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Archive for the 'Oil' Category

Norway intervenes to avert oil industry closure

Posted by WARREN MOSLER on 9th July 2012

This was about to be seriously disruptive:

Norway intervenes to avert oil industry closure

By Mia Shanley and Dmitry Zhdannikov

July 9 (Reuters) — Norway’s government ordered on Monday a last-minute settlement in a dispute between striking oil workers and employers in a move to alleviate market fears over a full closure of its oil industry and a steep cut in Europe’s supplies.

The strike over pensions had kept crude prices on the boil with analysts expecting far quicker action by the government to stop the oil industry from locking out all offshore staff from their workplaces from midnight (2200 GMT) on Monday.

Oil markets breathed a sigh of relief on news of the intervention and crude prices dropped in early Asian trade.

Under Norwegian law, the government can force the striking workers back to duty and has done so in the past to protect the industry on which much of the country’s economy depends.

But it was slow to intervene in the latest dispute, which was in its third week, and did so on Monday only minutes before the start of the lockout, citing potential economic consequences.

“I had to make this decision to protect Norway’s vital interests. It wasn’t an easy choice, but I had to do it,” Labour Minister Hanne Bjurstroem told Reuters after meeting with the trade unions and the Norwegian oil industry association (OLF).

A full closure of output in Norway – the world’s No. 8 oil exporter – would have cut off more than 2 million barrels of oil, natural gas liquids (NGL) and condensate per day.

But the minister said her main concern was the potential cut in gas supplies. Norway is the world’s second-biggest gas exporter by pipeline, with the majority of supplies going to Britain, the Netherlands France and Germany.

“This could have had serious consequences for the trust in Norway as a credible supplier,” she added.

The oil and gas industry makes up about one-fifth of Norway’s $417 billion economy.

Leif Sande, leader of the largest labour union Industri Energi, representing more than half of 7,000 offshore workers, said workers would return to work immediately.

“It’s very sad. The strike is over,” he told journalists.

The dispute has raised eyebrows in Norway, where oil and gas workers are already the world’s best paid, raking in an average $180,000 a year. Offshore workers clock 16 weeks a year but cite tough conditions for their call for early retirement at 62.

The oil industry had refused to budge.

“I am very happy that the minister chose to end a conflict that has cost Norway and the oil companies large sums,” said Gro Braekken, leader of the OLF.

The OLF said the 16-day strike came at a cost of some 3.1 billion Norwegian crowns ($509 million).

The next step is compulsory arbitration to define a new wage agreement.

“With this decision we can see that whenever the oil industry says jump, the government listens,” Hilde Marit Rysst, leader of union SAFE, told Reuters. “We will never leave this issue – it is completely unthinkable to stop fighting for those who are worn out at 62.”

She said unions would push their issues at the next suitable opportunity.

Norway is keen to retain its image as a reliable supplier of energy, but analysts have said the Labour-led coalition government was slow to intervene as it faces general elections in a year, and labour unions are important partners.

On Monday, Labour Minister Bjurstroem said she believed the lockout was not necessary and the oil industry will have to take responsibility.

About 10 percent of the 7,000 offshore workers have been on strike since June 24.

Brent crude dropped more than $1 to below $99 per barrel in early Asian trade on Tuesday on news of the intervention, after surging to above $101 on supply fears in the previous session.

The strike had choked off some 13 percent of Norway’s oil production and 4 percent of its gas output.

State-controlled Statoil, which operates the affected fields, said it would resume production immediately and would be back at full capacity by the end of the week.

The last lockout in the offshore sector occurred in 1986, shutting down production on the Norwegian continental shelf completely, and lasted for three weeks before the government intervened. In 2004, the center-conservative government stepped in to avert a lockout. ($1 = 6.0881 Norwegian crowns)

Posted in Comodities, Oil | 19 Comments »

Norway Oil Industry Calls Lockout to End Strike

Posted by WARREN MOSLER on 5th July 2012

This could send crude up to whatever price it takes to immediately reduce world consumption by the amount of the cutbacks.

In addition to the additional anticipated Iranian cutbacks.

Releasing strategic reserves could contain prices until production resumed.

Norway Oil Industry Calls Lockout to End Strike

By Vegard Botterli and Nerijus Adomaitis

July 5 (Reuters) — Norway’s oil industry moved to lock out all offshore workers on the Norwegian continental shelf on Thursday, aiming to get the government involved and put an end to a near two-week strike that has hit crude exports and helped push up prices.

While a lockout would mean a complete shutdown of oil and gas production in Norway, the world’s eighth-biggest crude exporter, analysts expected the government to intervene, end the strike and prevent a full closure.

“The conflict is deadlocked, and the demands are unreasonable … Unfortunately, we see no other course than to notify a lockout,” the Norwegian oil industry association (OLF) said in a statement.

Some 6,515 workers covered by offshore pay agreements will be locked out from their workplaces with effect from July 10.

The strike, which began June 24, has already slowed crude exports, cut Norway’s oil production by around 13 percent and its gas output by around 4 percent. News of the lockout sent Brent crude futures up to as high as $102.34 a barrel. They were trading at $101.03 at 1458 GMT.

“The likelihood is that the strike will end sooner than expected,” Commerzbank analyst Carsten Fritsch said.

State-controlled Statoil said the lockout would cause a production shortfall for the company of around 1.2 million barrels of oil equivalent (boe) per day and 520 million Norwegian crowns ($86.6 million) in lost revenues per day.

The Norwegian government declined to say whether it would intervene but called the lockout legitimate.

“A lockout is still a part of the legal strike. We are continuing to follow the situation closely,” Gro Oerset, senior adviser at the labour ministry, told Reuters.

Several North Sea oil traders on Thursday were in agreement in expecting the strike to end soon.

“It seems like Statoil is trying to get the government to settle it,” said one.

INTERVENTION?

The government has the authority to force an end to strikes if it believes that safety is being compromised or vital national interests could be harmed and has done so in the past to protect Norway’s image as a reliable energy exporter.

Analysts expect the government to intervene. In 2004, it intervened one day after the oil industry called a lockout.

“A repeat is likely, and if not there will be some SPR (Strategic Petroleum Reserve) release, but the most likely outcome is now a Norway government intervention,” Switzerland-based Petromatrix energy consultancy said in a note.

The Labour-led coalition government has been reluctant to intervene as it faces general elections in a year, and labour unions are important partners.

“I can’t imagine they can accept that the entire production on the Norwegian shelf is shut down for even a minute,” SAFE trade union leader Hilde-Marit Rysst told Reuters.

No new talks are planned between the parties, the state mediator said.

The International Energy Agency said on Thursday it was monitoring the summer oil supply situation very closely.

“We really hope that the sides can reach an agreement by Monday night in order to avoid a prolonged and more widespread outage,” IEA executive Maria van der Hoeven said in a webcast.

EXPORTS SLOWED

The strike initially shut production at the Oseberg and Heidrun fields. Oseberg in particular is significant for oil prices, because it is part of the North Sea Brent benchmark used as the basis for many of the world’s trades.

Oil traders said on Thursday the loading of Oseberg cargoes would be delayed by at least a few days in July, although exact loading dates were unclear because Statoil has not issued a revised July export programme.

An Oseberg cargo scheduled to load on July 1-3 has yet to do so, a source familiar with the matter said. The delay, as reported by Reuters on Monday, was the first sign of an impact of the strike on exports.

An August export plan for Oseberg was expected to be released on Friday, but trade sources said this would not appear until production resumed.

In an apparent expectation of business as usual, however, Statoil on Thursday issued an August loading programme for oil from its Troll field, scheduling a normal export rate. A trading source provided a copy of the loading plan.

Wage talks broke down on June 24 after the OLF refused to negotiate an early retirement scheme for the sector’s 7,000 workers. A second attempt at reaching a deal ended unsuccessfully on Wednesday over pensions.

Hays Oil & Gas said in a recent report Norwegian oil and gas workers were the best paid in the world, followed by Australia, Brunei and the Netherlands. They earn more than twice the average salary of all countries surveyed and more than double workers in Britain.

Harsh working conditions mean that offshore workers, in particular, are among the best paid industrial workers in Norway. Their 12-hour shifts last for two weeks and are followed by four weeks of leave, making for a total of 16 weeks of work a year, excluding overtime.

But the main sticking point for unions is an early retirement age for offshore workers of 62, below the standard 67. Top executives at Statoil are currently eligible for retirement at 62.

The OLF has argued their demands are not in line with government pension reforms.

In May Norway produced 1.6 million barrels of oil per day, and 8.9 billion cubic metres of gas in total.

Posted in Comodities, Oil | No Comments »

Saudi price setting

Posted by WARREN MOSLER on 5th July 2012

Interesting dynamic at work.

Saudis set a spread vs other grades.

But there is a ‘market spread’ that reflects ‘quality’.

So if they set their spread too low, demand for Saudi crude is higher than otherwise, which causes prices to fall for the other producers as they always sell all of their output at ‘market prices’. That is, a ‘too tight’ price spread puts downward pressure on prices.

Likewise, if the Saudis set their spread ‘too wide’, that increases demand for the other producers who are all at full capacity, and therefore drives up prices. So a ‘too wide’ spread puts upward pressure on crude prices.

And, with ‘market spreads’ continuously fluctuating, any given spread set by the Saudis can shift between bullish to bearish at any time.

Very clever, those Saudis!

July 4 (Bloomberg) — Saudi Arabian Oil Co., the world’s largest crude exporter, raised the differentials used to set official selling prices for August of its main grades to Asia, and boosted them for Medium and Heavy crudes to the U.S.

The state-owned producer, known as Saudi Aramco, increased the premium for Arab Light crude to buyers in Asia by 70 cents a barrel to $2.05 more than the average of Oman and Dubai grades, the company said in an e-mailed statement today.

Aramco raised the Arab Extra Light crude formula for Asia by 50 cents a barrel to a $2.70 premium to the average of the Oman and Dubai grades. The company set differentials for Medium and Heavy crudes to the U.S. at narrower discounts for August loadings against the Argus Sour Crude Index, the benchmark Aramco uses for sales there.

The company raised the price for Arab Light from the Egyptian port of Sidi Kerir, two people with the knowledge of the matter said, declining to be identified as the information is confidential.

Saudi Arabia and other Persian Gulf oil producers sell most of their crude under long-term contracts to refiners. Most of the Gulf region’s state oil companies price their oil at a premium or discount to a benchmark.

The following table shows differentials for the regions into which Aramco sells crude in relation to benchmark prices, the month-on-month change and the degrees of gravity as defined by the American Petroleum Institute. Prices are in U.S. dollars a barrel.

Posted in Comodities, Oil | 2 Comments »

Saudi output still at top of range

Posted by WARREN MOSLER on 2nd July 2012

Saudis post price and then sell whatever quantity their buyers want at their posted prices. That means their output fluctuates with net global demand.

So this chart shows there’s been no drop in net global demand. And why the Saudis decided to cut price recently remains a mystery to all be a privileged few.

If Iran cuts back further this month, only the Saudis have the capacity to replace it, and if, as some believe, they don’t actually have excess capacity, control of price on the upside will be lost.

Meanwhile, the Seaway pipeline seems to be (irregularly) eliminating the WTI discount.

Posted in Comodities, Oil | 6 Comments »

Saudi crude report

Posted by WARREN MOSLER on 1st June 2012

Looks to me like demand for their crude, at their posted prices, is still very strong. And as of approximately June 1 Iran is cutting back another 500,000 barrels per day or so, which changes this balance as of that date.

So yes, there are lots of cross currents- new supply, inventory jugglings of various sorts, etc.

But bottom line remains the net ‘call’ on Saudi crude, and what the Saudis want to charge for it.

That is, every day we either pay their price or let inventories run off or shut the lights off for a few hours.

Posted in Comodities, Oil | 3 Comments »

Quick update

Posted by WARREN MOSLER on 17th May 2012

US economy muddling through, growing modestly, particularly given the output gap, but growing nonetheless.

Lower crude prices should also help some.

I had guessed the Saudis would hold prices at the $120 Brent level, given their output of just over 10 million bpd showed strong demand
and their capacity to increase to their stated 12.5 million bpd capacity remains suspect. And so with the Seaway pipeline now open (last I heard)
to take crude from Cushing to Brent priced markets I’d guessed WTI would trade up to Brent.

But what has happened is the Saudi oil minister started making noises about lower prices and when ‘market prices’ started selling off the Saudis ‘followed’ by lowering their posted prices, sustaining the myth that they are ‘price takers’ when in reality they are price setters.

So to date, contrary to my prior guess, both wti and brent have sold off quite a bit, and cheaper imported crude is a plus for the US economy. Which is also a plus for the $US, as a lower import bill makes $US ‘harder to get’ for foreigners.

But the trade for quite a while has been strong dollar = weak US stocks due to export pricing/foreign earnings translations, and also because US stocks have weakened on signs of euro zone stress, which has been associated with a weaker euro. So when things seem to be looking up for the euro zone, the euro tends to go up vs the dollar, with US stocks doing better with any sign of ‘improvement’ in the euro zone.

It’s all a tangled case of cross currents, which makes forecasting anything particularly difficult.

Not to mention possible dislocations from the whale, which may or may not have run their course, etc.

And then there’s the news from Greece.

First, they made a full bond payment yesterday of nearly 500 million euro to bond holders who did not accept the PSI discounts. This is confounding for the obvious reasons, signals it sends, moral hazard, credibility, etc. etc. But it’s also a sign the politicians are doing what they think it takes to keep the euro going as the currency of the euro zone. Same goes for the decision to fund Greece as per prior agreements even when there is no Greek govt to talk to, and lots of signs any new govt may not honor the arrangements.

Even if that means tricking private investors out of 100 billion, rewarding those who defy them, whatever. Tactics may be continuously reaching new lows but all for the end of keeping the euro as the single currency.

It also means that while, for example, 10 year Spanish yields may go up or down, the intention is for Spain, one way or another, to fund itself, even if short term. Doesn’t matter.

And more EFSF type discussions. The plan may be to start using those types of funds as needed, keeping the ECB out of it for that much longer, regardless of where longer term bonds happen to trade.

As for the euro zone economy, yes, growth is probably negative, but if they hold off on further fiscal adjustments, the 6%+ deficit they currently are running for the region is probably, at this point, enough to muddle through around the 0 growth neighborhood. The upside isn’t much from there, as with limited private sector credit growth opportunities, and substantial net export growth unlikely, and strong ‘automatic stabilizers’ any growth could be limited by those automatic fiscal stabilizers. Not to mention that this type of optimistic scenario likely strengthens the euro and keeps a lid on net exports as well.

And sad that this ‘bullish scenario’ for the euro zone means their massive output gap doesn’t even begin to close any time soon.

For the US, this bullish scenario has similar limitations, but not quite as severe, so the output gap could start to narrow some and employment as a percentage of the population begin to improve. But only modestly.

The US fiscal cliff is for real, but still far enough away to not be a day to day factor. And it at least does show that fiscal policy does work, at least according to every known forecaster with any credibility, which might open the door to proactive fiscal? Note the increasing chatter about how deficits don’t seem to drive up interest rates? And the increasing chatter about how the US, Japan, UK, etc. aren’t like the euro zone members with regards to interest rates?

Same in the euro zone, where discussion is now common regarding how austerity doesn’t work to grow their economies, with the reason to maintain it now down to the need to restore solvency. This is beginning to mean that if they solved the solvency riddle some other way they might back off on the austerity. And now there is a political imperative to do just that, so things could move in that direction, meaning ECB support for member nation funding, directly or indirectly, which removes the ‘ponzi’ aspect.

Posted in Currencies, Deficit, ECB, Employment, Equities, EU, Germany, Government Spending, Greece, Inflation, Oil, Political | 30 Comments »

Oil a ‘Little Bit High,’ Saudi Arabia’s Al-Naimi Says

Posted by WARREN MOSLER on 8th May 2012

As swing producer/price setter, they call the tune. But what they say publicly isn’t always what they do privately. I had thought they may be holding Brent at 120 and letting WTI converge to it as the new pipeline scheduled to begin May 15 worked to equalize prices. But it’s certainly possible they could converge at a lower price, if the Saudis so choose.

Oil a ‘Little Bit High,’ Saudi Arabia’s Al-Naimi Says

By Jacob Adelman and Yuji Okada

May 8 (Bloomberg) — Saudi Arabia is storing as much as 80 million barrels of crude to boost supplies amid international prices that are “still a little bit high,” according to the country’s oil minister Ali al-Naimi.

The nation, the world’s largest oil exporter, has set aside supplies “on shore in Saudi Arabia, in pipelines, in tanks,” al-Naimi said in Tokyo today before board meetings of state- owned Saudi Arabian Oil Co., of which he is chairman.

Posted in Comodities, Oil | 7 Comments »

US crude rises on US pipeline reversal plan

Posted by WARREN MOSLER on 17th April 2012

This could be it- watch for WTI crude to converge to Brent.
My guess is that WTI rises to meet Brent at around 120+

The pipeline was scheduled to open June 1.
This moves it up to May 15th or so.

NYMEX-US crude rises on US pipeline reversal plan

By Randy Fabi

April 1 (Reuters) — U.S. crude oil prices rose above $103 a barrel on Tuesday in response to news that a plan to drain off a glut of oil from the Midwest could be implemented two weeks ahead of schedule.

FUNDAMENTALS

* NYMEX crude for May edged up 28 cents to $103.20 a barrel by 2306 GMT, adding to a 10 cent gain the previous session.

* Enterprise Product Partners and Enbridge plan to reverse the flow of the Seaway oil pipeline by mid-May pending regulatory approval, allowing the line to start draining the glut of crude from the U.S. Midwest two weeks ahead of schedule.

* Iran is ready to resolve all nuclear issues in the next round of talks with world powers if the West starts lifting sanctions, its foreign minister said on Monday.

* U.S. commercial crude stockpiles were forecast to have risen 1.6 million barrels last week after data showed the largest three-week build in more than three years due to higher imports, a preliminary Reuters poll showed on Monday. The American Petroleum Institute will release its report later on Tuesday.

Posted in Comodities, Oil | 28 Comments »

Saudi’s Naimi says determined to bring down oil prices

Posted by WARREN MOSLER on 13th April 2012

He could start by lowering his posted prices…

Saudi’s Naimi says determined to bring down oil prices

By Meeyoung Cho

April 13 (Reuters) — Top oil exporter Saudi Arabia is determined to bring down high oil prices and is working with fellow OPEC members to accomplish that, Oil Minister Ali al-Naimi said on Friday.

Brent crude has risen about 13 percent this year, trading above $120 a barrel on Friday, threatening a nascent recovery of the global economy. Oil has traded above $100 for all but a couple of days in the past year.

“We are seeing a prolonged period of high oil prices,” Naimi said in a statement during a visit to Seoul. “We are not happy about it. (The Kingdom of Saudi Arabia) is determined to see a lower price and is working towards that goal.”

The influential Saudi oil minister earlier this year identified $100 a barrel as an ideal price for producers and consumers earlier this year.

Concern of a supply shortage due to production problems in some producing countries and as U.S. and European sanctions target exports from OPEC’s second-largest producer Iran have helped keep Brent crude well above that mark.

Naimi reiterated that there were no supply shortages in the global oil market and the kingdom stood ready to use its spare production capacity if necessary.

Saudi Arabia is pumping 10 million barrels per day, he said. Output at that level would be the highest since November, when the kingdom produced more oil than it had done for decades. Naimi reiterated that production capacity stands at 12.5 million bpd.

“The story is one of plenty,” he said. “Supply is not the problem.”

Fellow OPEC producers Libya, Iraq and Angola have increased output, Naimi said. Non-OPEC members including Canada, the United States and Russia had also boosted supplies, he added.

Saudi stockpiles at home and abroad were full, he added. Inventories in industrialized countries were also filling up, he said.

“Fundamentally the market remains balanced — there is no lack of supply,” he said.

The International Energy Agency said on Thursday that the oil market had broken a two-year cycle of tightening supply conditions as demand growth weakens and top exporter Saudi Arabia increases output.

The agency, which advises industrialized nations on their energy policies, said increased supply and slowing demand growth might already point to a significant rise in global oil stocks.

Stubbornly high oil prices could be expected to ease when markets woke up to the shift in trend, it added.

Posted in Comodities, Oil | 7 Comments »

Saudi price setting

Posted by WARREN MOSLER on 30th March 2012

Saudi Oil Minister: There’s No Shortage of Supply

By Amena Bakr

March 1 (Reuters) — Top oil exporter Saudi Arabia sought to soothe fears about high oil prices, saying on Tuesday world supplies were well in excess of demand and that $125-a-barrel crude prices were not justified given the anemic state of the world economy.

Cleverly trying disguise their role as swing producer/price setter.

Saudi Oil Minister Ali al-Naimi said the kingdom had satisfied all of its customers’ requests for oil and stood ready to raise output to full capacity of 12.5 million barrels per day (bpd), if needed.

Yes, at their posted prices. That’s how monopoly works. The monopolist sets price and lets quantity demanded adjust.

“I want to assure you that there is no shortage of supply in the market,” Naimi told reporters at a press briefing in Doha, Qatar. “We are ready and willing to put more oil on the market, but you need a buyer.”

As the only nation with said excess capacity, they are necessarily swing producer/price setter.

Oil is trading above $123, just $24 short of an all-time high, as tighter Western sanctions on Iran threaten to slow the country’s exports.

“Oil prices today are unjustifiable on a supply and demand basis,” said Naimi. “We really don’t understand why the prices are behaving the way they are.”

Oh really? How about because that’s where you are setting your prices?

Try lowering your prices by $10 and see what happens?

He said supply of oil was now out-pacing demand by more than 1 million bpd and that customers were not asking for extra crude.

Right, at their posted prices.

“From our point of view, we have had no customer not satisfied. We have satisfied every request for every customer that has come asking,” said Naimi. “We ask the customers, ‘Do you need more?’ and invariably the answer is ‘No thank you.’”

Yes, that’s how monopoly works.

Riyadh is now pumping 9.9 million bpd – the highest in decades – and is willing to produce at full capacity of 12.5 million bpd immediately, should demand warrant, Naimi said. He said he expected output next month to stay at 9.9 million bpd.

Saudi spare production capacity now stands at 2.5 million bpd, he said.

And no one else has any spare capacity to speak of.

“We spent a lot of money building that capacity. We finished building it in 2009, and it is there to be used,” said Naimi.

Yes, they would like more demand at their posted prices.

How hard is this to understand?

The risk now is that WTI converges to Brent when the new pipeline out of Cushing starts flowing, which will be June 1 last I heard.

Storage inside the kingdom was full and Riyadh was holding about 10 million barrels outside of Saudi Arabia in Rotterdam, Sidi Kerir and Okinawa, he said.

“Our inventories both in Saudi Arabia and worldwide are full.”

Posted in Oil | 55 Comments »

Proposal update, including the JG

Posted by WARREN MOSLER on 10th January 2012

My proposals remain:

1. A full FICA suspension:

The suspension of FICA paid by employees restores spending which supports output and employment.
The suspension of FICA paid by business helps keep costs down which in a competitive environment lowers prices for consumers.

2. $150 billion one time distribution by the federal govt to the states on a per capita basis to get them over the hump.

3. An $8/hr federally funded transition job for anyone willing and able to work to assist in the transition from unemployment to private sector employment.

Call me an inflation hawk if you want. But when the fiscal drag is removed with the FICA suspension and funds for the states I see risk of what will be seen as ‘unwelcome inflation’ causing Congress to put on the brakes long before unemployment gets below 5% without the $8/hr transition job in place, even with the help of the FICA suspension in lowering costs for business.

It’s my take that in an expansion the ‘employed labor buffer stock’ created by the $8/hr job offer will prove a superior price anchor to the current practice of using the current unemployment based buffer stock as our price anchor.

The federal government caused this mess for allowing changing credit conditions to cause its resulting over taxation to unemploy a lot more people than the government wanted to employ. So now the corrective policy is to suspend the FICA taxes, give the states the one time assistance they need to get over the hump the federal government policy created, and provide the transition job to help get those people that federal policy is causing to be unemployed back into private sector employment in a more orderly, more ‘non inflationary’ manner.

I’ve noticed the criticism the $8/hr proposal- aka the ‘Job Guarantee’- has been getting in the blogosphere, and it continues to be the case that none of it seems logically consistent to me, as seen from an MMT perspective. It seems the critics haven’t fully grasped the ramifications of the recognition of the currency as a (simple) public monopoly as outlined in Full Employment AND Price Stability and the other mandatory readings.

So yes, we can simply restore aggregate demand with the FICA suspension and funds for the states, but if I were running things I’d include the $8 transition job to improve the odds of both higher levels of real output and lower ‘inflation pressures’.

Also, this is not to say that I don’t support the funding of public infrastructure (broadly defined) for public purpose. In fact, I see that as THE reason for government in the first place, and it should be determined and fully funded as needed. I call that the ‘right size’ government, and, in general, it’s not the place for cyclical adjustments.

4. An energy policy to help keep energy consumption down as we expand GDP, particularly with regard to crude oil products.

Here my presumption is there’s more to life than burning our way to prosperity, with ‘whoever burns the most fuel wins.’

Perhaps more important than what happens if these proposals are followed is what happens if they are not, which is more likely going to be the case.

First, given current credit conditions, world demand, and the 0 rate policy and QE, it looks to me like the current federal deficit isn’t going to be large enough to allow anything better than muddling through we’ve seen over the last few years.

Second, potential volatility is as high as it’s ever been. Europe could muddle through with the ECB doing what it takes at the last minute to prevent a collapse, or doing what it takes proactively, or it could miss a beat and let it all unravel. Oil prices could double near term if Iran cuts production faster than the Saudis can replace it, or prices could collapse in time as production comes online from Iraq, the US, and other places forcing the Saudis to cut to levels where they can’t cut any more, and lose control of prices on the downside.

In other words, the risk of disruption and the range of outcomes remains elevated.

Posted in CBs, China, Comodities, Congress, Credit, Deficit, ECB, Employment, Energy, Fed, Government Spending, Inflation, Interest Rates, Oil, Political, Proposal | 58 Comments »

Saudi production

Posted by WARREN MOSLER on 16th December 2011

The Saudis are the only producer with excess capacity, which puts them in the position of swing producer.

They post prices and then let their refiners buy as much as they want at their posted prices.

They have no choice but to be price setter, but they also don’t want anyone to know they are simply setting prices, so they talk around it and have obviously done a good pr job in that regard.

So after production spiked due to lost Libyan output, production now seems be falling back to prior levels as Libya comes back online.

There are other things affecting supply and demand as well, also altering Saudi production accordingly.

The Saudis lose control of price on the upside only when they don’t have sufficient productive capacity to meet demand. And they lose control on the downside when they can’t cut sufficiently to address a fall in net demand.

Looks to me like they will remain in that catbird seat for quite a while.

And if they keep prices relatively stable there will not likely be a 70′s style global inflation problem.

oil

Posted in Comodities, Oil | 19 Comments »

SPR release winding down

Posted by WARREN MOSLER on 20th November 2011

This chart of West Texas crude prices vs Brent north sea crude prices was done a few days ago, with the spread subsequently narrowing further to under $10.

As previously discussed a few weeks ago, with the Strategic Petroleum Reserve release initiated by President Obama now winding down, the glut in Cushing that looks to have caused West Texas crude prices to fall to about a $25 discount to Brent crude and world prices in general looks to be coming to an end. Additionally, to help ensure it doesn’t happen again, it was announced the flow in a large pipeline will soon be reversed to allow crude to flow out of Cushing.

As a consequence the WTI price has been rising steadily and looks to me to be reconverging with Brent prices.

And seems to me, watching the news broadcasting, the increase is at best very disconcerting to the US consumer in front of the holiday shopping season.

chart

Posted in Oil | No Comments »

Early Holiday Cheer…

Posted by WARREN MOSLER on 1st November 2011

As discussed last week, the latest euro package just announced is unravelling quickly as markets again realize there is no actual substance, and no operational path with regards to carrying any of it out. So things will deteriorate as described until markets again force further ‘action.’

At the same time, the austerity continues to weaken the euro economies, with Q4 potentially going negative, driving deficits that much higher in the process.

The ‘answer’ remains the ECB writing the check, which they’ve sort of seemed to recognize, but they remain (errantly) concerned that reliance on the ECB is inherently inflationary, and thereby violates the ECB’s mandate for price stability. So it won’t happen until things again get bad enough to force it to happen.

The catastrophic risk remains a failure, when push comes to shove, to allow the ECB to write the check as they have been doing to allow it all to muddle through.

The range of outcomes couldn’t be wider. Write the check and not much happens, don’t write the check and there is unthinkable collapse.

Meanwhile, the 1% running the US looks to be trying to take the lead in the global austerity race to the bottom as the Democrats in the super committee on deficit reduction have led off by proposing a $4 trillion deficit reduction package.

Toss in West Texas crude prices heading to Brent levels of about $110/barrel as the strategic petroleum reserve release winds down over the next three weeks and the looks to me like the US consumer crawls back into his foxhole just in time for the holiday season.

Not to mention Japan now darning the torpedoes and buying dollars to take back a bit of the export market they lost by kowtowing to former tsy sec paulson’s demands to not be a ‘currency manipulator’ in the context of still weakening global demand in general.

The number one threat to world order remains a failure to sustain demand. The good news is sustaining aggregate demand is a simple matter once the monetary system is understood. The bad news is there seems to be no one of authority who doesn’t have it all backwards.

Posted in Deficit, ECB, EU, GDP, Japan, Oil, USA | 2 Comments »

Crude Oil Update

Posted by WARREN MOSLER on 26th October 2011

Still seems to me that the idea that WTI appreciates to Brent as the Strategic Petroleum Reserve release winds down over the next few weeks is playing out as previously discussed. The WTI discount depends on a serious glut condition persisting, and the wind down of the approx 3.8 million barrels a week being delivered from the strategic petroleum reserve will work to reduce the glut by that amount.

If so, WTI is marching towards $110/barrel which seems to me could trigger substantial market reactions.

And about the same time the super committee deficit reduction talks will be in full swing, euro financing stresses elevated, exacerbated by confirmation of the 0 gdp growth forecasts hit the headlines, and further slowdown news from China complicating things as well.

The ‘answer’ remains as simple as it is further away from political reality than ever, even though the right policy responses couldn’t be more attractive to both sides:

The US budget deficit is too small.

Posted in China, Deficit, Oil, USA | 3 Comments »

Russia Says Close to Final Stage on China Gas Deal

Posted by WARREN MOSLER on 11th October 2011

This is what I’ve proposed the US do with Canada and Mexico- long term contracts for oil and nat gas at ‘fair’ prices would stabilize prices and reduce price disruptions and inflation possibilities of all three economies.

Russia says close to final stage on China gas deal

By Gleb Bryanski

October 11 (Bloomberg) — Russia said on Tuesday it was close to the final stage of a huge gas supply deal with China, in what would be a landmark trade agreement between the long-wary neighbours.

A deal to supply the world’s second biggest economy with up to 68 billion cubic metres of Russian gas a year over 30 years has long been delayed over pricing disagreements.

“We are nearing the final stage of work on gas supplies,” said Russian Prime Minister Vladimir Putin, on his first overseas trip since announcing he was ready to reclaim the Russian presidency.

Putin is hoping his two-day visit will help broaden trade with China, which he expects to grow to $200 billion in 2020 from $59.3 billion last year.

Posted in China, Oil, Russia | 13 Comments »

Libya

Posted by WARREN MOSLER on 24th August 2011

The US sales from the strategic reserve have been about 1 million bpd and are due to end soon. Saudis have upped output by about 1 million per day as well. My concern is how the US output will be ‘replaced’ next month as it looks like Libya won’t be back online as before any time soon. So unless demand falls it will be up to the Saudis. If they don’t have the capacity they could lose control of prices to the upside.

From CNBC:

Libyan oil production was just shy of 1.6 million barrels per day in February, before the uprising swept across the country, leading to six months of civil war. Production in May was down to 60,000 barrels per day, according to the International Energy Agency (IEA).

“The medium-term outlook is that they probably have the potential to produce more than the 1.6 million, so it’s a very bullish scenario for anyone who is ready to invest in Libya,” Johannes Benigni, managing director of JBC Energy, told CNBC Wednesday morning. “The reality factor is, everyone knows that Libya was easier to run in a dictatorship than in a democratic or semi-democratic environment, and those guys first have to prove that they are able to bring back stability.”

The TNC, headed by Mustafa Jalil, appears to be relatively cohesive at the moment, but the rebels are composed of a complex mix of political, tribal and social alliances that analysts worry may not hold once their common enemy is beaten.

Benigni said that he expected that Libya could pump 400,000 barrels per day by the end of the year, but that in the best case scenario it would be 12-18 months before it returned to pre-war levels.

Goldman Sachs had forecast average output of 250,000 barrels per day in 2012, with a potential to increase to 585,000 barrels per day by the end of the year if rebels were to take control of infrastructure in the west of the country. The rebellion, which began in the east of the country, rapidly seized parts of the Libyan oil industry. Goldman’s predictions were based around output from those eastern facilities.

In a report issued on Tuesday, however, the bank said that the seizure of western oil assets increases the likelihood that output could ramp up more swiftly.

Analysts have been struggling to obtain reliable information on the state of much of the Libyan oil infrastructure. A report from Exclusive Analysis, the risk forecasting firm, said that exports would be likely to resume from the east within three months and from the west within six to nine months.

Posted in Comodities, Oil | 4 Comments »

Consumer credit up, Friday update

Posted by WARREN MOSLER on 5th August 2011

It doesn’t look to me like anything particularly bad has actually yet happened to the US economy.

The federal deficit is chugging along at maybe 9% of US GDP, supporting income and adding to savings by exactly that much, so a collapse in aggregate demand, while not impossible, is highly unlikely.

After recent downward revisions, that sent shock waves through the markets, so far this year GDP has grown by .4% in Q1 and 1.2% in Q2, with Q3 now revised down to maybe 2.0%. Looks to me like it’s been increasing, albeit very slowly. And today’s employment report shows much the same- modest improvement in an economy that’s growing enough to add a few jobs, but not enough to keep up with productivity growth and labor force growth, as labor participation rates fell to a new low for the cycle.

And, as previously discussed, looks to me like H1 demonstrated that corps can make decent returns with very little GDP growth, so even modestly better Q3 GDP can mean modestly better corp profits. Not to mention the high unemployment and decent productivity gains keeping unit labor costs low.

Lower crude oil and gasoline profits will hurt some corps, but should help others more than that, as consumers have more to spend on other things, and the corps with lower profits won’t cut their actual spending and so won’t reduce aggregate demand.

This is the reverse of what happened in the recent run up of gasoline prices.

Japan should be doing better as well as they recover from the shock of the earthquake.

Yes, there are risks, like the looming US govt spending cuts to be debated in November, but that’s too far in advance for today’s markets to discount.

A China hard landing will bring commodity prices down further, hurting some stocks but, again, helping consumers.

A euro zone meltdown would be an extreme negative, but, once again, the ECB has offered to write the check which, operationally, they can do without limit as needed. So markets will likely assume they will write the check and act accordingly.

A strong dollar is more a risk to valuations than to employment and output, and falling import prices are very dollar friendly, as is continuing a fiscal balance that constrains aggregate demand to the extent evidenced by the unemployment and labor force participation rates. And Japan’s dollar buying is a sign of the times. With US demand weakening, foreign nations are swayed by politically influential exporters who do not want to let their currency appreciate and risk losing market share.

The Fed’s reaction function includes unemployment and prices, but not corporate earnings per se. It’s failing on it’s unemployment mandate, and now with commodity prices coming down it’s undoubtedly reconcerned about failing on it’s price stability mandate as well, particularly with a Fed chairman who sees the risks as asymmetrical. That is, he believes they can deal with inflation, but that deflation is more problematic.

So with equity prices a function of earnings and not a function of GDP per se, as well as function of interest rates, current PE’s look a lot more attractive than they did before the sell off, and nothing bad has happened to Q3 earnings forecasts, where real GDP remains forecast higher than Q2.

So from here, seems to me both bonds and stocks could do ok, as a consequence of weak but positive GDP that’s enough to support corporate earnings growth, but not nearly enough to threaten Fed hikes.

Consumer borrowing up in June by most in 4 years

By Martin Crutsinger

May 25 (Bloomberg) — Americans borrowed more money in June than during any other month in nearly four years, relying on credit cards and loans to help get through a difficult economic stretch.

The Federal Reserve said Friday that consumers increased their borrowing by $15.5 billion in June. That’s the largest one-month gain since August 2007. And it is three times the amount that consumers borrowed in May.

The category that measures credit card use increased by $5.2 billion — the most for a single month since March 2008 and only the third gain since the financial crisis. A category that includes auto loans rose by $10.3 billion, the most since February.

Total consumer borrowing rose to a seasonally adjusted annual level of $2.45 trillion. That was 2.1 percent higher than the nearly four-year low of $2.39 trillion hit in September.

Posted in Bonds, China, Comodities, Congress, Credit, Currencies, Deficit, ECB, Economic Releases, Employment, Equities, EU, Exports, Fed, GDP, Government Spending, Inflation, Interest Rates, Japan, Oil, Political | 49 Comments »

Saudi crude pricing

Posted by WARREN MOSLER on 5th July 2011

Setting price and letting quantity adjust:

Daily Oil Note: OSPs a Critical Piece in the Supply Puzzle


A key source of market uncertainty is how much oil Saudi Arabia will produce and export over the next few months. We see reports that Saudi Aramco recently offered additional cargoes to term buyers, but reportedly many declined because pricing was unattractive versus alternatives. Tanker bookings also do not point to a substantial ramp up in Middle East liftings in coming weeks. In fact, they are running well behind the pace in June.

Posted in Comodities, Oil | 2 Comments »

DJ OPEC Secretary General: Sees No Good Reason For IEA Oil

Posted by WARREN MOSLER on 27th June 2011

Looks like some OPEC infighting.

The only way OPEC could block Saudi attempts to lower price would be production cuts beyond the Saudi’s ability to increase supply.

In the past, OPEC has never actually been able to do that, as apart from the Saudis the rest pretty much always pump flat out even after they agree to cut.

I suspect the Saudis and Obama also know Lybia will be back online soon with another 1 million barrels a day make it that much more problematic for the rest of OPEC to cut sufficiently to get the price up.

And the US and the Saudis probably also know world demand is falling short of forecasts, or they probably wouldn’t have undertaken the price cutting actions.

*DJ OPEC Secretary General: Sees No Good Reason For IEA Oil Release
*DJ OPEC Secy Genl: Wants Immediate Cessation Of Stocks Release
*DJ OPEC President Ready To Call Emergency Meeting If Needed
*DJ OPEC President: Hopes Oil Market Won’t Warrant Emergency Meeting

Posted in Comodities, Oil | 3 Comments »