Obama administration approved wider exports of liquefied natural gas

Interesting!

US Energy Revolution Gathers Pace

By Ed Crooks, Jonathan Soble and Guy Chazan

May 18 (FT) — The growing role of the U.S. in world energy markets was underlined on Friday as the Obama administration approved wider exports of liquefied natural gas and international companies committed billions of dollars for new infrastructure.

The developments were both consequences of the shale revolution in the U.S., in which improvements in the techniques of horizontal drilling and hydraulic fracturing, or “fracking,” have unlocked new supplies of oil and gas, and raised the prospect that the US will be an increasingly important supplier of energy to the rest of the world.

The Department of Energy on Friday authorized the Freeport LNG project in Texas to export to countries that do not have a trade agreement with the US, including Japan and the members of the EU. It was the first such approval to be granted for two years and only the second ever.

President Barack Obama had been expected to approve worldwide sales from the Freeport project, as the administration sees rising energy exports as providing economic benefits and strengthening the global influence of the U.S.

However, a vocal lobby of companies in industries such as chemicals and steel has urged restrictions on gas exports to ensure U.S. manufacturers continue to derive a competitive advantage from cheap energy.

Freeport has signed deals to sell its gas to Osaka Gas and Chubu Electric of Japan, and BP of the U.K. The export project is owned by a consortium including Osaka Gas and Michael Smith, Freeport’s founder and chief executive.

Separately, Japanese and European companies said they would invest billions of dollars in another proposed gas export project, the $10 billion Cameron LNG plant in Louisiana.

Overall view of the economy

This is my overall view of the economy.

The US was on the move by Q4 last year. A housing and cars (and student loans) driven expansion was happening, with slowing transfer payments and rising tax revenues bringing the deficit down as the automatic stabilizers were doing their countercyclical thing that would eventually reverse the growth. But that could take years. Look at it this way. Someone making 50,000 per year borrowed 150,000 to buy a house. The loan created the deposit that paid for the house. The seller of the house got that much new income, with a bit going to pay taxes and the rest there to be spent. Maybe a bit of furniture etc. was bought on credit as well, again adding income and (gross) financial assets to the recipients of the borrowers spending. And increasing sales added employment as well as output, albeit not enough to keep up with population growth etc.

I was very hopeful. Back in November, after the ‘Obama is a socialist’ sell off, I wrote that it was time to buy stocks and go play golf for three years, as, left alone, the credit accelerator in progress could go on for a long time.

But it wasn’t left along. Only a few weeks later the cliff drama began to intensify, with lots of fear of going over the ‘full cliff’. While that didn’t happen, we did go over about 1/3 cliff when both sides let the FICA reduction expire, thus removing some $170 billion from 2013, along with strong prospects of an $85 billion (annualized) sequester at quarter end. This moved me ‘to the sidelines’. Seemed to me taking that many dollars out of the economy was a serious enough negative for me to get out of the way.

But the Jan and then Feb numbers showed I was wrong, and that the consumer had continued to grow his spending as before via housing and cars, etc. Even the cliff constrained -.1 GDP of Q4 was soon revised up to .4. Stocks kept moving up and bonds moved higher in yield, even as the sequester kicked in, with the market view being the FICA hike fears were bogus and same for the sequester fears. Balancing the budget and getting the govt out of the way does indeed work to support the private sector. The UK, Eurozone, and Japan were exceptions. Austerity inherently does work. And markets were discounting all that, as it’s what market participants believed and the data supported.

Then, it all changed. April releases of March numbers showed not only suddenly weak March numbers, but Jan and Feb numbers revised lower as well. The slope of things post FICA hike went from positive to negative all at once. The FICA hike did seem to have an effect after all. And with the sequesters kicking in April 1, the prospects for Q2 were/are looking worse by the day.

My fear is that the FICA hikes and sequesters didn’t just take 1.5% of GDP ‘off the top’ as forecasters suggest, leaving future gains from the domestic credit expansion there to add to GDP as they had been. That is, the mainstream forecasts are saying when someone’s paycheck goes down by $100 per month from the FICA hike, or loses his job from the sequester, he slows his spending, but he still borrows to buy a car and/or a house as if nothing bad had happened, and so GDP is reduced by approximately the amount of the tax hikes and spending cuts, with a bit of adjustment for the ‘savings multipliers’. I say he may not borrow to buy the house or the car. Which both removes general spending and also slows the credit accelerator, shifting the always pro cyclical private sector from forward to reverse. And the ‘new’ negative data slopes have me concerned it’s already happening. Before the sequesters kicked in.

Looking at Japan, theory and evidence tells me the lesson is that lower interest rates require higher govt deficits for the same level of output and employment. More specifically, it looks to me like 0 rates may require 7-8% or even higher deficits for desired levels of output and employment vs maybe 3-4% deficits when the central bank sets rates at maybe 5% or so, etc. And US history could now be telling much the same.

And another lesson from Japan we should have learned long ago is that QE is a tax that does nothing good for output or employment and is, if anything, ‘deflationary’ via the same interest income channels we have here. Note that the $90 billion of profits the Fed turned over to the tsy would have been earned in the economy if the Fed hadn’t purchased any securities. So, as always in the past, watch for Japan’s QE to again ‘fail’ to add to output, employment, or inflation. However, their increased deficit spending, if and when it materialize, will support output, employment, and prices as it’s done in the past.

Oil and gasoline prices are down some, which is dollar friendly and consumer friendly, but only back to sort of ‘neutral’ levels from elevated ‘problematic’ levels And there is risk that the Saudis decide to cut price for long enough to put the kibosh on the likes of North Dakota’s and other higher priced crude, wiping out the value of that investment and ending the output and employment and currency support from those sources. No way to tell what they may be up to.

So my overall view is negative, with serious deflationary risks looming.

And the solution is still fiscal- a tax cut and/or spending increase.
However, that seems further away then ever, as the President is now moving towards an additional 1.8 trillion of deficit reduction.

:(

Gold

When Central Banks buy it, the price tends to go up, and when they sell it, the price tends to go back towards marginal cost of production.

Talk of Cypress being forced to sell stokes fears of Greece doing same, and of course when EU policy turns biased towards selling its doubtful any of the member banks would buy?


Full size image

thatcher & oil

Well worth a read!

>   
>   (email exchange)
>   
>   On Wed, Apr 10, 2013 at 7:02 PM, James wrote:
>   
>   Paper attached, I cleaned it up some and added a few lines on shale oil that I had intended
>   to write. Its not what I would consider a finished product, but its so old now that I dont
>   see much point in improving it. Use it as you see fit.
>   

The Institutions of the Oil Industry: A Proposal for Adjustment

comments on a line from a confidential report from Karim

Comments and ramblings:

“Strong multiplier effects from construction jobs to broader economy.”

Good report!!!

I used to call this the ‘get a job, buy a car, get a job buy a house’ accelerator. And yes, it has happened in past business cycles and been a strong driver. But going back to the last Bush up leg, turns out it was supported to a reasonably large degree by the ‘subprime fraud’ dynamic of ‘make 30k/year, buy a 300k house’ with fraudulent appraisals and fraudulent income statements. And the Clinton up leg was supported by the funding of impossible .com business plans and y2k fear driven investment, and the Reagan years by the S&L up leg that resulted in 1T in bad loans, back when that was a lot of money. Japan, on the other hand, has carefully avoided, lets say, a credit boom based on something they would have regretted in hindsight, as was the case in the US.

The point is it takes a lot of deficit spending to overcome the demand leakages, and with the govt down to less than 6% of GDP this year, yes, ‘legit’ housing can add quite a bit, but can it add more than it did in Japan, for example? And, to the point of this report, will it be enough to move the Fed?

Also, looks to me like, at the macro level, credit is driven by/limited by income (real or imagined), and the proactive deficit reduction measures like the FICA hikes and the sequesters have directly removed income, as had QE and the rate cuts in general. So yes, debt is down as a % of income, but the level of income is being suppressed (call it income repression policy?) through pro active fiscal and the low number of people working and getting paid for it.

Domestic energy production adds another interesting dimension. It means dollar income is being earned by firms operating domestically that would have been earned by overseas agents. The question here is whether that adds to incomes that gets spent domestically. That is, did the dollars go to foreigners who spent it all on fighter jets, or did they just let them sit in financial assets vs the domestic oil company? Does it spend more of its dollar earnings domestically than the foreign agent did, or just build cash, etc? And either way its dollar friendly, which also means more non oil imports, particularly with portfolio managers ‘subsidizing’ exports from Japan with their currency shifting. That should be a ‘good thing’ for us, as it means taxes can be that much lower for a given size govt, but of course the politicians don’t have enough sense to do that. It all comes back to the question of whether the deficit is too small.

As for banking and lending, anecdotally , my direct experience with regulators is that they are ‘bad’ and vindictive people, much like many IRS agents I’ve come across, and right now they are engaging in what the Fed calls ‘regulatory over reach’, particularly at the small bank level, but also at the large bank level. This makes a bank supported credit boom highly problematic. And without bank support, the non bank sector is limited as well.

Lastly, there’s a difference between deficits coming down via automatic stabilizers and via proactive deficit reduction. The automatic stabilizers bring the deficit down when non govt credit growth is ‘already’ strong enough to bring it down, while proactive deficit reduction, aka ‘austerity’ does it ‘ahead of’ non govt credit growth, which means austerity can/does keep non govt credit growth from materializing (via income/savings reduction).

Conclusion- the Fed is correct in being concerned about our domestic dynamics. And they are right about being concerned about the rest of the global economy. Europe is still going backwards, as is China where they are cutting back on the growth of debt by local govts and state banks, all of which ‘counts’ as part of the deficit spending that drove prior levels of growth. And softer resource prices hit the resource exporters who growth is leveraged to the higher prices. I wrote a while back about what happens when the longer term commodity cycle peaks, supply tends to catch up and prices tend to fall back to marginal costs of production, etc.

And the Fed has to suspect, at least, the QE isn’t going to do anything for output and employment in Japan, any more than it’s actually done for the US.

Global growth and US oil and product imports

A while back I’d written about how the global economy had become leveraged to net exports to the US, which has turned out to be the case. And now with US imports of crude and products falling, another leg of this process seems to be underway, and in a world where no one runs high enough deficits to sustain domestic demand at reasonable levels.

A rough guess is 15x leverage? A US trade deficit of $500 billion is sustaining about $7.5 trillion in global ‘equity value’? More?

My story of the Thatcher era

Here’s how I remember it all.
I didn’t look anything up, with the idea that memories matter.

The ‘golden age’ from WWII was said to have ended around 1973. Inflation and employment was remembered as relatively low, productivity high, the American middle class thriving.

Why? Keynes was sort of followed. The Kennedy tax cuts come to mind. But also of consequence and ignored was the fact that the US had excess crude production capacity, with the Texas Railroad Commission setting quotas, etc. to support prices at maybe the $2.50-$3.00 price range. And stable crude prices, though maybe a bit higher than they ‘needed’ to be, meant reasonable price stability, as much was priced on a cost plus basis, and the price of oil was a cost of most everything, directly or indirectly.

But in the early 1970’s demand for crude exceeded the US’s capacity to produce it, and Saudi Arabia became the swing producer, replacing the Texas Railroad commission as price setter. And, of course, price stability wasn’t their prime objective, as they hiked price first to about $10 by maybe 1975, which caused a near panic globally, then after a too brief pause they hiked to $20, and finally $40 by maybe 1980.

With oil part of the cost structure, the consumer price index, aka ‘inflation’, soared to double digits by the late 70’s. Headline Keynesian proposals were largely the likes of price and wage controls, which Nixon actually tried for a while. But it turned out the voters preferred inflation to their government telling them what they could earn (wage controls on organized labor and others) and what they could charge. Arthur Burns had the Fed funds rate up to maybe 6%. Miller took over and quickly fell out of favor, followed by tall Paul in maybe 1979 who put on what might be the largest display of gross ignorance of monetary operations with his borrowed reserve targeting policy. However, a year or so after the price of oil broke as did inflation giving tall Paul the spin of being the man who courageously broke inflation. Overlooked was that Jimmy Carter had allowed the deregulation of natural gas in 1978, triggering a massive increase in supply, with our electric utilities shifting from oil to nat gas, and OPEC desperately cutting production by maybe 15 million barrels/day in what turned out to be an unsuccessful effort to hold price above $30, as the supply shock was too large for them and they drowned in the flood of no longer needed oil, with prices falling to maybe the $10 range where they stayed for almost 20 years, until climbing demand again put the Saudis in the catbird seat. Meanwhile, Greenspan got credit for that goldilocks period that again was the product of stable oil prices, not the Fed (at least in my story.)

So back to the 70’s, and continuous oil price hikes by a foreign monopolist. All nations experienced pretty much the same inflation. And it all ended at about the same time as well when the price of crude fell. The ‘heroes’ were coincidental. In fact, my take is they actually made it worse than it needed to be, but it did ‘get better’ and they of course were in the right place at the right time to get credit for that.

So back to the 70’s. With the price of oil being hiked by a foreign monopolist, I see two choices. The first is to try to let there be a relative value shift (as the Fed tries to do today) and not let those price hikes spill into the rest of the price level, which means wages, for the most part. This is another name for a decline in real terms of trade. It would have meant the Saudis would get more real goods and services for the oil. The other choice is to let all other price adjust upward to keep relative value the same, and try to keep real terms of trade from deteriorating. Interestingly, I never heard this argument then and I still don’t hear it now. But that’s how it is none the less. And, ultimately, the answer fell somewhere in between. Some price adjustment and some real terms of trade deterioration. But it all got very ugly along the way.

It was decided the inflation was caused by unions trying to keep up or stay ahead of things for their members, for example. It was forgotten that the power of unions was a derivative of price power of their companies, and as companies lost pricing power to foreign competition, unions lost bargaining power just as fast. And somehow a recession and high unemployment/lost output was the medicine needed for a foreign monopolist to stop hiking prices??? And there was Ford’s ‘whip inflation now’ buttons for his inflation fighting proposal, and Carter with his hostage thing adding to the feeling of vulnerability. And the nat gas dereg of 1978, the thing that actually did break the inflation two years later, hardly got a notice, before or after, and to this day.

As today, the problem back then was no one of political consequence understood the monetary system, including the mainstream Keynesians who had been the intellectual leadership for a long time. The monetarists came into vogue for real only after the failure of the Keynesians, who never did recover, and to this day I’ve heard those still alive push for price and wage controls, fixed exchange rates, etc. etc. in the name of price stability.

So in this context the rise of Thatcher types, including Reagan, makes perfect sense. And even today, those critical of Thatcher type policies have yet to propose any kind of comprehensive proposals that make any sense to me. They now all agree we have a long term deficit problem, and so put forth proposals accordingly, etc. as they are all destroying our civilization with their abject ignorance of the monetary system. Or, for some unknown reason, they are just plain subversive.

Thatcher?
It was the blind leading the blind then and it’s the same now.
And that’s how I remember it/her.
And i care a whole lot more about what happens next than about what happened then.

:(