of DHL.
“The challenge that Asian trade faces today is to hasten the migration to high value goods and focus on managing their growing dependence on oil.”
“The impact of rising oil prices will add risks and negatively impact Asian international trade,” Appel continued. “The study also reveals that for 2009 and beyond, international trade will depend more on rising Asian incomes, than the West.”
The study examined trade flows between 39 countries in three regions - Asia, the European Union and the North America Free Trade Agreement (NAFTA).
It included three countries under NAFTA- the US, Canada and Mexico, 25 European Union countries, the six largest economies in ASEAN along with Japan, South Korea, India, China and Hong Kong in Asia.
The report looked at the bilateral trade flows between each country and those outside its immediate trade bloc or region, which resulted in 383 bilateral trade relationships.
According to the study, the link between income and trade is stronger between Asia and the West than between North America and Europe.
A 1% increase in combined income between an Asian country and a Western country will deliver a 1.36% increase in trade.
Trade between ASEAN and the West will rise 1.35% for every 1% increase in combined income, while between two Western countries, a 1% increase in combined income delivers a 1.14% increase in trade.
“Equally, with oil prices showing extreme volatility this year, and with the price of oil likely to rise after the current economic downturn passes, this study identifies further challenges for Asian nations to address, especially in terms of pushing their manufacturing industries up the value chain,” Wood said.
Based on an average of all the 383 bilateral trade relationships in the study, a 1% increase in oil price leads to a 0.24% reduction in trade, with the assumption that all other drivers, such as income levels in two countries, remaining constant.
High oil prices have the greatest effect on Southeast Asia, where trade decreases the most.
The impact on oil prices is much greater when an ASEAN country trades with a nation in the EU or NAFTA , a 1% increase in the price of oil reduces the value of trade by 0.3%. Assuming no rise in income levels, the value of trade between ASEAN and the West would fall by 30% over five years if oil prices doubled, as had happened in middle of this year.
In West-to-West trade, there is a higher proportion of “high-value” goods such as computers, aircraft and media devices, and a smaller share of “low-value” goods such as coal and gas, palm oil, textiles and shoes.
In contrast, Asian nations are likely to have a much higher proportion of trade centred on low-value goods.
Since transport costs make up a larger share of the final cost of low-value goods than they do for high-value goods, rising oil prices have a larger impact on trade growth for Asia.
The Baltic Dry Index (BDI) is up over 10% to 711 in the past few weeks. It doesn’t mean much, considering it’s down over 93% for the year. In fact, if you consider this move in terms of this summer’s price high of 11,793 - it’s moved barely half a percent.
But that doesn’t mean you shouldn’t be keeping an eye on the BDI.
The BDI is the price used to determine global shipping rates and prices. Like blood pressure does for humans, BDI measures the flow of goods for the economies of the world. And just like us, excessively low or high readings are bad.
Because it isn’t traded, the BDI cannot be moved artificially. It’s one of the best ways to judge the true health of global trade and our economy. It’s why Louis Basenese has been instructing readers to keep an eye on the Baltic Dry Index for weeks.
And looking at the major shippers of the water transportation sector, it appears that the market is paying attention as well. Frontline (NYSE: FRO), Kirby (NYSE: KEX) and Nordic American Tanker Shipping (NYSE: NAT) have all moved up over 15% in the past few weeks. Positive movement from the Baltic will continue to float these shippers.
And it’s not just domestic lines; Asian shippers have been on the move as well. Time will tell if these movements are the start of a new trend or just a bounce. But the water transportation sector could use some good news - it’s down over 37% since October 1st. By comparison, the S&P is only down 25%.
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Graft a long-seated tradition in Illinois
State’s unusually lax laws allow corruption to thrive: Prosecutors
14 December 2008
NEW YORK: As much as politicians in Illinois have had a tradition of graft, the people of the state have had a tradition of accepting it - even expecting it - and long before Governor Rod Blagojevich was accused of trying to put a Senate seat up to the highest bidder.
Otto Kerner, who was governor in the 1960s, was found to have accepted bribes in the form of racetrack stock but only after the track owner deducted it on her taxes as a cost of doing business.
After Paul Powell, an Illinois secretary of state, long-time state legislator and infamous dealmaker, died in 1970, associates found US$800,000 in undocumented cash in shoeboxes, briefcases and strongboxes in his closet, a considerable cache for a man who had never earned a salary of more than US$30,000.
Powell had emerged unscathed from a Grand Jury investigation into accusations that he bought stock in a harness racing company. As he said: ‘It wound up with the grand jurors wanting to know from me where they could buy racetrack stock.’
The state’s unusually lax laws have allowed corruption to flourish, prosecutors say, adding that it was the threat of a new campaign finance law that takes effect next month that set Blagojevich off on one last spree of pay-to-play.
The tradition was set by the immigrants who settled the state in the 19th century and nurtured by a stubborn system of machine politics that other states eradicated long ago.
‘There is this attitude among politicians, and frankly among citizens, that this is the way things are,’ said political science professor Kent Redfield at the University of Illinois. ‘Politics is for professionals.’
The surprise for many Illinoisans last week was not that their governor was arrested, but that he could be brazen enough to try to sell a US Senate seat when he was already under federal investigation.
Now the culture of his adopted home state threatens to dog President-elect Barack Obama, whose vacated seat in the Senate Blagojevich is accused of putting up for auction, much as swampy Arkansas politics dogged the last young Democrat politician elected on a platform of change, Mr. Bill Clinton.
Prosecutors say Mr. Obama is not a subject of the inquiry. And he has been a champion of ethics reform in the Illinois Legislature and Senate.
But some Republicans have seized the opportunity to try to tie him to the worst side of Illinois politics.
As he faced questions at a news conference in Chicago last week, Mr. Obama argued that there were two Illinoises - and that he came from the one not represented in the criminal complaint against Blagojevich.
Ms. Cindi Canary, director of the Illinois Campaign for Political Reform, said: ‘It’s as if we have a good angel on one shoulder and a bad angel on the other.’
‘We have produced some real leaders,’ she added, mentioning ex-senator Paul Simon, former federal judge Abner Mikva and, of course, Abraham Lincoln.
‘At the same time, for historic and systemic reasons, we have real institutional corruption.’
Certainly other states have their problems. The Corporate Crime Reporter ranked Illinois a mere sixth on a list of the most corrupt states last year, based on federal public corruption convictions per 100,000 residents. It was beaten by Louisiana, Mississippi, Kentucky, Alabama and Ohio; it was slightly ahead of New Jersey and New York.
Oil glut leaves 50m barrels in supertankers Options
By Carola Hoyos in Paris and Javier Blas in London
December 16 2008
Oil companies and traders are storing at least 50m barrels of oil in supertankers - the equivalent of France's oil imports for a month - in a clear sign of supply outstripping demand as the global economy slows.
The surge in floating storage, the biggest since late 2001, is likely to push the Opec oil cartel, which meets tomorrow in Oran, Algeria, to make a deeper production cut to reduce inventories. Storing oil in tankers is unusual as it is significantly more expensive than inland.
"Stocks are very high," Abdullah al-Badri, Opec's secretary general, said yesterday. "We have to act. We see a very size-able reduction [in production]."
Chakib Khelil, Opec president, agreed: "Everybody is supporting a cut."
Oil prices yesterday rose briefly above $50 a barrel, recovering from a four-year low of $40.50 set this month. Oil later traded $1.30 down at $44.95 barrel on concerns Opec cuts will not stop further inventory building.
Several Opec officials have suggested a 2m barrels-a-day cut, the biggest in recent history, and were also hoping to persuade Russia - the world's largest oil producer outside the cartel - to make a reduction. But with Russia's oil output already declining because of a lack of investment, any commitment is likely to be seen as a political gesture rather than an actual reduction.
Whatever the size of Opec's cut, the floating storage surge is a clear sign the cartel is losing its battle to cut supplies more quickly than demand falls.
Jens Martin Jensens, managing director at Bermuda-based Frontline, the world's largest operator of supertankers, told the Financial Times that as many as 25 supertankers - each holding about 2m barrels - were being used as floating storage. Other traders suggested a similar number, pointing to companies such as BP and Royal Dutch Shell and traders such as Vitol and Koch as the holders of oil.
Big Oil Projects Put in Jeopardy by Fall in Prices
By JAD MOUAWAD
December 15, 2008
From the plains of North Dakota to the deep waters of Brazil, dozens of major oil and gas projects have been suspended or canceled in recent weeks as companies scramble to adjust to the collapse in energy markets.
In the short run, falling oil prices are leading to welcome relief at the pump for American families ahead of the holidays, with gasoline down from its summer record of just over $4 to an average of $1.66 a gallon, and still falling.
But the project delays are likely to reduce future energy supplies — and analysts believe they may set the stage for another surge in oil prices once the global economy recovers.
Oil markets have had their sharpest-ever spikes and their steepest drops this year, all within a few months. Now, with a global recession at hand and oil consumption falling, the market’s extreme volatility is making it harder for energy executives to plan ahead. As a result, exploration spending, which had risen to a record this year, is being slashed.
The precipitous drop in oil prices since the summer, coming on the heels of a dizzying seven-year rise, was a reminder that the oil business, like those of most commodities, is cyclical. When demand drops and prices fall, companies curb their investments, leading to lower supplies. When demand recovers, prices rise again and companies start to invest in new production, starting another cycle.
As familiar as the pattern may be, the changes this time are taking place at record speed. In June, some analysts were forecasting oil at $200 a barrel and companies were scouring the earth for new places to drill; now, no one knows how low prices may fall.
“It’s a classic — if extraordinarily dramatic — cycle,” said Daniel Yergin, chairman of Cambridge Energy Research Associates and author of “The Prize,” a history of the oil business. “Prices have come down so far and so fast, it’s become a shock to the supply system.”
The list of projects delayed is growing by the week. Wells are being shut down across the United States; new refineries have been postponed in Saudi Arabia, Kuwait and India; and ambitious plans for drilling off the coast of Africa are being reconsidered.
Investment in alternative energy sources like biofuels that had flourished in recent years could dry up if prices stay low for the next few years, analysts said. Banks have become reluctant lenders, especially to renewable energy projects that may prove unprofitable in an era of low oil and gas prices.
These delays could curb future global fuel supplies by the equivalent of four million barrels a day within the next five years, according to Peter Jackson, an energy analyst at Cambridge Energy Research Associates. That is equal to 5 percent of current oil supplies.
One reason projects are being shut down so fast is that costs throughout the industry, which had surged in recent years, are still elevated despite the drop in oil prices. Many companies are waiting for those costs to come down before deciding whether to go forward with new projects.
“The global market has been turned upside down since the summer,” the International Energy Agency, a leading energy forecaster, said in a recent report.
In today’s uncertain environment, a slowdown in spending is inevitable, according to energy executives who are devising their budgets for next year. Last year, spending on exploration and production amounted to $329 billion, according to PFC Energy, a consulting firm. That figure is certain to fall.
“We’re in remission right now,” said Marvin E. Odum, the vice president for exploration and production for Royal Dutch Shell in the Americas. But once the economy picks up, he said, “the energy challenge will come back with a vengeance.”
Oil demand growth has weakened throughout the industrial world. The International Energy Agency projects that worldwide demand will actually fall this year, for the first time since 1983.
So much surplus oil is sloshing around the world right now that some companies, including Shell, are using oil tankers for storage.
Oil prices have declined by more than $100 a barrel since July, returning to levels last seen more than four years ago. They settled at $44.51 a barrel, down $1.77, on Monday in New York, as concerns about the economy outweighed efforts by oil producers to stem the slide in prices.
Prices could drop below $30 a barrel, according to Merrill Lynch and other forecasters, if the Chinese economy slows drastically next year, which looks increasingly likely.
Different companies have different price thresholds for going forward with drilling projects. But across the industry, a price drop this big has “a dampening effect,” according to Mr. Odum of Shell. “The big uncertainty is how long this economic environment is going to last.”
The biggest cutbacks so far have been in heavy oil projects in Canada, where some of the world’s highest-cost production is concentrated. Some operators there need oil prices above $90 a barrel to turn a profit.
StatoilHydro, a large Norwegian company, recently pulled out of a $12 billion project in Canada because of falling prices. Similarly, Shell, Nexen and Petro-Canada have all canceled or postponed new ventures in the province of Alberta in recent weeks.
Producers are bracing for a painful contraction, and the drop in prices could crimp investments even in places where production costs are low. The Saudi monarch, King Abdullah, recently said he considered $75 a barrel to be a “fair price.”
The kingdom, which has invested tens of billions of dollars in recent years to increase production, recently announced that two new refineries, with ConocoPhillips and Total of France, were being frozen until costs go down. In neighboring Kuwait, the government recently shelved a $15 billion project to build the country’s fourth refinery because of concerns about slowing growth in oil demand.
The list goes on: South Africa’s national oil company, PetroSA, on Thursday dropped plans to build a plant that would have converted coal to liquid fuel. The British-Russian giant TNK-BP slashed its capital expenditure budget for next year by $1 billion, for a 25 percent reduction from this year.
In North Dakota, oil drillers are scaling back exploration of the Bakken Shale, a geological formation recently seen as promising, where production is more expensive than in conventional fields.
“People are dropping rigs up there in a pretty significant way already,” Mark G. Papa, the chief executive of EOG Resources, a small natural gas producer, recently told an energy conference.
Another domestic producer, Callon Petroleum, suspended a major deepwater project in the Gulf of Mexico, called Entrada, weeks before completion because of what it described as a “serious decline in project economics.”
According to research analysts at the brokerage firm Raymond James, domestic drilling could drop by 41 percent next year as companies scale back.
“We expect operators to significantly cut their activity in the coming weeks due to the holiday season, and many of these rigs will not come back to work,” the report said.
As scores of small wells are shut down, analysts at Bernstein Research have calculated that oil production in North America could decline by 1.3 million barrels a day through 2010, or 17 percent, to 6.14 million barrels a day. This decline, rather than cuts by members of the Organization of the Petroleum Exporting Countries, “will be the catalyst needed for oil prices to rebound,” Neil McMahon, an analyst at Bernstein Research, said in a conference call this month. The United States remains the world’s largest oil consumer.
The drop in energy consumption could afford some breathing room for producers, which had been straining in recent years to match fast-rising demand. But analysts warn the world can ill afford a lengthy drop in investment in energy supplies. To meet the growth in global population and the rising affluence expected in the future, the world will need to invest $12 trillion in order to increase its oil and natural gas supplies, according to the International Energy Agency.
“If we cut back dramatically on investments, we could end up in a situation where supply growth goes flat when the economy starts to recover,” said Mr. Jackson, the analyst. “The steeper the decline, the steeper the response.”
Wall Street surges after Fed’s historic move
Dow gains 360 points after Fed lowers target for key interest rate
Dec. 16, 2008
NEW YORK - A surprised Wall Street bolted higher Tuesday after the Federal Reserve's historic decision to further slash interest rates and pledge broad support to revive the troubled economy.
The Dow Jones industrials surged nearly 360 points, or 4.2 percent, and broader indexes jumped more than 5 percent after the central bank said it will use "all available tools" to jump-start the economy. It also set its target for the rate at which banks lend to each other to a range of zero to 0.25 percent, the lowest level on record.
Demand for long-term government bonds increased and pushed yields to record lows.
The promise of further government action and a Swiss-army-knife approach for mending the economy damped concerns that policymakers were running low on tools to fan the economy by further lowering interest rates.
The idea that the Fed will likely proceed with plans to snap up government and mortgage debt made it easier for investors to place bets that the central bank will do what is necessary to help bring an end to the longest recession in a quarter-century.
"Today was a reminder that the Fed was on the case," said Jim McDonald, director of equity research at Northern Trust in Chicago. "It was a reaffirmation of their willingness to be very aggressive."
"What we heard today was not revolutionarily different but it was a reminder that they are committed to using their balance sheet to the fullest extent to repair the financial markets and stimulate the economy."
The Fed's unprecedented move to lower its fed funds target rate to a range of zero to 0.25 percent rather than a fixed point was a surprise. The move is an acknowledgment that rates in the marketplace had been well below the Fed's 1 percent target, which it set at its previous meeting on Oct. 29. The central bank also cut the lending rate for loans directly to banks.
Many analysts had expected the Fed would cut its fed funds rate to 0.5 percent from 1 percent.
"In some senses the whole point of this meeting was to say quit watching interest rates, watch the other things that we can and will do," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland.
Jack A. Ablin, chief investment officer at Harris Private Bank, said the fact that the Fed targeted a range for its fed fund rate indicates that policy makers did not want to bring the rate all the way to zero. Such a move could have had problematic implications for money market funds, whose fees could then outpace yields.
The Dow rose 359.61, or 4.20 percent, to 8,924.14 after having been up about 100 in subdued trading ahead of the Fed's announcement.
Broader stock indicators also rose. The Standard & Poor's 500 index advanced 44.61, or 5.14 percent, to 913.18, and the Nasdaq composite index rose 81.55, or 5.41 percent, to 1,589.89.
The Russell 2000 index of smaller companies rose 30.28, or 6.69 percent, to 482.85.
The number of stocks advancing outnumbered those declining by 5-to-1 on the New York Stock Exchange, where volume came to 1.54 billion.
Demand for government bonds surged. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 2.28 percent from 2.53 percent late Monday. The yield on the 30-year fell to a record low 2.75 from 2.99 percent late Monday.
Meanwhile, the yield on the popular three-month T-bill — whose yield has at times gone negative due to frenzied buying — was at 0.03 percent up from 0.02 percent late Monday.
The rate decision came on a day when investors received two more pieces of evidence on Tuesday that the economy was worsening: The Commerce Department reported a 18.9 percent drop in new home construction in November, while the Labor Department said consumer prices sank by 1.7 percent.
Richard E. Cripps, chief market strategist for Stifel Nicolaus, said the recent string of downbeat economic readings could eventually convince Wall Street that the economy has hit a bottom and could be poised for a modest recovery. In past downturns, the data remain weak long after the economy has began to recover.
"The idea is it's so bad that maybe it doesn't take much to go up from here," he said.
Wall Street remained nervous about the growing list of firms and individual investors affected by investment manager Bernard Madoff, who is accused of scamming investors.
Madoff, former chairman of the Nasdaq stock market, was arrested Thursday in what the Securities and Exchange Commission is calling one of the biggest pyramid scams on record. Investors of all sizes — from major banks to small charities — may record losses of more than $50 billion.
U.S. Nov. housing starts plunge 18.9% to record low
By Rex Nutting
Dec. 16, 2008
WASHINGTON - U.S. home builders slashed construction of new homes in November, driving housing starts far below the worst levels seen in 50 years, the Commerce Department reported Tuesday. New starts dropped an eye-popping 18.9% to a seasonally adjusted annual rate of 625,000, the lowest rate since the Commerce Department began keeping records in 1959. Starts were far lower than the 740,000 expected by economists surveyed by MarketWatch. Building permits fell 15.6% in November to a seasonally adjusted annual rate of 616,000, also a record low. Permits for single-family homes fell 12.3% to a seasonally adjusted annual rate of 412,000, a 27-year low.
DHL: Asia too dependent on the West
December 15, 2008
ASIAN governments need to re-balance their economies as they are currently too dependent on the West, according to a study commissioned by DHL and undertaken by the Economist Intelligence Unit.
“Much of Asia has grown up on the back of vibrant trade with the West,” said Justin Wood, a director at the Economist Intelligence Unit and South-East Asia expert.
“But with the economies of North America and Europe forecast to perform poorly next year, the impact on Asia’s trade-dependent economies could be serious indeed.”
The study, entitled: Fuelling Global Trade: How GDP growth and oil prices affect international trade flows, also revealed the slowing Asian growth story and the need to re-balance their economies, said Frank Appel, the CEO of Deutsche Post World Net, the parent company of DHL.
“The challenge that Asian trade faces today is to hasten the migration to high value goods and focus on managing their growing dependence on oil.”
“The impact of rising oil prices will add risks and negatively impact Asian international trade,” Appel continued. “The study also reveals that for 2009 and beyond, international trade will depend more on rising Asian incomes, than the West.”
The study examined trade flows between 39 countries in three regions - Asia, the European Union and the North America Free Trade Agreement (NAFTA).
It included three countries under NAFTA- the US, Canada and Mexico, 25 European Union countries, the six largest economies in ASEAN along with Japan, South Korea, India, China and Hong Kong in Asia.
The report looked at the bilateral trade flows between each country and those outside its immediate trade bloc or region, which resulted in 383 bilateral trade relationships.
According to the study, the link between income and trade is stronger between Asia and the West than between North America and Europe.
A 1% increase in combined income between an Asian country and a Western country will deliver a 1.36% increase in trade.
Trade between ASEAN and the West will rise 1.35% for every 1% increase in combined income, while between two Western countries, a 1% increase in combined income delivers a 1.14% increase in trade.
“Equally, with oil prices showing extreme volatility this year, and with the price of oil likely to rise after the current economic downturn passes, this study identifies further challenges for Asian nations to address, especially in terms of pushing their manufacturing industries up the value chain,” Wood said.
Based on an average of all the 383 bilateral trade relationships in the study, a 1% increase in oil price leads to a 0.24% reduction in trade, with the assumption that all other drivers, such as income levels in two countries, remaining constant.
High oil prices have the greatest effect on Southeast Asia, where trade decreases the most.
The impact on oil prices is much greater when an ASEAN country trades with a nation in the EU or NAFTA , a 1% increase in the price of oil reduces the value of trade by 0.3%. Assuming no rise in income levels, the value of trade between ASEAN and the West would fall by 30% over five years if oil prices doubled, as had happened in middle of this year.
In West-to-West trade, there is a higher proportion of “high-value” goods such as computers, aircraft and media devices, and a smaller share of “low-value” goods such as coal and gas, palm oil, textiles and shoes.
In contrast, Asian nations are likely to have a much higher proportion of trade centred on low-value goods.
Since transport costs make up a larger share of the final cost of low-value goods than they do for high-value goods, rising oil prices have a larger impact on trade growth for Asia.
Baltic Dry Index Floats Shippers
December 15, 2008
The Baltic Dry Index (BDI) is up over 10% to 711 in the past few weeks. It doesn’t mean much, considering it’s down over 93% for the year. In fact, if you consider this move in terms of this summer’s price high of 11,793 - it’s moved barely half a percent.
But that doesn’t mean you shouldn’t be keeping an eye on the BDI.
The BDI is the price used to determine global shipping rates and prices. Like blood pressure does for humans, BDI measures the flow of goods for the economies of the world. And just like us, excessively low or high readings are bad.
Because it isn’t traded, the BDI cannot be moved artificially. It’s one of the best ways to judge the true health of global trade and our economy. It’s why Louis Basenese has been instructing readers to keep an eye on the Baltic Dry Index for weeks.
And looking at the major shippers of the water transportation sector, it appears that the market is paying attention as well. Frontline (NYSE: FRO), Kirby (NYSE: KEX) and Nordic American Tanker Shipping (NYSE: NAT) have all moved up over 15% in the past few weeks. Positive movement from the Baltic will continue to float these shippers.
And it’s not just domestic lines; Asian shippers have been on the move as well. Time will tell if these movements are the start of a new trend or just a bounce. But the water transportation sector could use some good news - it’s down over 37% since October 1st. By comparison, the S&P is only down 25%.
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