Diminishing Marginal Utility

Source: Slate.com

By Dahlia Lithwick
Posted Saturday, Dec. 30, 2006, at 6:30 AM ET

I love those year-end roundups—ubiquitous annual lists of greatest films and albums and lip glosses and tractors. It's reassuring that all human information can be wrestled into bundles of 10. In that spirit, Slate proudly presents, the top 10 civil liberties nightmares of the year:

10. Attempt to Get Death Penalty for Zacarias Moussaoui
Long after it was clear the hapless Frenchman was neither the "20th hijacker" nor a key plotter in the attacks of 9/11, the government pressed to execute him as a "conspirator" in those attacks. Moussaoui's alleged participation? By failing to confess to what he may have known about the plot, which may have led the government to disrupt it, Moussaoui directly caused the deaths of thousands of people. This massive overreading of the federal conspiracy laws would be laughable were the stakes not so high. Thankfully, a jury rejected the notion that Moussaoui could be executed for the crime of merely wishing there had been a real connection between himself and 9/11.

9. Guantanamo Bay
It takes a licking but it keeps on ticking. After the Supreme Court struck down the military tribunals planned to try hundreds of detainees moldering on the base, and after the president agreed that it might be a good idea to close it down, the worst public relations fiasco since the Japanese internment camps lives on. Prisoners once deemed "among the most dangerous, best-trained, vicious killers on the face of the earth" are either quietly released (and usually set free) or still awaiting trial. The lucky 75 to be tried there will be cheered to hear that the Pentagon has just unveiled plans to build a $125 million legal complex for the hearings. The government has now officially put more thought into the design of Guantanamo's court bathrooms than the charges against its prisoners.

8. Slagging the Media
Whether the Bush administration is reclassifying previously declassified documents, sidestepping the FOIA, threatening journalists for leaks on dubious legal grounds, or, most recently, using its subpoena power to try to wring secret documents from the ACLU, the administration has continued its "secrets at any price" campaign. Is this a constitutional crisis? Probably not. Annoying as hell? Definitely.

7. Slagging the Courts
It starts with the president's complaints about "activist judges," and evolves to Congressional threats to appoint an inspector general to oversee federal judges. As public distrust of the bench is fueled, the stripping of courts' authority to hear whole classes of cases—most recently any habeas corpus claims from Guantanamo detainees—almost seems reasonable. Each tiny incursion into the independence of the judiciary seems justified. Until you realize that the courts are often the only places that will defend our shrinking civil liberties. This leads to ...

6. The State-Secrets Doctrine
The Bush administration's insane argument in court is that judges should dismiss entire lawsuits over many of the outrages detailed on this very list. Why? Because the outrageously illegal things are themselves matters of top-secret national security. The administration has raised this claim in relation to its adventures in secret wiretapping and its fun with extraordinary rendition. A government privilege once used to sidestep civil claims has mushroomed into sweeping immunity for the administration's sometimes criminal behavior.

5. Government Snooping
Take your pick. There's the NSA warrantless eavesdropping program wherein the president breezily authorized spying on the phone calls of innocent citizens, in violation of the Foreign Intelligence Surveillance Act. The FBI's TALON database shows the government has been spying on nonterrorist groups, including Quakers, People for the Ethical Treatment of Animals, and Veterans for Peace. The Patriot Act lives on. And that's just the stuff we know about.

4. Extraordinary Rendition
So, when does it start to become ordinary rendition? This government program has us FedEx-ing unindicted terror suspects abroad for interrogation/torture. Khalid El-Masri, a German citizen, was shipped off to Afghanistan for such treatment and then released without charges, based on some government confusion about his name. Heh heh. Canadian citizen Maher Arar claims he was tortured in Syria for a year, released without charges, and cleared by a Canadian commission. Attempts to vindicate the rights of such men? You'd need to circle back to the state-secrets doctrine, above.

3. Abuse of Jose Padilla
First, he was, according to then-Attorney General John Ashcroft, "exploring a plan to build and explode a radiological dispersion device, or 'dirty bomb,' in the United States." Then, he was planning to blow up apartments. Then he was just part of a vague terror conspiracy to commit jihad in Bosnia and Chechnya. Always, he was a U.S. citizen. After three and a half years, in which he was denied the most basic legal rights, it has now emerged that Padilla was either outright tortured or near-tortured. According to a recent motion, during Padilla's years of almost complete isolation, he was treated by the U.S. government to sensory and sleep deprivation, extreme cold, stress positions, threats of execution, and drugging with truth serum. Experts say he is too mentally damaged to stand trial. The Bush administration supported his motion for a mental competency assessment, in hopes that will help prevent his torture claims from ever coming to trial, or, as Yale Law School's inimitable Jack Balkin put it: "You can't believe Padilla when he says we tortured him because he's crazy from all the things we did to him."

2. The Military Commissions Act of 2006
This was the so-called compromise legislation that gave President Bush even more power than he initially had to detain and try so-called enemy combatants. He was generously handed the authority to define for himself the parameters of interrogation and torture and the responsibility to report upon it, since he'd been so good at that. What we allegedly did to Jose Padilla was once a dirty national secret. The MCA made it the law.

1. Hubris
Whenever the courts push back against the administration's unsupportable constitutional ideas—ideas about "inherent powers" and a "unitary executive" or the silliness of the Geneva Conventions or the limitless sweep of presidential powers during wartime—the Bush response is to repeat the same chorus louder: Every detainee is the worst of the worst; every action taken is legal, necessary, and secret. No mistakes, no apologies. No nuance, no regrets. This legal and intellectual intractability can create the illusion that we are standing on the same constitutional ground we stood upon in 2001, even as that ground is sliding away under our feet.

What outrage did I forget? Send mail to Dahlia.Lithwick@hotmail.com. (E-mail may be quoted by name unless otherwise stipulated.)

Wishing you and yours a happy, and freer, New Year.

A version of this piece appears in the Washington Post Outlook section.

Posted by Hugo Albert Orwell at 10:04 AM | Permalink | TrackBacks (0)

Source: Reuters

By Ben Blanchard
December 29, 2006

BEIJING (Reuters) - China's military modernization will focus on strengthening its navy and air force as it faces security threats from border spats, historical disputes and self-ruled Taiwan, a defense white paper released on Friday said.

But China, whose increasing defense spending and military build-up has been a source of friction with the United States, will never engage in an arms race or threaten any other nation, the policy paper said.

"The navy will gradually ... raise its marine combat and nuclear counter-attack capabilities," it said.

"The air force aims at speeding up its transition from territorial air defense to both offensive and defensive operations, and increasing its capabilities in the areas of air strike, air and missile defense, early warning and reconnaissance and strategic projection."

President
Hu Jintao this week urged the building of a powerful Chinese navy that was prepared "at any time" for combat.

The report also defended China's rising military spending, pointing out that it spends less per capita than the United States, Britain, France or Russia and saying it was committed to peaceful development.

Describing China's general security situation as good, the 83-page document nonetheless wasted little time in denouncing Taiwan independence moves, saying the island over which Beijing claims sovereignty was a serious threat to regional stability.

"The struggle to oppose and control 'Taiwan independence' splittist forces and their activities is complex and grim," it said.

China and Taiwan have faced off since 1949 when Nationalist forces fled to the island after losing the Chinese civil war to the Communists.

Liu Te-shun, vice chairman of Taiwan's policy-making Mainland Affairs Council, said the release of the white paper raised China's military threat toward Taiwan and cast a cloud over the normalization of cross-strait ties.

"China's 2006 defense white paper still deliberately avoids the world's misgivings about its expanded military and the truthfulness of the increase of its national defense budget," Liu told a news conference in Taipei on Friday.

"It will only increase suspicion among the international community about the rise of China," he said.

Analysts said the report reflected China's primary goal of deterring both Taiwan independence and the prospect of U.S. intervention in the Taiwan Strait.

"China does not want to develop ... the kind of power projection capability that would match the United States in the long term," said Li Mingjiang, an assistant professor at the Singapore Institute of Defense and Strategic Studies.

"Its specific focus is on Taiwan, on the worst-case scenario for Taiwan moving toward independence, then declaring independence and U.S. intervention," he said.

OTHER THREATS

The report also said China was facing threats from other, unnamed neighbors. "The issues of border complexities and sensitive historical problems still have an effect on China's security environment," it said.

China has fought brief border wars with India, Vietnam and the former Soviet Union, and continues to dispute the ownership of islets in the South China Sea with Vietnam, Taiwan, Malaysia, Brunei and the Philippines.

China also remains wary of Japan, which occupied parts of the country between 1931 and 1945 and which called on Beijing earlier this year to be more open about its military.

Japan's Kyodo news agency said on Friday that Tokyo held a joint navy exercise with Washington for the first time last month under the assumption that China had invaded the disputed Senkaku islands -- known as Diaoyus in China -- in the East China Sea.

The report also defended the rise in China's defense expenditure, officially projected to be some $36 billion in 2006, up about 15 percent from the previous year. Many foreign experts believe the real figure is significantly higher.

"This increase is to compensate for topping up basic defense weaknesses," it said.

(Additional reporting by Guo Shipeng and Lindsay Beck in Beijing, Lee Chyen Yee in Taipei and Chisa Fujioka in Tokyo)

Posted by Hugo Albert Orwell at 11:10 AM | Permalink | TrackBacks (0)

Source: Axis of Logic

The Proposed Iranian Oil Bourse
By Krassimir Petrov
Dec 29, 2006, 05:48

I. Economics of Empires

A nation-state taxes its own citizens, while an empire taxes other nation-states. The history of empires, from Greek and Roman, to Ottoman and British, teaches that the economic foundation of every single empire is the taxation of other nations. The imperial ability to tax has always rested on a better and stronger economy, and as a consequence, a better and stronger military. One part of the subject taxes went to improve the living standards of the empire; the other part went to strengthen the military dominance necessary to enforce the collection of those taxes.

Historically, taxing the subject state has been in various forms—usually gold and silver, where those were considered money, but also slaves, soldiers, crops, cattle, or other agricultural and natural resources, whatever economic goods the empire demanded and the subject-state could deliver. Historically, imperial taxation has always been direct: the subject state handed over the economic goods directly to the empire.

For the first time in history, in the twentieth century, America was able to tax the world indirectly, through inflation. It did not enforce the direct payment of taxes like all of its predecessor empires did, but distributed instead its own fiat currency, the U.S. Dollar, to other nations in exchange for goods with the intended consequence of inflating and devaluing those dollars and paying back later each dollar with less economic goods—the difference capturing the U.S. imperial tax. Here is how this happened.

Early in the 20th century, the U.S. economy began to dominate the world economy. The U.S. dollar was tied to gold, so that the value of the dollar neither increased, nor decreased, but remained the same amount of gold. The Great Depression, with its preceding inflation from 1921 to 1929 and its subsequent ballooning government deficits, had substantially increased the amount of currency in circulation, and thus rendered the backing of U.S. dollars by gold impossible. This led Roosevelt to decouple the dollar from gold in 1932. Up to this point, the U.S. may have well dominated the world economy, but from an economic point of view, it was not an empire. The fixed value of the dollar did not allow the Americans to extract economic benefits from other countries by supplying them with dollars convertible to gold.

Economically, the American Empire was born with Bretton Woods in 1945. The U.S. dollar was not fully convertible to gold, but was made convertible to gold only to foreign governments. This established the dollar as the reserve currency of the world. It was possible, because during WWII, the United States had supplied its allies with provisions, demanding gold as payment, thus accumulating significant portion of the world’s gold. An Empire would not have been possible if, following the Bretton Woods arrangement, the dollar supply was kept limited and within the availability of gold, so as to fully exchange back dollars for gold. However, the guns-and-butter policy of the 1960’s was an imperial one: the dollar supply was relentlessly increased to finance Vietnam and LBJ’s Great Society. Most of those dollars were handed over to foreigners in exchange for economic goods, without the prospect of buying them back at the same value. The increase in dollar holdings of foreigners via persistent U.S. trade deficits was tantamount to a tax—the classical inflation tax that a country imposes on its own citizens, this time around an inflation tax that U.S. imposed on rest of the world.

When in 1970-1971 foreigners demanded payment for their dollars in gold, The U.S. Government defaulted on its payment on August 15, 1971. While the popular spin told the story of “severing the link between the dollar and gold”, in reality the denial to pay back in gold was an act of bankruptcy by the U.S. Government. Essentially, the U.S. declared itself an Empire. It had extracted an enormous amount of economic goods from the rest of the world, with no intention or ability to return those goods, and the world was powerless to respond— the world was taxed and it could not do anything about it.

From that point on, to sustain the American Empire and to continue to tax the rest of the world, the United States had to force the world to continue to accept ever-depreciating dollars in exchange for economic goods and to have the world hold more and more of those depreciating dollars. It had to give the world an economic reason to hold them, and that reason was oil.

In 1971, as it became clearer and clearer that the U.S Government would not be able to buy back its dollars in gold, it made in 1972-73 an iron-clad arrangement with Saudi Arabia to support the power of the House of Saud in exchange for accepting only U.S. dollars for its oil. The rest of OPEC was to follow suit and also accept only dollars. Because the world had to buy oil from the Arab oil countries, it had the reason to hold dollars as payment for oil. Because the world needed ever increasing quantities of oil at ever increasing oil prices, the world’s demand for dollars could only increase. Even though dollars could no longer be exchanged for gold, they were now exchangeable for oil.

The economic essence of this arrangement was that the dollar was now backed by oil. As long as that was the case, the world had to accumulate increasing amounts of dollars, because they needed those dollars to buy oil. As long as the dollar was the only acceptable payment for oil, its dominance in the world was assured, and the American Empire could continue to tax the rest of the world. If, for any reason, the dollar lost its oil backing, the American Empire would cease to exist. Thus, Imperial survival dictated that oil be sold only for dollars. It also dictated that oil reserves were spread around various sovereign states that weren’t strong enough, politically or militarily, to demand payment for oil in something else. If someone demanded a different payment, he had to be convinced, either by political pressure or military means, to change his mind.

The man that actually did demand Euro for his oil was Saddam Hussein in 2000. At first, his demand was met with ridicule, later with neglect, but as it became clearer that he meant business, political pressure was exerted to change his mind. When other countries, like Iran, wanted payment in other currencies, most notably Euro and Yen, the danger to the dollar was clear and present, and a punitive action was in order. Bush’s Shock-and-Awe in Iraq was not about Saddam’s nuclear capabilities, about defending human rights, about spreading democracy, or even about seizing oil fields; it was about defending the dollar, ergo the American Empire. It was about setting an example that anyone who demanded payment in currencies other than U.S. Dollars would be likewise punished.

Many have criticized Bush for staging the war in Iraq in order to seize Iraqi oil fields. However, those critics can’t explain why Bush would want to seize those fields—he could simply print dollars for nothing and use them to get all the oil in the world that he needs. He must have had some other reason to invade Iraq.

History teaches that an empire should go to war for one of two reasons: (1) to defend itself or (2) benefit from war; if not, as Paul Kennedy illustrates in his magisterial The Rise and Fall of the Great Powers, a military overstretch will drain its economic resources and precipitate its collapse. Economically speaking, in order for an empire to initiate and conduct a war, its benefits must outweigh its military and social costs. Benefits from Iraqi oil fields are hardly worth the long-term, multi-year military cost. Instead, Bush must have went into Iraq to defend his Empire. Indeed, this is the case: two months after the United States invaded Iraq, the Oil for Food Program was terminated, the Iraqi Euro accounts were switched back to dollars, and oil was sold once again only for U.S. dollars. No longer could the world buy oil from Iraq with Euro. Global dollar supremacy was once again restored. Bush descended victoriously from a fighter jet and declared the mission accomplished—he had successfully defended the U.S. dollar, and thus the American Empire.

II. Iranian Oil Bourse

The Iranian government has finally developed the ultimate “nuclear” weapon that can swiftly destroy the financial system underpinning the American Empire. That weapon is the Iranian Oil Bourse slated to open in March 2006. It will be based on a euro-oil-trading mechanism that naturally implies payment for oil in Euro. In economic terms, this represents a much greater threat to the hegemony of the dollar than Saddam’s, because it will allow anyone willing either to buy or to sell oil for Euro to transact on the exchange, thus circumventing the U.S. dollar altogether. If so, then it is likely that almost everyone will eagerly adopt this euro oil system:

The Europeans will not have to buy and hold dollars in order to secure their payment for oil, but would instead pay with their own currencies. The adoption of the euro for oil transactions will provide the European currency with a reserve status that will benefit the European at the expense of the Americans.

The Chinese and the Japanese will be especially eager to adopt the new exchange, because it will allow them to drastically lower their enormous dollar reserves and diversify with Euros, thus protecting themselves against the depreciation of the dollar. One portion of their dollars they will still want to hold onto; a second portion of their dollar holdings they may decide to dump outright; a third portion of their dollars they will decide to use up for future payments without replenishing those dollar holdings, but building up instead their euro reserves.

The Russians have inherent economic interest in adopting the Euro – the bulk of their trade is with European countries, with oil-exporting countries, with China, and with Japan. Adoption of the Euro will immediately take care of the first two blocs, and will over time facilitate trade with China and Japan. Also, the Russians seemingly detest holding depreciating dollars, for they have recently found a new religion with gold. Russians have also revived their nationalism, and if embracing the Euro will stab the Americans, they will gladly do it and smugly watch the Americans bleed.

The Arab oil-exporting countries will eagerly adopt the Euro as a means of diversifying against rising mountains of depreciating dollars. Just like the Russians, their trade is mostly with European countries, and therefore will prefer the European currency both for its stability and for avoiding currency risk, not to mention their jihad against the Infidel Enemy.
Only the British will find themselves between a rock and a hard place. They have had a strategic partnership with the U.S. forever, but have also had their natural pull from Europe. So far, they have had many reasons to stick with the winner. However, when they see their century-old partner falling, will they firmly stand behind him or will they deliver the coup de grace? Still, we should not forget that currently the two leading oil exchanges are the New York’s NYMEX and the London’s International Petroleum Exchange (IPE), even though both of them are effectively owned by the Americans. It seems more likely that the British will have to go down with the sinking ship, for otherwise they will be shooting themselves in the foot by hurting their own London IPE interests. It is here noteworthy that for all the rhetoric about the reasons for the surviving British Pound, the British most likely did not adopt the Euro namely because the Americans must have pressured them not to: otherwise the London IPE would have had to switch to Euros, thus mortally wounding the dollar and their strategic partner.

At any rate, no matter what the British decide, should the Iranian Oil Bourse accelerate, the interests that matter—those of Europeans, Chinese, Japanese, Russians, and Arabs—will eagerly adopt the Euro, thus sealing the fate of the dollar. Americans cannot allow this to happen, and if necessary, will use a vast array of strategies to halt or hobble the operation’s exchange:

Sabotaging the Exchange—this could be a computer virus, network, communications, or server attack, various server security breaches, or a 9-11-type attack on main and backup facilities.

Coup d’état—this is by far the best long-term strategy available to the Americans.

Negotiating Acceptable Terms & Limitations—this is another excellent solution to the Americans. Of course, a government coup is clearly the preferred strategy, for it will ensure that the exchange does not operate at all and does not threaten American interests. However, if an attempted sabotage or coup d’etat fails, then negotiation is clearly the second-best available option.

Joint U.N. War Resolution—this will be, no doubt, hard to secure given the interests of all other member-states of the Security Council. Feverish rhetoric about Iranians developing nuclear weapons undoubtedly serves to prepare this course of action.

Unilateral Nuclear Strike—this is a terrible strategic choice for all the reasons associated with the next strategy, the Unilateral Total War. The Americans will likely use Israel to do their dirty nuclear job.

Unilateral Total War—this is obviously the worst strategic choice. First, the U.S. military resources have been already depleted with two wars. Secondly, the Americans will further alienate other powerful nations. Third, major dollar-holding countries may decide to quietly retaliate by dumping their own mountains of dollars, thus preventing the U.S. from further financing its militant ambitions. Finally, Iran has strategic alliances with other powerful nations that may trigger their involvement in war; Iran reputedly has such alliance with China, India, and Russia, known as the Shanghai Cooperative Group, a.k.a. Shanghai Coop and a separate pact with Syria.
Whatever the strategic choice, from a purely economic point of view, should the Iranian Oil Bourse gain momentum, it will be eagerly embraced by major economic powers and will precipitate the demise of the dollar. The collapsing dollar will dramatically accelerate U.S. inflation and will pressure upward U.S. long-term interest rates. At this point, the Fed will find itself between Scylla and Charybdis—between deflation and hyperinflation—it will be forced fast either to take its “classical medicine” by deflating, whereby it raises interest rates, thus inducing a major economic depression, a collapse in real estate, and an implosion in bond, stock, and derivative markets, with a total financial collapse, or alternatively, to take the Weimar way out by inflating, whereby it pegs the long-bond yield, raises the Helicopters and drowns the financial system in liquidity, bailing out numerous LTCMs and hyperinflating the economy.

The Austrian theory of money, credit, and business cycles teaches us that there is no in-between Scylla and Charybdis. Sooner or later, the monetary system must swing one way or the other, forcing the Fed to make its choice. No doubt, Commander-in-Chief Ben Bernanke, a renowned scholar of the Great Depression and an adept Black Hawk pilot, will choose inflation. Helicopter Ben, oblivious to Rothbard’s America’s Great Depression, has nonetheless mastered the lessons of the Great Depression and the annihilating power of deflations. The Maestro has taught him the panacea of every single financial problem—to inflate, come hell or high water. He has even taught the Japanese his own ingenious unconventional ways to battle the deflationary liquidity trap. Like his mentor, he has dreamed of battling a Kondratieff Winter. To avoid deflation, he will resort to the printing presses; he will recall all helicopters from the 800 overseas U.S. military bases; and, if necessary, he will monetize everything in sight. His ultimate accomplishment will be the hyperinflationary destruction of the American currency and from its ashes will rise the next reserve currency of the world—that barbarous relic called gold.

--------------------------------------------------------------------------------

Recommended Reading
William Clark “The Real Reasons for the Upcoming War in Iraq”
William Clark “The Real Reasons Why Iran is the Next Target”

About the Author
Krassimir Petrov (Krassimir_Petrov@hotmail.com) has received his Ph. D. in economics from the Ohio State University and currently teaches Macroeconomics, International Finance, and Econometrics at the American University in Bulgaria. He is looking for a career in Dubai or the U. A. E.

Also by this author
“China’s Great Depression”
“Masters of Austrian Investment Analysis”
“Austrian Analysis of U.S. Inflation”
“Oil Performance in a Worldwide Depression”
See: www.financialsense.com/editorials/petrov/main.html

~~~~~ Notes from the Editor of Energy Bulletin~~~~~

An excellent and thought provoking article by Krassimir Petrov!

However, I think perhaps it's not entirely correct to state that "critics can’t explain why Bush would want to seize those fields." The Bush regime are probably aiming to set themselves up as policeman of the Middle East oil fields, 'protecting' oil supply to Asia and Europe in return for various advantages at any future negotiation tables. Meanwhile billions of dollars of unaccountable no-bid contracts have been handed to corporations with ties to Bush administration, and the Iraqi oil industry is set to be privatised. So the reasons for the war are rich and varied. However Petrov has given us one of the clearest explanations yet of one of the most important, and certainly least understood, motivations for the war.

-AF

http://www.energybulletin.net/12125.html

Posted by Hugo Albert Orwell at 10:33 AM | Permalink | TrackBacks (0)

Source: Associated Press

By MATT MOORE, AP Business Writer
December 29, 2006

FRANKFURT, Germany - The surging euro is confounding critics who once doubted it could rival the dollar, pound and yen — but Europe's shared currency still annoys some consumers five years after its introduction in cash form.

In 2006, it has surged in value, rising nearly 14 percent to 20-month highs and is about three or four cents off its all-time high of $1.36 in December 2004. It's a strong turnaround from an initial plunge to as low as 82 cents in 2000.

"When it first started — and even before it hit markets properly, everyone was very skeptical and negative on the whole thing, and that's exactly the performance we saw," said David Jones, chief currency analyst for CMC Markets.

"That initial negative view is history now," Jones said. "The euro is seen as a strong global currency now."

However, some consumers still grumble about using the euro, with 41 percent of people in the 12-nation euro zone saying they still have difficulties using it, according to a recent Gallup poll for the EU. Many still calculate large purchases in the old currencies.

And having a single currency hasn't closed the growth gap between Europe — where one or two percent annual growth constitutes an upswing — and more dynamic economies in the United States and Asia.

But companies and governments can now raise money across borders with their investors no longer facing the risk that stock or bond holdings will be eroded by exchange rate fluctuations. And travelers no longer have to waste time and money at airport exchange booths, or return home with a pocketful of foreign currency.

The euro — which was initially introduced on financial markets in 1999 — has also increasingly gained acceptance as a foreign currency reserve in the coffers of companies and governments from China to the Middle East.

"Indeed, there is the very real possibility that several countries could switch a proportion of their foreign currency reserves out of dollars over time to the euro," said Howard Archer, chief European economist for Global Insight in London.

According to the International Monetary Fund, global foreign currency reserves during the first quarter of 2006 stood at approximately $4.34 trillion. Of that, the dollar accounted for 66.3 percent with the euro, the British pound and the yen accounting for 24.8 percent, 4 percent and 3.4 percent respectively.

In November, China's central bank said it was mulling whether to reduce the weighting of dollars in its reserves. Central Bank Governor Zhou Xiaochuan said his country was "considering lots of instruments to diversify its foreign exchange reserves."

Archer said other countries have expressed similar sentiment.

"Also potentially significant were indications from the central banks of Qatar, Sweden, Russia, and the United Arab Emirates in recent months that they are either diversifying away from the dollar in their foreign-exchange reserves, or considering doing so in the longer term," he said.

On Thursday, the Emirates' central bank governor said the dollar's weakness is prodding his country to convert 8 percent of its foreign exchange reserves into euros.

About 98 percent of the Emirates' nearly $25 billion currency reserves are in dollars. That may decline to 90 percent in six to nine months if the bank's directors approve the switch as is expected, Central Bank governor Sultan Bin Nasser al-Suwaidi said.

Peter Morici, a professor at the University of Maryland School of Business, said the dollar's supremacy, while vibrant, could suffer because of larger U.S. trade deficits and the urge to diversify.

"The euro is the prime candidate for diversification," he said, but added that Europe's struggles to maintain single-digit growth and high unemployment rates would keep the euro from supplanting the dollar as the primary reserve currency.

"Moreover, Europe's trade problems with China, and trade deficits, will grow in the years ahead, casting some doubt on the euro's long-term strength relative to the dollar," Morici said. "Picking the euro over the dollar or vice versa comes down to picking which currency will be stronger two and five years from now. That is a difficult choice to make."

Posted by Hugo Albert Orwell at 09:42 AM | Permalink | TrackBacks (0)

Source: Financial Times.com

By Ralph Atkins in Frankfurt
Published: December 27 2006 22:07 | Last updated: December 27 2006 22:07

The US dollar bill’s standing as the world’s favourite form of cash is being usurped by the five-year-old euro.

The value of euro notes in circulation is this month likely to exceed the value of circulating dollar notes, according to calculations by the Financial Times. Converted at Wednesday’s exchange rates, the euro took the lead in October.

The figures highlight the remarkable growth in euro notes since their launch on January 1 2002, three years after the start of Europe’s monetary union, which in January welcomes its 13th member – Slovenia, the former Yugoslav republic.

“After the launch, we expected growth to stabilise – but it has continued over five years,” Antti Heinonen, head of the European Central Bank’s bank notes directorate, told the Financial Times.

Although the ECB does not deliberately promote the international use of the euro, it has become popular in official foreign exchange reserves – even if it is far from challenging the dollar’s lead as the most popular reserve currency.

News that euro notes are challenging the dollar may cheer eurozone politicians – even if it partly reflects the currency’s strength – but it may have a dark side too. Fast growth in the highest denomination notes, especially the €500 note, has raised suspicions that they are popular among criminals, although the ECB plays down this factor.

By the end of October the $759bn-worth of US dollar notes in circulation was only a fraction ahead of the value of euro notes, converted at exchange rates at that time.

But since October the euro has risen strongly against the dollar and this month the value of euro notes has risen to more than €610bn, or in excess of $800bn at the latest exchange rates. That level is unlikely to have been beaten by the greenback.

Copyright The Financial Times Limited 2006

Posted by Hugo Albert Orwell at 04:35 PM | Permalink | TrackBacks (0)

Source: International Herald Tribune

By Matthew Brown Bloomberg News
Published: December 27, 2006

ABU DHABI: The United Arab Emirates plans to convert 8 percent of its foreign-exchange reserves to euros from dollars before September, the latest sign of growing global disaffection with the weakening U.S. currency.

The U.A.E. has started, "in a limited way," to sell part of its dollar reserves, the governor of the country's central bank, Sultan Bin Nasser al-Suwaidi, said in an interview. "We will accumulate euros each time the market appears to dip" as part of a plan to expand the country's holding of euros to 10 percent of the total from the current 2 percent.

The Gulf state is among oil producers, including Iran, Venezuela and Indonesia, looking to shift their currency reserves into euros or sell their oil, which is now priced in dollars, for euros. The total value of the reserves held by the U.A.E. is $24.9 billion, Suwaidi said.

The dollar has fallen more than 10 percent this year against the euro.

Part of the reason for the decline is the outlook for slower U.S. growth, which makes the dollar a less attractive investment.

But fears that the dollar's level is unsustainable because of the heavy indebtedness of the United States to other countries is also behind the weakness this year, analysts said.

The shift to euros underscores its growing role as a reserve currency nearly eight years after its establishment. Central banks often keep the details about their currency holdings a secret.

The move by the U.A.E. central bank "is hard evidence that diversification is happening," said Shaun Osborne, chief currency strategist at TD Securities in Toronto. "This is negative for the dollar in a broad sense as it reflects falling confidence in the currency."

Central banks in Russia, Switzerland and New Zealand are also diversifying away from the dollar and into yen after the Japanese currency reached a 10- month low against its biggest trading partners in October.

Gulf Arab energy producers will earn as much as $500 billion from oil sales this year, the International Monetary Fund forecasts. The region's central bank reserves represent a fraction of the currency holdings of state-owned investment firms like the Abu Dhabi Investment Authority, which is estimated to have more than $500 billion under management.

But the signal that such a move sends to financial markets is a negative one.

"It is a recognition of the vulnerability of the dollar over the coming year," Simon Williams, an economist with HSBC Holdings, said by phone from Dubai.

The euro rose to $1.3123 from $1.3098 after Suwaidi's comments were published Wednesday.

"This is not confined to the U.A.E. There's a general awareness across the Gulf of the benefits of diversifying currency holdings," Williams said.

The U.S. current account deficit widened to $225.6 billion in the third quarter. Oil producers in the Middle East and Central Asia will run a surplus of $322 billion for all of 2006, according to the International Monetary Fund.

Total foreign holdings of U.S. Treasury securities — which generally support the dollar — increased to a record $2.16 trillion in September, just under half of the $4.34 trillion outstanding.

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Source: Agence France-Presse

by Sebastian Smith
December 28, 2006

MOSCOW (AFP) - The tense countdown to Russia's threatened cutting of gas supplies to Belarus, which could also hit deliveries to western Europe, has entered its final hours of confrontation over pricing.

Negotiations continued in Moscow Thursday, said Sergei Kupriyanov, spokesman for Russia's state-controlled monopoly Gazprom.

He refused to give details of the talks, slightly more than three days before a deadline laid down by Russia which is causing concern in the
European Union.

Gazprom chairman Alexei Miller has warned that gas supplies to Belarus will be turned off at 10:00 am in Moscow (0700 GMT) on Monday if Belarus, an ex-Soviet republic, does not agree to a more than doubling of price.

With Gazprom and Belarus both warning of a knock-on effect for western European customers who rely on Belarus as a transit point for Russian gas, the crisis increasingly resembles the showdown between Russia and Ukraine at New Year's 2006.

"A second gas war has been declared," said the respected Vedomosti business daily in Moscow. "Belarus will be cut off, like Ukraine."

The European Union, where Russian imports accounted for 24 percent of total gas requirements in 2005, is watching closely.

"I call on the two parties to reach as soon as possible a satisfactory agreement that does not put in question gas transits to the EU," Energy Commissioner Andris Piebalgs said in a statement.

"The Commission is following the situation very closely since it may affect gas supplies to the European Union."

Gazprom accuses Belarus of preparing to siphon off gas destined for Europe in the event of a cut to its domestic supplies and has warned that compensation for a loss in volumes might be impossible.

Belarus argues that if it is unable to agree with Gazprom on a new contract for its domestic supplies in 2007, then the contract governing transit of Russian gas westward will also become void.

Gazprom says the price increase would bring Belarus' fee closer to international standards and away from Soviet-style subsidies, while critics accuse the giant company of using energy as a weapon to bring neighbouring countries under Kremlin dominance.

Ironically, the dispute pits Belarus' President Alexander Lukashenko against the one major country that supports his authoritarian regime.

In contrast, Gazprom's strong-arm tactics in Ukraine 12 months ago, culminating with the brief cut-off in gas, were widely seen as part of a Kremlin strategy to weaken strongly pro-Western President Viktor Yushchenko.

The current crisis is on a smaller scale than the Ukraine episode, since just 20 percent of Russian gas exports to Europe go through Belarus, compared to 80 percent through Ukraine.

Last winter was also one of the coldest recorded in Europe.

So far, this winter is one of the mildest and so demand for energy is lower. According to the European Union, reserves are big enough to deal with any temporary shortfall.

Russia's media predicted that Belarus, a country of 10.3 million people sandwiched between Russia and the European Union, will find the cost too high to maintain defiance for long.

"Unpredictable he may be, but Lukashenko will not continue the conflict with Russia for long," Vedomosti quoted an unnamed Kremlin official as saying, suggesting that Lukashenko might accept a compromise in which Belarus took a loan from Moscow that covered the increased gas price.

However, commentators in Belarus said the country was ready to stand firm.

"In the end they will come to a deal. Belarus has its own cards in this fight -- transit, Russian military bases stationed on its territory, political relations," said analyst Andrei Fyodorov.

Belarus currently pays Gazprom a highly subsidised 46.68 dollars per 1,000 cubic metres of gas and Gazprom originally demanded an increase to 200 dollars, which is closer to western European prices, unless Belarus agreed to sell 50 percent of its pipeline operator Beltransgaz.

This would give the Russian state-owned giant an important strategic foothold on the European Union's eastern border.

Gazprom has since reduced that demand to 105 dollars per 1,000 cubic metres -- 75 dollars per 1,000 cubic metres in cash payments, plus the equivalent of another 30 dollars in shares of Beltransgas.

Belarus is so far refusing to accept the deal.

"Russia is not only after extra revenues, but wants to take under control certain parts of the property in neighbouring countries," Belarussian parliament deputy Anatoly Krasutsky said. "The government should have diversified its energy sources earlier, but you learn by your mistakes."

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As the symptoms of peak oil and gas production become more evident, the competition for these resources will likely also become more visible. There is trouble brewing in Eastern Europe over former Soviet countries who are unhappy with the prices they are being forced to pay Russia for badly needed natural gas supplies.

Since Russia supplies much of Europe with natural gas through pipelines that run through Belarus and Ukraine, those countries have a degree of leverage over Russia in their negotiations for the price of their own gas deliveries.

------

Source: Reuters

By Andrei Makhovsky and Dmitry Zhdannikov
2 hours, 16 minutes ago

MINSK/MOSCOW (Reuters) - Belarus issued an implicit threat that it could stop Russian gas deliveries through its pipelines to western Europe unless Russia's gas monopoly Gazprom relented on demands Minsk pay steep price increases in 2007.

The threat is likely to revive unpleasant memories of gas cuts to Europe last year when Russia was locked in a similar pricing row with Ukraine. But Belarus ships smaller volumes of gas to Europe via its territory and Russia said Europe was safe as Gazprom (GAZP.MM) had stockpiled extra gas in Germany.
"We are inter-dependent. If I don't have a domestic gas supply contract, Gazprom won't have a transit deal," Belarus's Deputy Prime Minister Vladimir Semashko said at Minsk airport late on Tuesday after his return from failed talks in Moscow.

About 80 percent of Russian exports to Europe are pumped via Ukraine, with the rest going through Belarus. Russia supplies a quarter of Europe's gas to more than 20 countries.

Belarus, whose President Alexander Lukashenko is accused in the West of crushing human rights, has long been a Russian ally.

Vladimir Putin's distaste for Belarus's Soviet-style economic policy and reluctance to share enterprises with Moscow.

Semashko did not say whether Belarus was prepared to stop all gas transit via its territory.

Two years ago, Minsk took no such action in a similar dispute, but Gazprom accused it of taking gas from transit pipelines for its domestic needs. Gazprom said it viewed Semashko's latest comments as a new threat to steal gas.

Two years ago, the row generated no major criticism of Russia in the West due to Lukashenko's poor political image.

Last year, Russia came under fire from politicians in the European Union and the United States following gas cuts to Ukraine. The dispute accentuated rocky relations between Moscow and Ukraine's pro-Western leadership, since tempered by the return of a prime minister friendlier to Russia.

U.S. ACCUSATION

The sniping reached a climax when Vice President smaller neighbors.

Some analysts say Moscow may decide against resorting to cuts this year given the Ukrainian experience and the growing importance of Germany as its top trade partner.

"Belarus has a very strong negotiating position with its gas transportation infrastructure and we believe that Gazprom will have to be very flexible with its Belarus pricing policy," said Yelena Savchik from Renaissance Capital brokerage.

But a Gazprom source told Reuters some top employees had been told to cancel New Year holidays: "It looks exactly like one year ago with Ukraine."

Gazprom still hopes for a deal to allow Belarus to receive supplies and Gazprom to transit gas to Poland and Germany.

Gazprom says it offered major concessions to Belarus on Tuesday such as lowering the proposed price to $110 per 1,000 cubic meters from the previous proposal of $200. On Wednesday, it lowered its offer still further to $105. Gazprom has also said the country could pay part of its bill in assets.

Belarus now pays $46.7, or as much as consumers in Russia. By comparison, Gazprom will charge Moldova $170 in 2007 and Georgia $235, while consumers in Europe pay over $250.

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Source: Kuwait Times

By Peter J. Cooper
December 25, 2006

KUWAIT: It was an incredible revelation last week that the second largest oil field in the world is exhausted and past its peak output. Yet that is what the Kuwait Oil Company revealed about its Burgan field. The peak output of the Burgan oil field will now be around 1.7 million barrels per day, and not the two million barrels per day forecast for the rest of the field's 30 to 40 years of life, Chairman Farouk Al-Zanki told Bloomberg. He said that engineers had tried to maintain 1.9 million barrels per day but that 1.7 million is the optimum rate. Kuwait will now spend some $3 million a year for the next year to boost output and exports from other fields.

However, it is surely a landmark moment when the world's second largest oil field begins to run dry. For Burgan has been pumping oil for almost 60 years and accounts for more than half of Kuwait's proven oil reserves. This is also not what forecasters are currently assuming.

Last week the International Energy Agency's report said output from the Greater Burgan area will be 1.64 million barrels a day in 2020 and 1.53 million barrels per day in 2030. Is this now a realistic scenario?

The news about the Burgan oil field also lends credence to the controversial opinions of investment banker and geologist Matthew Simmons. His book 'Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy' claims that ageing Saudi oil fields also face serious production falls.

The implications for the global economy are indeed serious. If the world oil supply begins to run dry then the upward pressure on oil prices will be inexorable. For the oil producers this will come as a compensation for declining output, and cushion them against an economic collapse.

However, the oil consumers then face a major energy crisis. Industrialized economies are still far too dependent on oil. And the pricing mechanism of declining oil reserves will press them into further diversification of energy supplies, particularly nuclear, wind and solar power.

All this was foreshadowed in the energy crisis of the late 1970s when a serious inflection in oil supply by the year 2000 was clearly forecast. How ironic that those earlier forecasts now look correct, while more modern and recent forecasts begin to look over optimistic and out-of-date with geological reality.

Nobody can change the geology, and forces of nature that laid down reserves of oil and gas over millions and millions of years. Could it be that we have been blinded by technological advances into thinking that there is some way to beat nature?

The natural world has an uncanny ability to hit back at the arrogance of man, and perhaps a reassessment of reality at this point is called for, rather than a reliance on oil statistics that may owe more to political manoeuvring than geological facts. - AME Info FZ LLC.

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Source: The Independent Online

Published: 24 December 2006

Disappearing world: Global warming claims tropical island

For the first time, an inhabited island has disappeared beneath rising seas. Environment Editor Geoffrey Lean reports.

Rising seas, caused by global warming, have for the first time washed an inhabited island off the face of the Earth. The obliteration of Lohachara island, in India's part of the Sundarbans where the Ganges and the Brahmaputra rivers empty into the Bay of Bengal, marks the moment when one of the most apocalyptic predictions of environmentalists and climate scientists has started coming true.

As the seas continue to swell, they will swallow whole island nations, from the Maldives to the Marshall Islands, inundate vast areas of countries from Bangladesh to Egypt, and submerge parts of scores of coastal cities.

Eight years ago, as exclusively reported in The Independent on Sunday, the first uninhabited islands - in the Pacific atoll nation of Kiribati - vanished beneath the waves. The people of low-lying islands in Vanuatu, also in the Pacific, have been evacuated as a precaution, but the land still juts above the sea. The disappearance of Lohachara, once home to 10,000 people, is unprecedented.

It has been officially recorded in a six-year study of the Sunderbans by researchers at Calcutta's Jadavpur University. So remote is the island that the researchers first learned of its submergence, and that of an uninhabited neighbouring island, Suparibhanga, when they saw they had vanished from satellite pictures.

Two-thirds of nearby populated island Ghoramara has also been permanently inundated. Dr Sugata Hazra, director of the university's School of Oceanographic Studies, says "it is only a matter of some years" before it is swallowed up too. Dr Hazra says there are now a dozen "vanishing islands" in India's part of the delta. The area's 400 tigers are also in danger.

Until now the Carteret Islands off Papua New Guinea were expected to be the first populated ones to disappear, in about eight years' time, but Lohachara has beaten them to the dubious distinction.

Human cost of global warming: Rising seas will soon make 70,000 people homeless

Refugees from the vanished Lohachara island and the disappearing Ghoramara island have fled to Sagar, but this island has already lost 7,500 acres of land to the sea. In all, a dozen islands, home to 70,000 people, are in danger of being submerged by the rising seas.

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Source: NRDC.org

December 10, 2006

How bad is the current energy crisis? Really, really bad, says oil expert Charley Maxwell.

After half a century in the oil business, Charles Maxwell is widely referred to as the dean of energy analysts. As a Marshall Scholar at Oxford he specialized in Arabic and Persian language and history before joining Mobil in 1957. He spent a decade with the oil giant, scheduling tanker shipments, working in a field office in Nigeria, and negotiating Middle East production agreements. When the Arab oil embargo hit in 1973, he was already being hailed by Institutional Investor as Wall Street's number-one oil analyst. Today he is a senior energy analyst with Weeden & Co., which provides proprietary research to institutional investors.

Charley Maxwell is not your classic environmentalist -- he favors further development of coal and nuclear energy and sits on the board of a coal-bed methane company in Denver. But in this late-September conversation with Sonia Shah, author of Crude: The Story of Oil, Maxwell urges a new conservation ethic that may -- or may not -- save us from the worst energy crisis we have yet faced.

You are famous for coining the term "energy crisis" in the 1970s. Do you think that we're entering another crisis now?

I do. In the first energy crisis, we tried to keep prices low and ration the physical gasoline. People sat in these long queues and it was a huge loss of time and money. When the second energy crisis hit, in the late seventies and early eighties, we just allowed the price to rise. And that's what we're doing now -- rationing by price. The fact that gasoline recently hit $3.20 a gallon would suggest that we are in crisis. I would say even $2.50, which is where it is now, represents some form of crisis.

What are the underlying reasons?

There are four, I think. First and foremost, there was a lot of oil that could have been discovered that wasn't, because the national oil companies such as Saudi Aramco didn't invest enough in exploration. Second, the big oil companies didn't exercise much vision. When prices went up in 2000, they basically pocketed the money. Of course, if you're an executive and you have stock options, you start to think that the whole world depends on your stock price rather than on getting more oil. And who's to say that we should have more oil? If it means that everyone is going to work harder and longer to make possible the greater use of SUVs, is that a worthy end in the world of God?

And the other two reasons?

The third is political instability around the world. And the fourth is that we are now approaching the 50 percent mark of recoverable oil. Global oil production will reach a maximum rate and then it will inexorably start to go down. I predict that will be between 2015 and 2020. When that happens it will be the single biggest problem that we face.

And we're using more oil all the time.

Yes, as the world economic system grows, we're needing about 1.5 percent to 2 percent more oil every year. Right now the non-OPEC countries are providing about half of that. But those proportions are changing fast. In 2010 that door slams shut, and we will have to call on OPEC for all the new oil we need. So they will have complete control over its availability and its price.

How much more oil is still waiting to be discovered?

There is still a lot of oil out there. But if it takes 30 years rather than 10 to discover it, then we're not going to be producing enough each year to meet our needs. What's happened is that the search has slowed dramatically. So we're in deep trouble.

Exxon has said there could be up to 4.8 trillion barrels of oil still recoverable. And there are other industry estimates that go as high as 7 trillion.

I read that stuff and it's good background humor, you know what I mean? But I really hope they don't think anyone takes them seriously.

So is it just a PR thing?

No, I think Exxon actually believes it, which is really sad.

What's the outlook for new sources of oil, so-called unconventional sources?

Most of that is actually gas. There's coal-bed methane, which is the gas from coal deposits. There's the gas from so-called tight sands, which are geologic formations on the way to becoming sandstone. And then there's shale, which gives up the gas very slowly. That makes it uneconomic when [natural] gas costs $2 [per million Btu], but in a world of $7 gas, you'd accept the slow production and you'd still be happy to get it.

Do you think price levels are high enough at the moment to start triggering changes in our behavior?

Even with $3 gas, nobody's saying, "I can't take Johnny to the soccer match." But there's no doubt we're going to have to change our habits. We're going to have to design our cities differently. We're going to need greater population densities and more public transportation. We're going to have to build our houses to different building codes. But the system can't change overnight. We can change our habits in two or three years and the next generation of equipment will be developed with energy conservation in mind, but people will have to go on with their present equipment for a time.

Even so, I think we're already triggering some favorable changes at $3, like the decline in SUV sales and the increased sales of smaller sedans. I read the other day that in 10 years, 10 percent of the country will be using hybrids -- which isn't that much. So there's got to be more than hybrids, and I think Honda is on to it with a new small diesel with a very efficient engine. One advantage of diesel is that the engine lasts longer than the gasoline engine.

But doesn't our whole model of economic growth depend on throwing things out and getting new ones?

Yes, but I think this new conservation ethic is going to come in. It will be hard on General Motors and Ford and Chrysler, and it may take some subsidies. I don't think the government can afford to put any of those companies into bankruptcy.

Do you see any prospect of a gasoline tax? Or is that still a taboo?

I think it's changing. But there are lots of ways to do it. You don't have to have a gasoline tax; you can have a tax on horsepower and thus give a huge lift to lighter cars with less powerful engines. There's a recognition that we have to decrease the weight of vehicles. We can now make cars with traditional engines that are half the weight of the cars today. There are some marvelous new plastics that give us this very light weight with great strength, so we'll be able to hold on to these cars for much longer.

Where's the political leadership on all this? I mean, when the president talks about our being "addicted to oil" and needing more ethanol...

Well, he's just being told what to say by his minions, you know. Ethanol, for the moment -- meaning ethanol from corn -- is a stupid investment, as people are discovering. Pretty close to 100 percent of the savings [in oil consumption] that you get on ethanol is consumed by the hydrocarbon fuel that has to be used to grow the corn. You do save something in national security terms -- it's not from the Middle East, and you're not putting dollars out into the wider world. But if they can convert cellulose to sugar, and sugar to alcohol, then we will really have something.

They're using sugarcane in Brazil, of course. But you mean other crops, like switchgrass?

Yes, that's right, and that would give you maybe a 40 percent savings. That's coming, but probably not for six or seven years.

What about solar and wind and other alternatives?

I'm very keen on solar, because it works and it's getting more efficient every year. But the problem is that today it represents maybe one-tenth of 1 percent of the energy we produce. In 10 years it may be half a percent. So it won't solve the problem. Wind will be a little better, a little bigger. And I do believe that when the problem is solved, it will be solved by a host of small contributions like this, from different directions.

And that will take a lot of technological innovation.

Yes. You know, entrepreneurs are doing all kinds of things -- racing to design new types of wiring for electric motors, new types of batteries for cars. In garages around the country, the inventive geniuses are being let loose. I think it's going to become an American jamboree, in a way, because what we do best is innovate.

Does that make you an optimist?

I think we'll get through this problem by about 2020 to 2025. My worry is how we get there. We have a time when oil is winding down before anything is able to slide over and solve the problem. A lot of nuclear development is being brought along by the incipient shortage of future oil, and it's putting people into a proliferation mode. The whole world could come under this threat, and it's a terrible one. We could also be in deep trouble as a social system. How do we achieve fairness [in rationing scarce energy supplies] when the gridlock between rich and poor already stops us from having an energy policy in this country? We could see democracy entering its death throes.

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Source: Times Online UK

December 22, 2006
Carl Mortished, International Business Editor

Iran is selling more of its oil for payment in euros than dollars as it seeks to shift its foreign currency reserves away from the depreciating currency of its political enemy, the United States.

The world’s fourth-biggest oil exporter has inserted a clause in its oil contracts allowing it to request payment in alternative currencies.

Gholanhossein Nozari, the managing director of National Iranian Oil Company, said that 57 per cent of Iran’s income from oil exports was now received in euros.

The move reflects a political desire for less reliance on the dollar, as well as a need to avoid further depreciation in currency reserves. Iran’s dollar holdings are thought to have fallen from 40 per cent of currency reserves to just a third.

Iran announced plans in 2004 to develop an Iranian oil bourse, a commodity exchange that would become a Middle Eastern rival to the major exchanges in New York, London and Singapore, which set benchmark oil prices.

The Iranian bourse would also challenge the petrodollar by setting oil prices in euros. However, there has been little progress in establishing the bourse, which failed to launch as planned last March.

A spokesman for National Iranian Oil Company said that the switch to euros for oil payments would not affect the pricing of Iranian oil. “Our oil contracts are still based on the dollar because the international market assessments are in US dollars,” he said.

Iran’s decision to switch currencies extends a trend among big oil exporters moving from the dollar as they seek protection from a continuing slide in the petrocurrency’s value. In October Russia said it would diversify its currency reserves into Japanese yen. Overall, Russia is believed to have let its dollar holdings slip and they are now equal with euros.

The dollar’s slide protected non-dollar oil importers from the escalation in the price of fuel early this year. Oil was $63 per barrel at the beginning of January, rose to $74 at the start of July and has fallen back to $63 per barrel this month. However, translated into euros, the rise is less impressive — from €53 a barrel to a peak of €58 before a sharp decline to €48.

The fall in the dollar against major currencies has had a dramatic impact on the revenues of oil exporters and has exacerbated the rumbling anti- American feeling in the Gulf.

In March the United Arab Emirates said that it would switch 10 per cent of its currency reserves from dollars to euros, a decision that closely followed the attempt by the US Congress to block the acquisition by Dubai Ports World of a number of ports in the United States.

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Source: Times Online UK

Julian Evans in Moscow

The Russian Government is considering hiring a foreign fund manager for a proposed oil-and-gas fund that it hopes will account, eventually, for 60 per cent of its GDP, or about $500 billion (£255 billion) at present estimates, a source at the Ministry of Finance told The Times.

It would be one of the biggest funds in the world. The Government has stowed $83 billion in petrodollars in its Stabilisation Fund, which the central bank manages and is invested entirely in AAA-rated US Treasury bills.

However, the ministry wants to take more risks with its money. It is proposing that the Government set up two new funds, including a reserve fund, accounting for 7 per cent to 10 per cent of GDP, which, a ministry source said would probably be managed by the central bank. However, it would be allowed to invest in all investment-grade assets. The fund would be used to manage oil price shocks.

The second fund would be a savings fund and, eventually, it would account for 60 per cent of GDP, according to sources. This fund could be dipped into by the Government. It would have a more aggressive risk profile and be allowed to invest in foreign equities, corporate debt and money-market instruments.

A source from the Ministry of Finance said: “We are considering who should manage this. It could be a foreign investment firm, the central bank or a state-owned bank.” The state-owned Vnesh-econombank (VEB) looks like a favourite to win the enormous mandate. Not to be confused with Vneshtorgbank (VTB), VEB is a Soviet-era state-owned bank whose original mandate was to manage the debt of the USSR. However, its ambitious management, led by Vladimir Dmitriev, its chief executive, is expanding its remit aggressively.

A botched reform process in 2003 meant that Russian citizens did not have the time or education to choose private fund managers for their state pensions, so about 95 per cent of pensions ended up being managed by VEB. Private fund managers, including Deutsche UFG and Raiffeisen Bank, were disappointed.

VEB has since put almost all the pension fund in Russian government bonds, so the state pension fund significantly underperforms privately managed pension funds. VEB is considered a Silovik bank, meaning that it has close ties to the Russian security services. It is thought to have covertly shifted federal money to the state-owned Rosneft in December 2004 to help it to acquire Yuganskneftegaz, Yukos’s main asset, in a controversial auction. The Kremlin denies that Rosneft used federal money to buy the asset.

VEB is also the favourite to become the new Russian development bank, which the Government wants to set up next year to help to renovate the country’s infrastructure via multibillion-dollar public- private partnership deals. And now it is favoured to manage what will be one of the biggest investment funds in the world.

A source at the Ministry of Finance said: “VEB manages the Government’s debt, so perhaps it should also invest the Government’s money. However, it has little experience of active investment management . . . The problem is that few private Russian fund managers have much experience, either. Only foreign managers have much experience.” Hiring foreign managers would be sensitive, but it would allay fears that the Government’s petrodollars could be misused.

Another option being considered is setting up a special agency to manage the fund, under the auspices of the central bank but employing a large team of professional investment managers, similar to what Norway did to manage its huge petrofund.

Capitalism at its finest

- Russian Government has accumulated $83 billion in oil revenues in its Stabilisation Fund

- Fund, managed by the central bank, is invested 45% in US Treasury bills, 45% in euroland government bonds and 10% in gilts

- The Kremlin wants to set up two new funds. One will have a conservative risk profile, investing only in investment-grade securities

- The other fund will be allowed to invest in equities, corporate bonds and other instruments

- Eventually, sources say, it will account for 60% of Russian GDP, which could be $500 billion, making it one of the biggest funds in the world

- The Government has not decided who will manage the fund, but is considering holding tenders and accepting bids from foreign managers

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Source: Playfuls.com

The Iranian oil ministry on Saturday confirmed signing a memorandum of understanding on a 16 billion US dollars gas deal with China, Khabar news network reported.

According to the deal, the North Pars gas field, located 85 kilometres north of the giant South Pars gas field in the Persian Gulf, is to be developed by China within eight years and four phases.

The gas from the field is to be converted to liquefied natural gas and shared equally between Iran and China.

The South Pars gas field has an estimated 80 trillion cubic feet of natural gas.

© 2006 DPA

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Source: Bloomberg

By Bill Varner

Dec. 23 (Bloomberg) -- The United Nations Security Council voted 15 to 0 to impose sanctions on Iran for its nuclear program for the first time, including a ban on acquisition of materials and technology that might be used to build an atomic bomb.

The measure demands that Iran halt uranium enrichment and heavy-water projects that the U.S. and its European allies have said may lead to the development of nuclear weapons. It freezes the financial assets of 12 named individuals and 11 groups such as the Atomic Energy Organization of Iran.

The resolution also requires the UN's nuclear watchdog agency, the International Atomic Energy Agency, to report on Iran's compliance within 60 days. ``Further appropriate measures'' such as economic penalties and severance of diplomatic relations will be required if Iran doesn't comply, it says.

``We are sending Iran an unambiguous message that there are serious repercussions to its continued disregard of its obligations and defiance of this body,'' U.S. Acting Ambassador Alejandro Wolff said. ``We look forward to Iran's full, unconditional and immediate compliance with this resolution.''

The vote, the result of more than two months of negotiations largely aimed at winning Russia's support, occurred as the U.S. and Britain are close to increasing naval power in the Persian Gulf in a display of military resolve, the New York Times reported, citing unidentified Pentagon and military officials.

Serious Message

``Russia views this resolution as a serious message being sent to Iran regarding the need more actively and more openly to cooperate with the IAEA to lift or resolve the remaining concerns relating to their nuclear program,'' Russian Ambassador Vitaly Churkin said. ``We hope that Iran will correctly and very seriously perceive the contents of this resolution and take the necessary measures to redress their situation.''

The Security Council action will likely add to tensions in the region and may contribute to rising oil prices in 2007, according to Ian Bremmer, president of the Eurasia Group, a New York-based organization that analyzes political risk for businesses. Iran is the second-biggest oil producer in the Middle East.

``Oil markets won't move very much on this resolution,'' Bremmer said. ``But we think Iran is one of the biggest risks out there and that there will be escalation of tensions in 2007 as Iran retaliates. They can disrupt markets by driving proxy wars in Iraq, Lebanon and the Palestinian territories.''

Retaliation

Senior Iranian lawmakers said today that their parliament might retaliate by blocking inspections by the IAEA, according to IRNA, the state-run Iranian news agency. Legislation to suspend inspections has been passed by the parliament's security and foreign affairs committee, the agency reported.

At the UN, Iranian Ambassador Javad Zarif said suspension of enrichment activities was ``not a solution,'' that it was instead a ``temporary, stop-gap measure'' that didn't work from November 2003 to February 206. Without specifying how Iran would react to the vote, he said the ``days of bullying, pressure and intimidation by some nuclear-weapons holders are gone.''

Zarif said the Security Council was guilty of hypocrisy for taking no action against Israel after Prime Minister Ehud Olmert appeared to confirm recently that Israel has nuclear weapons.

The U.S. and its European allies, Zarif said, which ``pushed this council to take groundless punitive measures against Iran's peaceful nuclear program, have systematically prevented any action to nudge the Israeli regime towards submitting itself to the rules governing the nuclear non-proliferation regime.''

Russia agreed to vote for the resolution after Britain, France and Germany dropped a proposed travel ban on Iranian officials and narrowed the scope of the trade embargo to ``proliferation sensitive'' materials and technology. An earlier version of the text, first circulated in October, would have banned any item that could contribute to Iran's nuclear or missile programs.

Nuclear Power Plant

The resolution's sponsors also deleted any mention of the Bushehr commercial nuclear power plant that Russia is helping Iran build. An earlier text would have barred delivery of fuel to the plant.

``It is an important symbolic move, but it is hard to see that this puts sufficient pain on Iran to compel it to do anything,'' said Bruce Reidel, senior fellow at the Brookings Institution in Washington. ``At best, this is a warning shot across the bow of the Iranian state, a long way from authorizing the use of force.''

Iran ignored a July 31 resolution requiring it to suspend enrichment activities by Aug. 31, and President Mahmoud Ahmadinejad, pronounced ah-ma-deen-ah-ZHAD, has said his government will continue its nuclear program.

Vigilance

The resolution creates a Security Council committee to monitor implementation of the sanctions and calls on UN member nations to ``exercise vigilance'' regarding the international travel of the 12 Iranian officials and any ``specialized teaching or training'' of Iranian nationals.

UN member governments are to report to the committee within 60 days on steps they have taken to implement the resolution.

The sanctions would be suspended by Iran's decision to suspend enrichment activities and terminated by a report that the government in Tehran has complied with all UN Security Council and IAEA requirements.

Undersecretary of State Nicholas Burns said in a conference call with reporters that the U.S. would follow the vote with new efforts to persuade other nations to enact the same type of financial and trade sanctions on Iran that the U.S. has had in place for 27 years.

``Russia and China tell us that want to deny Iran a nuclear weapons capability,'' Burns said. ``We want to see more vigorous action by them. We would like to see them stop selling arms to Iran and limit export credits to Iran. We think it is time to an end for business as usual.''

To contact the reporter on this story: Bill Varner in the United Nations at wvarner_at_bloomberg.net.
Last Updated: December 23, 2006 13:02 EST

Posted by Hugo Albert Orwell at 11:51 AM | Permalink | TrackBacks (0)

Source: Houston Chronicle.com

Dec. 21, 2006, 11:18AM
By ALEX NICHOLSON AP Business Writer
© 2006 The Associated Press

MOSCOW — A golden statue of Saparmurat Niyazov rotates on a pedestal in Turkmenistan's capital to always face the sun _ a testament to the leader's personality cult and a garish product of the Central Asian nation's vast energy wealth.

Now, the autocratic president's death on Thursday is set to fuel a rivalry between Russia, the United States and China for access to the former Soviet republic's massive gas reserves in what analysts call a repeat of 19th-century rivalries in the region.

"Turkmenistan has returned as a key piece in the new Great Game," said Alfa Bank strategist Chris Weafer, referring to Russia and Britain's jostling for pre-eminence in Central Asia in the 1800s. "It is a big prize."

Over the past year Niyazov, who personally brokered the country's energy deals, had sought to balance Russia's influence _ courting Turkish and, in particular Chinese companies, to help explore and develop its nearly 3 trillion cubic meters of proven gas reserves.

Russia's state-controlled gas monopoly OAO Gazprom controls the only transit route for Turkmen gas exports to other former Soviet states and Europe.

Keen to lock in fresh energy sources to feed its exploding economy, China saw its efforts rewarded with Niyazov's promise to pipe 30 billion cubic meters of gas beginning in January 2009. It also won an invitation last month to tap the giant Iolotan fields, which the late president declared, to international disbelief, to contain 7 trillion cubic meters of natural gas _ or more than even Saudi Arabia's proven reserves.

Washington, meanwhile, has lobbied for a pipeline out of Turkmenistan across the Caspian Sea to the west, bypassing Russian territory. That would meet a U.S. strategy of tapping sources of crude and gas outside the Middle East, and drawing Caspian states away from Russia and closer to the West.

Niyazov ultimately proved "too difficult" for U.S. officials to deal with, Weafer said.

The Turkmen leader used revenues from energy investments to nourish lavish construction projects _ a huge, man-made lake in the Kara Kum desert, a vast cypress forest to change the desert climate, a ski resort and a 40-meter (130-foot) pyramid to celebrate the anniversary of the country's independence from the Soviet Union.

"Russia will want to retain its political influence in the country and one assumes that the U.S. will try to use the opportunity (of Niyazov's death) to get back in there, increase its influence and resurrect the plan for the pipeline across the Caspian," Weafer said. "But my guess is that the Chinese will have the biggest delegation at the funeral."

Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies, says that multinational oil companies will prick up their ears at the news of Niyazov's death, but serious reforms would need to be undertaken before they could enter the promising market.

"The big guys, the people who might be interested, can't touch the place _ it doesn't come close to meeting the standards of corporate responsibility," he told The Associated Press.

"Obviously they can't afford not to look that this place and the possibility that it might open up _ it's obviously clear that they need to consider this," he said. "I just don't think we'll see any rapid developments. We need to finds out if there will be real change in status quo."

That could come in the form of some indication of democratization in the capital Ashgabat or open auctions of its hydrocarbon reserves.

"Given the resource base, it's always been at the back of peoples minds, but it's become increasingly difficult to work there because of the centralized decision-making and dominance of state-run monopolies," said analyst Hilary McCutcheon of energy consultants Wood MacKenzie. "That may be on the brink of changing."

Turkmenistan's burgeoning relationship with China has also rattled Ukraine, which relies on cheap Turkmen gas supplies to keep its domestic bill down.

Gazprom has a contract until 2009 to buy 50 billion of the 60 billion cubic meters that Turkmenistan produces annually, most of which it then re-exports to Ukraine.

While a recent price hike secured by Niyazov just months before his death suggests that pact is unlikely to be reconsidered in the near future, analysts say little will be clear until a successor is named.

Turkmenistan's State Security Council named Deputy Prime Minister Kurbanguli Berdymukhamedov the acting president, even though the Constitution required Parliament Speaker Overzgeldy Atayev to take over as acting head of state. The council said the Prosecutor General's office has opened a criminal investigation against Atayev, making him ineligible to fill in as president. The move could herald a battle for succession between rival groups in the Turkmen administration.

If Ashgabat makes good on its deal with China, and if fresh reserves are not developed apace, supplies to Ukraine could be cut, analysts say.

If that happens, Kiev would be forced to buy more expensive Russian gas, potentially putting it into a situation similar to a price fight with Gazprom last winter, which resulted in some cuts in supplies to some European cities.

Posted by Hugo Albert Orwell at 03:11 PM | Permalink | TrackBacks (0)

Source: Wikipedia

Iran is planning to open a commodity exchange, referred as 'Iran Petroleum Exchange', 'International Oil Bourse' or 'Iranian Oil Bourse'. A Petrobourse for Petroleum, petrochemicals and gas in various non-dollar currencies, primarily the Euro. If successful, this would establish a euro-based pricing mechanism for oil trading, or oil marker as it is called by traders.

The acronym 'IOB' has been used as it can be interpreted as either "International Oil Bourse" or "Iranian Oil Bourse", but it has no official status.

The geographical location is expected to be the Persian Gulf island of Kish (which is designated by Iran as a free trade zone.)[1].
Contents

Background

The three current oil markers are all US dollar denominated: North America's West Texas Intermediate crude (WTI), North Sea Brent Crude, and the UAE Dubai Crude. The two major oil bourses are the New York Mercantile Exchange (NYME) in New York City and the International Petroleum Exchange (IPE) in London. The proposed Iranian bourse would establish a fourth oil marker, denominated by the euro.

Timeline

The Iranian oil bourse, first reported in 2005, was to have a planned opening date of March 20, 2006 [2], which is the Iranian New Year, Nauroz. According to an April 2005 report, the Tehran Stock Exchange (TSE), the Wimpole Consortium and a private staff fund for retired petroleum workers will together form the consortium developing the exchange [3].

In January 2006, Chris Cook of the Wimpole Consortium referred to delays in the process due to the election to the presidency of Mahmoud Ahmadinejad and subsequent difficulty in appointing a new oil minister acceptable both to the president and parliament [4].

In March 2006, the Petroleum Minister of Iran, Kazem Vaziri Hamaneh, announced that due to "technical glitches", the Bourse launch was postponed, with no new date set. [5]. However, as of April 26 Iran had restarted its move to open the oil market, and Kazem announced the bourse was set to open the first week of May [6].

In May 2006, Minister of Economic Affairs and Finance Davud Danesh-Jafari said the Oil Ministry has a two-month deadline for presenting the Articles of Association of the Iranian Oil Bourse. Danesh-Jafari said that the Euro had not yet been finalized as the legal tender of transactions in the oil bourse, and the final decision about that depends upon the Oil Ministry’s proposed IOB Articles of Association [7]

During the first phase of its implementation, the Iranian Oil Bourse plans to offer financial derivatives relating to crude oil.

In July 2006, a building has been purchased and the projected opening date is September 2006. [8] On September 15, Oil Minister Kazem Vaziri-Hamaneh stated that all preparatory requirements had been arranged for launching the oil stock market in the country.[9]

In December 2006 Bloomberg cited two Iranian newspapers reporting Iran's Minister of Economy Davoud Danesh-Ja'fariIran as wanting to cut US dollar based transactions to a minimum.[10] Iran-Kyrgyzstan Joint Economic Commission will credit 50 Million Euros to Kyrgyzstan for primarily industrial joint projects, showing a strong commitment to large Euro dealing. [citation needed]

See also

* Ministry of Petroleum of Iran
* Petrobourse
* Petroeuro
* Petrodollar
* Petroruble
* Petrodollar warfare
* Economy of Iran

Citations

1. ^ Kish Oil Exchange Planned, Iran Daily, January 24, 2006
2. ^ The Iranian line in the sand, Dan Crawford, The Republic (Vancouver), August 18 to 31, 2005
3. ^ A star rises in the east, Stella Farrington, April 2005
4. ^ Speaking freely: What the Iran 'nuclear issue' is really about, Chris Cook, January 21, 2006, Asia Times/energybulletin.net
5. ^ A frenzied Persian new year, March 22, 2006, Asia Times
6. ^ Iran oil bourse next week, April 26, 2006, Iranian.ws
7. ^ Ministry to offer IOB Articles of Association in two months, May 19, 2006, Mehr News Agency
8. ^ Iranian Journel, building has been purchased and new date is September, accessed July 6 2006
9. ^ Iran's oil bourse to be launched, September 15, 2006, Mehr News Agency
10. ^ Iran May Reduce Use of Dollar, Tehran Papers Say, December 6, 2006, Bloomberg

Literature

* Clark, William R.: Petrodollar Warfare : Oil, Iraq and the Future of the Dollar, New Society Publishers, 2005, ISBN 0-86571-514-9

External links

* PetroTalk Portal for petro related Articles, Discussion, Links and more
* infowars article, infowars, May 9, 2006
* Iran oil bourse next week, Persian Journal, Apr 26, 2006
* Iran takes on west's control of oil trading, The Guardian
* The Real Reasons Why Iran is the Next Target: The Emerging Euro-denominated International Oil Marker
* Petrodollar Warfare: Dollars, Euros and the Upcoming Iranian Oil Bourse
* The Proposed Iranian Oil Bourse
* Trading oil in euros – does it matter?
* Will the Iranian Oil Bourse Threaten the Dollar?
* Petrodollars and Nuclear Weapons Proliferation: Understanding the Planned Assault on Iran, Centre for Research on Globalization, February 10, 2006
* The Iranian line in the sand
* Petrodollar or Petroeuro? A new source of global conflict
* The Iranian Threat: The Bomb or the Euro?
* The Real Reasons Why Iran is the Next Target
* Will Iran’s oil kill the U.S. dollar?
* Strange ideas about the Iranian oil bourse (a counterpoint with countercounterpoints in comments...)
* Why Iran's Oil Bourse can't break the Buck

Posted by Hugo Albert Orwell at 10:00 AM | Permalink | TrackBacks (0)

Source: The Financial Express

Posted online: Thursday, December 07, 2006 at 0000 hours IST

DEC 6: Iran, the world’s fourth-largest oil exporter, plans to reduce its use of the US dollar in world trade and increase use of the euro, two Tehran-based newspapers reported.

The Tehran Times said on Wednesday Iran has started substituting euros for dollars in oil sales, citing an unidentified person at the oil ministry. Iran Daily reported Iran wants to cut its dollar-based transactions to a minimum, citing minister of economy Davoud Danesh-Ja’fari. Iran’s policy of selling oil in US dollars ‘‘has not changed yet,’’ said Hojatollah Ghanimifard, executive director for international affairs at National Iranian Oil Co., in a statement read to Bloomberg News from his office.

The US and several European nations are pushing the United Nations to sanction Iran for its nuclear programme.

The dollar touched a 20-month low against the euro this week, and central banks in the Middle East including the United Arab Emirates have plans to convert some of their dollar reserves into euros. Exporting nations ‘‘are only holding so many dollars because of all the trade in the currency, but if the trend begins to move out of it, then it’s going to be a positive for the euro and add to the negative sentiment on the dollar,’’ said David Mann, a foreign-exchange strategist at Standard Chartered Bank Plc in Hong Kong.

Organisation of Petroleum Exporting Countries members including Qatar earlier this week expressed concern about the falling dollar, saying output should be cut to drive prices higher.

—Bloomberg

Posted by Hugo Albert Orwell at 09:56 AM | Permalink | TrackBacks (0)

Source: Digital Journal

Posted Dec 8, 2006 by Sam Elfassy

The end of the petrodollar is the end of the dollar hegemony. And the end of the dollar hegemony is the end of the United States of America as a superpower, if not worst than that.

Full story: financialexpress.com

The Tehran Times, a central media outlet of the world’s fourth-largest oil exporter, said that Iran has started substituting euros for dollars in oil sales. The minister of economy, Davoud Danesh-Ja’fari, announced that Iran wants to cut its dollar-based transactions to a minimum.
Bloomberg News reports: "Iran's oil export contracts for months have included a clause that allows the nation to seek payment in the euro and other currencies, creating a mechanism for a switch should Iran's policy change, according to traders who buy Iranian oil".

It was expected: Iran seems like it is defending itself from Iraq's diabolic fate generated by the same US which declares it to be next.

Accordingly, Iran, as an act of self defense, signals straight to Washington it can hurt harder.
And it can indeed: by shifting the most valuable commodity on earth nowadays, oil and gas, from a dollar tied commodity (hence “the petrodollar”, trading oil in US dollars) to a euro tied commodity (hence “the petroeuro”) it can collapse, surprisingly easily, the already fragile dollar hegemony. Due to the fact that others will follow.

Other economies around the world will join Iran out of their own substantial reasons. like Iran, they have their own motivation and necessity to get loose from United States’ violent grip. Venezuela, another important OPEC member is one, Russia another, and others. Add it to the just announced new Chinese oil wholesale market plus the upcoming Iranian oil bourse plus the efforts of major central banks to get rid of their dollars while the collapse of the petrodollar looming and the reason for Washington’s panic is getting much clearer.

Iran still leaves an open door for diplomacy, it is sending the message “I can do this already”, but on the other hand “I didn’t start operating the whole transition yet”. It looks as if the Iraq Study Group that showed up suddenly to recommend a diplomatic channel with Iran was formed only to enable Washington to climb down the tall tree it is on.

When asked for an official statement regarding Iran's energy trade policy, by US Bloomberg news, Hojatollah Ghanimifard, executive director for international affairs at National Iranian Oil Co., played the game of the official lines and replied that Iran’s policy of selling oil in US dollars ‘‘has not changed yet’’.

Posted by Hugo Albert Orwell at 09:53 AM | Permalink | TrackBacks (0)

Source: Telegraph.co.uk

By Ambrose Evans-Pritchard
Last Updated: 12:01am GMT 07/12/2006

America's stock markets typically start crumbling four months before each recession, anticipating the crunch in profits. Shares then grind relentlessly down for 10 months or so until they have on average knocked 26 per cent off the S&P 500 index, Wall Street's listing of top companies.

So if you think the US property slump is looking scary after October's 9.7 per cent drop in new home prices, it may be time to take a little money off the table. It has been a lucrative autumn rally, but the four-year bull market is long in the tooth by any standards.

As we report today, the rate of insider stock sales by company directors on both sides of the Atlantic is the highest since records began 20 years ago, with sales outnumbering purchases by 60:1.

It makes scant difference whether your shares are on Wall Street or the London Stock Exchange. The FTSE 100 index is a global play these days. The lion's share of profits come from overseas, while London's AIM market has become a bet on Chinese and Russian companies nesting there by the dozens.

The world economy is what matters, and I don't like the smell of it. Nor, apparently, does Hank Paulson, who made $700 million at Goldman Sachs before taking over the US Treasury this year. He has reactivated a crisis team with a command centre in Washington to cope with the "systemic risk" in a market melt-down. His worry? 8,000 unregulated hedge funds with $1.3 trillion at hand, and derivative contracts now worth $370 trillion. "We need to be very careful here," he said.

A well-sourced article in Washington's Weekly Standard says Mr Paulson fears a "serious crisis that would be a body-blow to the US economy".

Yes, China is booming – for now – but it accounts for just 4 per cent of world consumption. The great US shopping extravaganza is six times bigger, and remains the anchor of the international system. It is slowing fast, unsurprising after 17 interest rate rises from 1 per cent in June 2004 to the current 5.25 per cent. "Big ticket" orders for cars, aircraft, computers and such plummeted 8.2 per cent in October.

Average house prices have fallen from $244,000 in April to $221,000 last month, with more violent corrections in Florida, Arizona, and New England. Builders have warned of a "death spiral" as they slash prices to off-load a glut of unsold homes.

The "happy handover" orthodoxy of the International Monetary Fund is that America will escape with a shallow slowdown. Asia and Europe will pick up the growth baton. The world will march on without missing a step.

Nice if you can get it. The more ominous possibility is that America fails to recover quickly, and takes the world with it. Japan already shows signs of stalling. Retail sales have fallen for two months. Far from bursting back to life as expected, it is still teetering on the edge of deflation.

France ground to a halt in the last quarter as the surging euro ate into the country's industrial core. Airbus was humming when the euro was worth 90 US cents. Now it must compete at $1.33, with wage costs in euros set against delivery contracts in dollars. Currency hedges protect for a while, then reality hits.

German industry says $1.40 is the pain limit. It is hard to see what can stop the dollar sliding that far as funds bet on US rate cuts next year. The yield premium that kept the currency aloft earlier this year is about to narrow, perhaps sharply. The central banks of Asia and Russia are sated on dollar reserves. They may not slash their US holdings, but they are unlikely to add either. So who will fund America's deficits?

"The US needs a trillion dollars a year just to stand still," says David Bloom, currency guru at HSBC. Modern financial crises have always begun on the peripheries of global economy, setting off a chain reaction. Mr Bloom says the seizure this time will be at the heart of the system as the dollar buckles, pressing down on the "aorta of capitalism".

So we have a world where the ageing economies of Europe and Japan are too fragile to withstand a dollar slide, yet America needs a weak dollar to cushion its own downturn. Meanwhile, China is holding its currency far below equilibrium. Nobody is doing much to break this impasse. The 1930s come to mind.

The consensus is that America will rebound quickly, averting a sticky end. But it takes two years for rate rises to feed through an economy, so Americans have not yet faced the worst. Nobody knows how US households with record debt will cope with the squeeze. Borrowings rose 8.1 per cent in 2000, 8.6 per cent in 2001, 9.7 per cent in 2002, 11.4 per cent in 2003, 11.1 per cent in 2004, 11.7 per cent in 2005, with no let-up in 2006. Debt payments have reached an all-time high of 13.9 per cent of personal income.

Americans extracted 6 per cent of GDP from their homes last year in equity withdrawals (ie, more debt), mostly to subsidise their lifestyles. This game is up. Professor Nouriel Roubini from New York University says recession is inevitable. "People have been using their homes as their ATM machine, but many are now facing negative equity so there will be a lot of foreclosures. As the housing recession spreads to manufacturing, this is going to lead to a much harder landing than people think."

The bonds markets are alert, even if equities are not. Interest rates on 10-year Treasury bonds (4.46 per cent) have dropped below short-term rates (5.25 per cent) for five months. This is the "inverted yield curve" of satanic fame, flag of recession. Ignore that at your peril.

Whatever happens, the Federal Reserve will come to the rescue. But how soon? The Fed minutes from December 2000 show some governors fretting about inflation long after the danger had shifted to slump. That wily old bird Alan Greenspan silenced them, knowing in his bones that the economy was going over a cliff.

His untested sucessor, Ben Bernanke – burdened with inflationist baggage – does not yet have the credibility to pull off that stunt. Whatever he really thinks, he will have to play by the book. So batten down the hatches for a long storm.

Posted by Hugo Albert Orwell at 03:32 PM | Permalink | TrackBacks (0)

Source: Financial Times (FT.com)

By Haig Simonian in Zurich and Javier Blas and Carola Hoyos in London

Published: December 10 2006 20:11 | Last updated: December 10 2006 20:11

Oil producing countries have reduced their exposure to the dollar to the lowest level in two years and shifted oil income into euros, yen and sterling, according to new data from the Bank for International Settlements.

The revelation in the latest BIS quarterly review, published on Monday, confirms market speculation about a move out of dollars and could put new pressure on the ailing US currency.

Market liquidity is traditionally low in December, and many traders have locked in profits, potentially reinforcing volatility.

Russia and the members of the Organisation of the Petroleum Exporting Countries, the oil cartel, cut their dollar holdings from 67 per cent in the first quarter to 65 per cent in the second.

Meanwhile, they increased their holdings of euros from 20 to 22 per cent, the BIS said. The speed of the shift may help to explain the weakness of the dollar, which recently fell to a 20-month low against the euro and a 14-year low against sterling.

The BIS, the central bank for the developed world’s central banks, is customarily cautious in its language. However, it noted: “While the data are not comprehensive, they do appear to indicate a modest shift over the quarter in the US dollar share of reporting banks’ liabilities to oil exporting countries.”

The review shows that Qatar and Iran, whose foreign exchange policy has sparked widespread market speculation, cut their dollar holdings by $2.4bn and $4bn respectively.

Such shifts may be modest compared with the total assets held, but they provide a crucial indication on future thinking.

Currency switches are likely to be progressive, subtle and discreet, as untoward attention could hit the dollar, lowering the value of depositors’ remaining dollar-denominated assets.

The last time oil-exporting countries cut their exposure to the dollar – in late 2003 – it pushed the euro to an all-time high against the dollar. Eighteen months ago, the exposure to the dollar of oil producing countries was above 70 per cent.

BIS data is the best guide financial markets have to the currency investment trends of oil producers, which otherwise do not provide figures. The rise in oil prices since 2002 means oil producing countries have amassed a current account surplus of about $500bn, according to the IMF. This is 2½ times the current account surplus of China.

Overall, Opec’s dollar deposits fell by $5.3bn, while euro and yen-denominated deposits rose $2.8bn and $3.8bn, respectively. Placements of dollars by Russians rose by $5bn, but most of their $16bn additional deposits were denominated in euros.

The dollar has suffered weakness because of concerns about global imbalances and the future course of the Federal Reserve’s interest rate policy.

Additional reporting by Peter Garnham in London

Copyright The Financial Times Limited 2006

Posted by Hugo Albert Orwell at 03:30 PM | Permalink | TrackBacks (0)

Source: Spiegel Online

By Christian Reiermann

Is an end of an era looming in the foreign exchange markets? The dollar has been depreciating against the euro for weeks. Currency experts and the German government don't yet see this as cause for alarm. The US currency's role as a lead currency isn't as important as it used to be, they say.

Like most central bankers, Jean-Claude Trichet, the president of the European Central Bank (ECB), has a penchant for cryptic comments. Injecting a certain degree of incomprehensibility is a signal to the professionals that he's competent. And when it comes to laymen, industry jargon has the desired effect of generating the necessary respect.

Last Thursday the public was treated to yet another example of Trichet's convoluted speaking style. A number of risks, the ECB president said, could jeopardize a generally favorable economic outlook in the euro zone. They included, according to Trichet, "concerns regarding possible uncontrolled developments triggered by global economic imbalances."

What Europe's most powerful protector of the currency was actually saying was this: The gradual decline of the dollar in the foreign currency markets in recent weeks could pose a threat to the economy. What Trichet was also trying to broadcast is that the ECB has recognized and is aware of the threat.

Nevertheless, the European Central Bank in Frankfurt again increased its key interest rate on Thursday by a quarter percentage point to 3.5 percent, which makes the euro more attractive to international investors. The central bankers had no choice but to take the step, having already announced their intentions weeks ago.

Experts have been predicting for some time that the dollar would eventually go into a nosedive, and now that time seems to have come. The US currency has lost five percent of its value against the euro since late October, and 13 percent since the beginning of the year. The euro is currently fluctuating around a value of $1.33, which is only 3 cents away from its all-time high in 2004. And yet Trichet's counterpart Ben Bernanke, the chairman of the US Federal Reserve, has done nothing but look on as the dollar plunges.

A sea change appears to be taking place on the international financial markets. For years, global capital flowed in only one direction, with $2 billion going into the United States every day. Investors viewed the world's largest economy not only as a bastion of stability, but also as a place that promised the best deals, the most lucrative returns and the highest growth rates.

The Americans, for their part, welcomed foreign investment. For them, it was almost a tradition to save very little and spend more than they earned -- essentially achieving affluence on credit. Foreigners financed the Americans' almost obsessive consumer spending, which spurred worldwide economic growth for years.

Because the US government was unable to fall back on the savings of its citizens, it too was forced to finance its budget deficit with foreign capital. Both consumer spending and the federal deficit kept the dollar high, because the rest of the world was practically scrambling to invest in the United States.

This phase seems to have come to an end, at least for the time being. "There are fundamental weaknesses in the American economy. This could not continue in the long term," says Alfred Steinherr, chief economist at the German Institute for Economic Research (DIW).

Investors pulling out

Investors worldwide are becoming sceptical and starting to pull their money out of the United States. They have realized that a people and a country cannot live beyond their means in the long term. The US dollar's exchange rate is starting to crumble as a result of this withdrawal.

The depreciation is causing growing concern about what will happen to the global economy if the United States loses its role as an engine of growth. If German cars, machinery and services become more expensive, will the German economic recovery end before it has really started?

The German government isn't worried yet, at least not officially. Nevertheless, experts in the finance and economics ministries have been keeping a close eye on developments. Although they continue to believe that the changes still fall within the scope of long-term averages, they don't rule out that the situation could worsen.

They believe that a first critical threshold for the competitiveness of the German economy will be reached at an exchange rate of about $1.36 per euro, and that Germany could see major difficulties at rates in the neighborhood of $1.50. If there is turbulence in the foreign currency markets, the government in Berlin will find itself in an especially challenging position. In early 2007, Germany will assume the chairmanship of the so-called G8 group of seven major industrialized nations plus Russia.

The G8 has repeatedly engaged in crisis management to deal with problems in the international financial system. It did so in the 1980s, when the combined forces of the G8 were needed to put a stop to the soaring dollar. It stepped in with equal verve a few years to forestall a decline in the American currency with the so-called Louvre Accord.

There are two principal causes behind the most recent development. Both have to do with the fact that Europe is becoming more attractive for international investors compared to the United States. On the one hand, interest rates in Europe and the United States are moving in opposite directions. "The ECB will continue to raise its key rates next year, whereas interest rates appear to have peaked in the USA," says Joachim Scheide, an expert on the economy at the Global Economic Institute (IFW) in the northern German city of Kiel. This means that financial investments denominated in euros are yielding higher interest and are in greater demand internationally, which in turn leads to a rise in the euro.

The prospects for growth are also shifting. The US economy is cooling off. The government recently lowered its 3.3 percent growth forecast for 2007. If Americans consume less as a result of a decline in foreign capital investment, the United States could even face a prolonged period of more modest growth.

Germany has shed 'sick man' image

By contrast the euro zone economy is robust. Germany, in particular, has surprised many with a stream of good economic news. Unemployment dropped below the psychologically critical threshold of four million in November. The Ifo business climate index, which measures the expectations of businesses, is at its highest point in 15 years, while consumer confidence has reached a five-year high.

In the last quarter of this year Germany, long considered the sick man of Europe, will have transformed itself into an engine of economic growth. According to analysts at Postbank, Germany's annual growth, projected at 3.4 percent, will even exceed that of the United States this year.

This is the kind of news that fuels the expectations of investors who now prefer to invest their money in the euro zone. The result is an increase in the exchange rate for the European Union's common currency. But how will the decline in the dollar's value affect future economic development? Could it cause a major imbalance in the global economy, or will the global economy, and Germany, get off lightly?

Pessimists are quick to come out of the woodwork whenever a major shift in the financial markets approaches. Many economists and bank analysts, especially in the United States, believe that the correction will happen very suddenly, with the dollar depreciating by 10 to 30 percent within a short period of time.

This would inevitably cause an adjustment crisis. Growth rates would plunge worldwide and a global recession, coupled with a drastic jump in unemployment, could follow.

This doomsday scenario is by no means the majority view. Some experts, especially in Germany, are more optimistic. "The US trade deficit has grown in the course of a few years," says IFW expert Scheide. "It will also gradually decline over a period of several years."

Scheide expects the dollar to lose another 10 percent in value against the euro in the next five years, a scenario that would be much easier to handle for the German and European economies. Companies would have sufficient time to adjust to changes in exchange rates. "In that case even an exchange rate of 1.40 wouldn't be disastrous," said DIW analyst Steinherr.

Germany is a good example of how effectively this can work. Despite the fact that the dollar has lost half of its value against the euro since 2002, exports have not been adversely affected. Indeed, they even increased from €651 billion ($861 billion) to €786 billion ($1.04 triilion). The Germany economy exported more than ever before in October.

Another reason is that the dollar zone is no longer as important for German exports as it was only a few decades ago. Leaving aside exceptions such as the auto industry, other regions of the world have long since become more important to the German economy than the United States, where Germany now sells less than one-tenth of its exports. Germany exports more than 40 percent of its goods and services to other countries within the euro zone, 13 percent to eastern Europe and nine percent to Asia. The turbulence surrounding the dollar has had virtually no effect on German exports to neighboring European countries. Most of the EU's new members have tied their currencies to the euro, and exchange rate risks evaporated for western Europe with the introduction of the euro.

The euro even prevents the kinds of major upheavals in Europe that occurred in the past whenever the dollar fell. When that happened, German businesses and consumers were routinely forced to bear a greater burden of adjustment than the economies of neighboring countries. In the past, if the German mark gained 10 percent in value against the dollar, the French franc or the Italian lira would only gain six or seven percent. As a result, the German mark was overvalued relative to other European currencies, which translated into economic disadvantages for the German economy.

This mechanism was eliminated when the euro was introduced. Now all member states carry the same burden.

The consequences of a declining dollar for the German and European economy will be determined in large part by the way other currencies develop relative to the dollar. "It would be fatal if only the euro were to rise," says DIW analyst Steinherr. "Then it would only be the euro zone that would have to bear the burden of adjustment." But the foreign currency markets suggest a different development, as the dollar is also losing value in relation to other important currencies.

The British pound, for example, rose to new highs last week. Even more importantly, the currencies of east Asian growth regions are also appreciating against the dollar. The Thai Baht, for example, gained about 15 percent against the dollar in 2006, while the South Korean Won gained 10 percent. Even the Chinese Yuan, which slavishly followed the dollar in the past, gained more than three percent. Virtually every economy is bearing part of the burden of adjustment.

The decline in the dollar also has its advantages. For Germany, the greatest advantage is that Germans pay less for oil. The oil price is mainly set in dollars worldwide. If the dollar declines, the same amount of oil costs Europe fewer euros, and the money the Europeans save can be spent on other goods.

A similar dynamic applies to exports from the dollar zone. If the decline in the dollar continues, computers, software licenses and machinery from the United States will become less expensive. Both developments would represent a windfall for companies and people in the euro zone, because the same amount of money would buy more goods.

The perils of a currency crash are not nearly as great as they were in the days of the dollar's absolute dominance 30 or 40 years ago. Globalization has led to the development of a number of growth centers in the world economy which share the burden of turbulence. Gone are the days when an American finance minister could boast: "The dollar is our currency, but it's your problem."

Translated from the German by Christopher Sultan

Posted by Hugo Albert Orwell at 03:27 PM | Permalink | TrackBacks (0)

Source: AP Special Correspondent

By CHARLES J. HANLEY, AP Special Correspondent
Sat Dec 9, 1:12 PM ET

JINJA, Uganda - At Jinja pier the rusty red hull of a Lake Victoria freighter sat barely afloat in water just six feet deep — and dropping. "The scientists have to explain this," said ship's engineer Gabriel Maziku.

Across the bay, at a fish packing plant, fishermen had to wade ashore with their Nile perch in flat-bottomed boats, and heave the silvery catch up to a jetty that soon may be on dry land and out of reach entirely. Looking on, plant manager Ravee Ramanujam wondered about what's to come.

"Such a large body of water, dropping so fast," he said.

At 27,000 square miles, the size of Ireland, Victoria is the greatest of Africa's Great Lakes — the biggest freshwater body after Lake Superior. And it has dropped fast, at least six feet in the past three years, and by as much as a half-inch a day this year before November rains stabilized things.

The outflow through two hydroelectric dams at Jinja is part of the problem — a tiny part, says the Uganda government, or half the problem, say environmentalists. But much of what is happening to Victoria and other lakes across the heart of Africa is attributable to years of drought and rising temperatures, conditions that starve the lakes of inflowing water and evaporate more of the water they have.

An extreme example lies 1,500 miles northwest of here, deeper in the drought zone, where Lake Chad, once the world's sixth-largest, has shrunk to 2 percent of its 1960s size. And the African map abounds with other, less startling examples, from Lake Turkana in northern Kenya, getting half the inflow it once did, to the great Lake Tanganyika south of here, whose level dropped over five feet in five years.

"All these lakes are extremely sensitive to climate change," the U.N. Environment Program warned in a global water assessment two years ago.

Now, in a yet unpublished report obtained by The Associated Press, an international consulting firm advises the Ugandan government that supercomputer models of global-warming scenarios for Lake Victoria "raise alarming concerns" about its future and that of the Nile River, which begins its 4,100-mile northward journey here at Jinja.

The report, by U.S.-based Water Resources and Energy Management International, says rising temperatures may evaporate up to half the lake's normal inflow from rainfall and rivers, with "severe consequences for the lake and its ability to meet the region's water resources needs."

A further dramatic drop in Victoria's water levels might even turn off this spigot for the Nile, a lifeline for more than 100 million Egyptians, Sudanese and others.

"People talk about the snows of Kilimanjaro," said Aris P. Georgakakos, the study's chief author, speaking of that African mountain's melting glaciers. "We have something much bigger to worry about, and that's Lake Victoria."

Each troubled lake is a complex story.

Lake Chad's near-disappearance, for example, stems in part from overuse of its source waters for irrigation. Deforestation around Lake Victoria, shared by Uganda, Kenya and Tanzania, makes the area a less efficient rain "catchment" for the lake, and overfishing and pollution are damaging its $400-million-a-year fishing industry. Kenya's Rift Valley lakes, some just a few feet deep, have always fluctuated in size, even drying up with drought.

But African leaders say things are different this time, because long-term climate change may eclipse other factors.

"These cycles, when they've happened, they haven't happened under the circumstances pertaining now — the global warming, overpopulation, degradation," said Maria Mutagamba, Uganda's water and environment minister.

African temperatures rose an average 1 degree Fahrenheit in the 20th century — matching the global average — and even more in the past few decades in such places as Lake Tanganyika, climatologists say. If greenhouse gases continue to build in the atmosphere, temperatures may be several degrees warmer by this century's end.

At Lake Victoria's receding shoreline, a place of scavenging storks, weedy expanses of water hyacinth, fishing boats derelict on dried lake bed, people see what's happening but don't understand why.

"In just a few years, the lake pulled back from there, maybe 60 meters (200 feet)," said fisherman Patrick Sewagude, 24, pointing to old high-water marks at Ssese Beach, near Kampala, Uganda's capital.

Someone had planted a few rows of corn on the exposed lake bed. Grass was taking over elsewhere. "It's tough. The fish have gone way out. You pull up stones in your nets," Sewagude said.

Back in Jinja, 40 miles east of Kampala, researchers at the Lake Victoria Fisheries Organization said falling water levels are the latest blow to the dying biology of Lake Victoria, where pollution has helped kill off scores of unique species of tropical fish in recent decades. Now tilapia, once a prime food fish, are declining because their inshore breeding grounds are vanishing.

"People for many years haven't seen such a sudden change in the lake level," said the fisheries office's Richard Ogutu-Ohwayo, a biologist on the lake for 35 years. "Right now it's very difficult to say what will happen. It's a grim scenario, of worldwide climate change."

Around the lake shore, everyone has his own theories.

"The water's too hot, and the fish are going deeper, beneath the nets," said Modi Kafeel Ahmed, a Jinja fish processor. But the lake has been overfished, too, he said. "If it goes like this another five years, the lake will be empty of fish."

For 30 million people living in its basin, Lake Victoria is a vital source — of livelihoods and food, of water, of transportation, of electric power.

Almost 200 miles across the lake from here, Tanzanian authorities have reduced water supplies to the city of Mwanza because an intake pipe was left high and dry. The same is happening in Uganda, where German engineer Erhard Schulte is pushing work crews to finish refitting Entebbe's city water plant, extending its intake pipe 1,000 feet farther out into the lake.

"The old Britisher who designed the original plant never expected the lake would drop this way," Schulte told a visitor.

Perhaps the worst impact is on power supplies. Tanzanian factories have shut down because the rivers powering hydroelectric dams, and replenishing Lake Victoria, are running dry. Kampala, a city of more than 1 million, has endured hours-long blackouts daily.

Uganda's two big hydro dams, side by side on the Victoria Nile, the lake's only outlet, are victims and — some say — prime suspects in the crisis.

In 2003, facing growing Ugandan demand for electricity, the Nalubaale and Kiira dams produced a peak 265 megawatts of power. In the process, their operators began overshooting long-standing formulas regulating flow of water out of the lake, an independent hydrologist later concluded.

That outside study, cited by environmentalists, contends 55 percent of the lake-level drop since 2003 is traceable to excessive outflow. But the dams' private operators and Ugandan officials strongly dispute that.

Paul Mubiru, Ugandan energy commissioner, says the dams have had a "negligible" impact on Lake Victoria, and points to Lake Tanganyika's similar fall in levels — with no dams involved.

Earlier this year, the operators announced they were reducing the dam outflows, "but our observations show that even with the reduced outflow, the water loss is still on the increase," Mutagamba, the water minister, told the AP.

Falling lake levels, meantime, mean lower "head" pressure at the dams. Their output has dropped to 120 megawatts, pushing Uganda deeper into economic crisis.

It is such unanticipated ripple effects — from abrupt environmental change — that underlie the warnings worldwide about global warming. Scientists find another unexpected example in Lake Tanganyika, where they say warmer surface waters may be depleting fish stocks.

Many African lakes go unvisited by scientists, but what is known is troubling enough, says veteran researcher Robert E. Hecky, of Canada's University of Waterloo. "It is some of the most imperative data we have, that global climate change can be affecting these African water bodies," he said.

A "very comprehensive, very realistic" study of Lake Victoria is needed, preferably conducted by U.N. specialists, said Frank Muramuzi, the head of Uganda's leading environmental organization.

"Businesses are standing still, not working. Fishermen can't get enough fish. We do not have enough water supplies," Muramuzi said. "Rains alone won't bring back the lake levels, because there would still be climate change, a lot of heat, evaporation. It's reached a point where people don't know what to do."

Posted by Hugo Albert Orwell at 09:48 AM | Permalink | TrackBacks (0)

Source: Falls Curch News Press Online

By Tom Whipple
Thursday, 07 December 2006

On November 29, the Washington Post carried an op-ed by Nawaf Obaid, an advisor to the Saudi government. Despite the obligatory "the opinions expressed are his own", and a press release denying government involvement, the piece clearly carries an important message from Saudi King Abdullah to President Bush, Washington, and the American people.

"Stepping Into Iraq" starts by reminding President Bush that in February 2003 the Saudi Foreign Minister had warned him that if the US removed Saddam Hussein by force he would only be solving one problem by creating five more.

Obaid goes on to point out that had the President followed the Foreign Minister's advice, Iraq would not now be facing "full blown civil war and disintegration."

The thrust of the message, however, is a thinly veiled warning to the US not to walk away from Iraq. Obaid quotes the Saudi Ambassador who said last month: "Since America came into Iraq uninvited, it should not leave Iraq uninvited." And Obaid adds, "If it does, one of the first consequences will be massive Saudi intervention to stop Iranian-backed Shiite militias from butchering Iraqi Sunnis."

"As the economic powerhouse of the Middle East, the birthplace of Islam and the de facto leader of the world's Sunni community (which comprises 85 percent of all Muslims), Saudi Arabia has both the means and the religious responsibility to intervene," he continues.

The Saudis, of course, are reminding us that while America can get on its ships and planes and go home, Saudi Arabia is going to be left right at the heart of what is starting to look more and more like the beginnings of a regional war. Should the fighting increase, it is only a manner of time before the vital interests or perhaps the very existence of the Kingdom, or at least the Royal family, is threatened.

The Saudis are clear about why they are sending this message to America. "Just a few months ago it was unthinkable that President Bush would prematurely withdraw a significant number of American troops from Iraq. But it seems possible today." Obviously the American election, with the unmistakable message that the American voters want out is much on Saudi minds. "The Saudi leadership is preparing to substantially revise its Iraq policy," says Obaid.

The critical part of all this is just what the Saudis are going to do in the face of an American threat to withdraw. The op-ed lists three options. First Riyadh could give their Sunni kinsmen (money, arms and logistical support. So far they claim to have refrained from doing this because the Sunni insurgents were busy shooting and blowing up Americans so it was considered highly impolitic to aid them. This of course shows commendable self-restraint as the Iranians have been supporting the Shiites for years.

The second Saudi option would be to fund, equip, and train new "Sunni brigades" to offset the Shiite militias. This of course would formalize the "civil war."

Now, however, we get to the Saudis' third option as suggested by Obaid— oil. "King Abdullah may decide to strangle Iranian funding of the militias through oil policy." "If the Saudis boosted production and cut the price of oil in half, the kingdom could still finance its current spending. But it would be devastating to Iran, which is facing economic difficulties even with today's high prices."

Now the notion of the Saudis flooding the 85 million barrel a day world oil market with enough oil to halve the world price and destroy the Iranian economy is a stretch. Saudi oil production has been dropping in recent months and some analysts believe this is from necessity not choice. Even if the Saudis were to attempt to increase output, it would likely be hard-to-sell heavy crude, and the effort would probably damage future oil production by over producing existing fields.

The Saudis may no longer be able to increase production enough to attain their political objectives, however, there is no reason why they can't cut their production. Cutting is easy and it can be done is many ways varying from an overt embargo as happened in the 1970's to more subtle reductions.

Why are the Saudi's continuing to produce circa 9 million barrels a day? Given the tight worldwide oil market, the Saudi's could cut their production in half; the price of oil would more that double; they would get richer; their oil fields would get a much needed rest; and there would be oil left for their great-grand children to export.

What keeps them from cutting production and reaping all these benefits? That too is simple, their relationship with the USA. So long as the US was their number one protector, and needed the oil to keep flowing, the Saudis historically would bend over backwards to help Washington out. The only exception was the short-lived oil boycott back in 1973.

Now, however, everything has changed. Against Saudi advice, the US charged into Baghdad and set 27 million Iraqis at each other's throats. America's partners in the invading "coalition" are bailing out one by one. The US people have just voted to change something and it is clear that "stay the course" is not going to obtain for much longer.

The key Saudi foreign policy objective at the minute clearly is to keep sufficient US military forces in Iraq to keep the lid on the situation for as long as it takes to keep the mess from spilling over into Saudi Arabia itself.

The threat to the existence of the Saudi Royal Family from a spreading civil war now is much greater than any threat from an unhappy Washington. Can anyone imagine the new US Congress voting to invade some other large Middle Eastern country in the near future? With what?

Could a major cutback in Saudi oil production bring down America? Maybe not, but it sure could do a lot of harm. The most blatant action would be cut their oil production in half. Taking 4-5 million barrels a day off the world oil market would get everybody's attention very quickly. Oil prices would certainly go well over $100 per barrel. In short order, the US and world economies would suffer greatly.

The Saudis could, however, bring pressure without doing anything so provocative as a major production cut. Simply ratcheting down production in an unobtrusive manner should be enough to scare Washington into reconsidering leaving Riyadh, as the leader of the world's Sunnis to deal with the mess on its own.

Just before President Bush met with the Iraqi Prime Minister in Jordan last week, Vice President Cheney was summoned to Riyadh to receive the whole Saudi message. It may be many years before we learn exactly what that message was, but already President Bush is back to talking about "staying the course."

It may be a lot harder, or a lot more expensive, for the US to get out of Iraq than anyone ever thought.

Posted by Hugo Albert Orwell at 09:54 AM | Permalink | TrackBacks (0)