Big Chill 'To Black Out Us' Financial Mail Source: Mail on Sunday Publication date: 2000-11-26

OIL bosses are warning of winter power and petrol shortages in America and analysts forecast rationing and blackouts. BP Amoco chief executive Sir John Browne is among those predicting that harsh weather there could put too much strain on already overstretched supplies.

Oil producers and refiners are operating at near capacity and the world's oil tankers are fully laden, but it is still not enough to meet demand. Any increase in consumption of heating oil, for example could lead to severe shortages.

Freezing weather has hit the US East coast states and last week a cold snap in California sent gas prices up to the equivalent of $90 a barrel for oil.

Emergency stocks of heating oil are already 20 per cent down on last year.

Browne said: 'There is a very real likelihood of shortages this winter, particularly if the weather is severe in North America.' Oil exploration company Soco International's finance director, Roger Cagle, said there was no spare capacity in the system.

'Tankers are full and oil refineries are working at full capacity. So if demand increases no more oil can be pushed through the system.' Another danger is that cold weather could hit American transport and stop crude oil shipments reaching the refineries.

The looming crisis reflects the almost total failure of the West to persuade Opec to boost production and bring the price below $30 a barrel. Instead, it is steady at $32 to $33, threatening inflation and slump in the industrial countries.

Earlier this month, the International Energy Agency in Paris also warned that low stocks of oil ahead of winter were likely to trigger supply problems.

Already evidence of this is appearing. Gas prices, closely aligned with the oil price and a major source of fuel for the American electricity generating industry, have tripled in the past three months.

Matt Simmons, president of Houston energy investment bank Simmons & Co, said the problems stem from inaccurate government figures on oil stocks and low investment in the past few years as oil prices slumped to $10 a barrel.

'The low price discouraged investment and big new fields have not been opened up,' he said.

'People say "OK, but don't we have reserves?" Yes, there are reserves but they are all crude oil and it takes 100 days to turn crude into refined products.'

http://cnniw.yellowbrix.com/pages/cnniw/Story.nsp?story_id=16067900&ID=cnniw&scategory=Energy

-- Martin Thompson (mthom1927@aol.com), November 27, 2000

Answers

Good find Martin. Here's a really dumb quote from the article...

"The looming crisis reflects the almost total failure of the West to persuade Opec to boost production and bring the price below $30 a barrel. Instead, it is steady at $32 to $33, threatening inflation and slump in the industrial countries. "

Duuh! If the price were & had been a lot higher, then there would exist the shipping and refinery capacity to avoid this crisis. They can't persuade OPEC to ramp up production when they have practically no spare capacity. Inflation and slump in the industrial countries is well on the way. That Simmons guy seems to know wazzup.

-- number six (iam_not_a_number@hotmail.com), November 27, 2000.

This is a link for an emergency Boston City council meeting on the issue of all of these high prices:link: http://207.150.197.195/Map/bostoncitycouncil.htm

-- jax (jax@borg.com), November 27, 2000.

Link isnt hot,I will try to paste it in:

Nov. 18 -- The proposals put forward by U.S. economist Lyndon LaRouche are currently before the Boston City Council, in the form of a "Resolution on Emergency Governmental Action To Reduce Oil and Natural Gas Prices." That resolution, Docket #1261, was put forward by City Councillor Chuck Turner, and will be debated during a public hearing in the City Council Chambers on December 4, between 5 and 7 pm.

Councillor Turner's resolution, which was introduced to the Council on Nov. 1, reads as follows:

Whereas: The price of oil has more than tripled since January of 1999, to over $35 per barrel, and threatens to go even higher over the coming weeks and months; and Whereas: Worldwide oil prices continue to rise despite increased production by OPEC [Organization of Petroleum Exporting Countries] nations, and release of the U.S. Strategic Petroleum Reserve; and

Whereas: The citizens of Boston, Massachusetts, and the New England states in particular, will face danger from increased fire hazards, as well as severe and potentially deadly economic hardship this winter, due to increases in prices for home heating fuels; and

Whereas: The petroleum price crisis is presently but one leading economic consequence of a general hyperinflation in financial asset-prices, now being expressed at increasing rates as a hyperinflation in commodity prices, following a trend similar to that suffered by Weimar Germany during 1923; and

Whereas: The increasingly desperate effort to secure inflows of financial assets into the U.S. dollar sector, by means of various forms of speculative activity, seizes upon several combined factors, to increase asset-price accumulations from hyperinflationary trends in the delivery prices of petroleum products; and

Whereas: These factors include recent increased concentration of ownership of major oil companies through mergers and acquisitions, the increased role of the spot market in petroleum deliveries, the significance of denomination of delivery in U.S. dollars, most especially the intensity of speculative dealings in the form of financial derivatives in this area, which threaten to bring the per- barrel price of petroleum to between $40 and $50 soon, and not much later, much higher; and

Whereas: Only drastic measures taken in concert between sovereign national governments can bring the petroleum-price crisis under control; and

Whereas: Appropriate action led by the U.S. government must aim at immediate emergency cooperation among the governments of principal petroleum-exporting and principal petroleum-consuming nations; and

Whereas: The actions of legislative groupings, i.e., town and city councils, state legislatures, and Federal elected representatives must uphold the oath of office to defend and secure the General Welfare of all citizens; and

Whereas: The following actions proposed by economist Lyndon LaRouche to deal with that emergency situation contribute an important, and decisive step in the direction of moving the government of these United States to act in concert with other nations to solve the more general problem of the world's financial and monetary systems;

Therefore Be It Resolved: That the City Council of Boston urges the President of the United States, the U.S. Senate, and the House of Representatives to take emergency action to reduce oil and natural gas prices, including the following measures: A. Declare a general strategic emergency in the matter of stability of flows and prices of essential energy-supplies of national economies; B. Establish contracts, directly between the U.S. government and the governments of petroleum-exporting nations, of not less than twelve months government-scheduled deliveries of petroleum; C. Define reasonable prices for these contracts; D. On the grounds of a global emergency in petroleum prices and supplies, set priorities on processing of such contracted petroleum flows through relevant refiners to priority categories of consumers in the United States, causing other stocks to be shunted to one side in the degree that these priority deliveries must be processed first; E. Urge governments of other oil-consuming nations to take these same actions, in the context of this global emergency; F. Investigate petroleum market manipulation, through financial derivatives speculation or other unfair speculative practices, and probe allegations that some portion of the U.S. Strategic Petroleum Reserve recently released for the benefit of citizens of the Northeastern United States, are in fact being exported overseas for profit by U.S. refineries;

Be It Further Resolved: That the City Council of Boston urges the Government of the Commonwealth of Massachusetts, the Massachusetts General Court, and other state and local governments of the United States to support these emergency actions in the vital interest of the General Welfare of its citizens.

More information about the resolution, and the campaign to get it passed, are available from the Boston representatives of FDR-PAC, who can be reached at 781-380-4000.

-- jax (jax@borg.com), November 27, 2000.

Larouche the "economist" (and I use the word loosely in his case) almost completely misunderstands the basics of the oil situation, and Larouche the fascist then calls for the nationalization of the oil industry to cure the problem. It's not an economic problem, as Larouche's "solution" suggests. It's a supply problem, and one that is going to get a lot worse, as anyone who understands the Hubbert Curve and what it means for our future knows. The unfortunate part is that his conspiracy-theory maunderings may look good to an increasingly desperate society looking for easy answers that will keep their SUVs on the road. Remember, this is the same man who insists that the Queen of England runs the international drug trade. BTW, is he still in prison for credit-card fraud?

-- Cash (cash@andcarry.com), November 27, 2000.

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The Black King Forget the FOMC and thinly-veiled promises of where the next 25bps is coming from on the Funds rate, the Fed has already embarked upon an easing. Since the week of the 26th October, when the Dollar had finally looked like topping out, driven from its DXY highs by a sharp reversal in UST prices, the Fed has been quietly expanding its balance sheet. Picking up a billion or two quietly in outright Treasury purchases and swelling repos by two thirds or nearly $8 billion, less a few diminishing factors, it has added a net $8.7 billion to the sum.

While that may not sound much, it does mean that anything between $80 - $100 billion of new bank credit has been given a base by this enlargement of the tip of the lowest of the inverted pyramids which is the monetary system. Occurring over 4 short weeks, this represents an annualized increase of 20% and is both the fastest gain and the highest end-total since late April-early May.

In addition, the ECB is still grinding its weekly way higher with its reserve provision, as it has since its inception, and seems to be foolishly sterilizing its interventions. The BOJ has positively exploded to mid-November with its six week injection of Y10 trillion. The last two weeks' development of the Yen and the JGB market both, against a backdrop of official concern for plunging equities and banking stock weakness, can only suggest another slug of high-powered money will hit the numbers when they next batch come out.

Forget CPI and its equivalents. The Central Banks have - as ever – gone back to protecting their cartel, the banking sector which they were all instituted to underwrite with government mandate and taxpayer's money, from the consequences of its own follies.

To encapsulate those follies, let us look at one simple set of data. As the BIS Quarterly Review on International Banking and Financial Developments summarizes, net issuance of debt securities in Q3 was $259 billion, with US Dollars accounting for twice that in the Euro – a reversion to the pre-EMU pattern after a year of Euro predominance. Banking activity had also been expanding through the year across the BIS area, in particular in the syndicated loan market where Mar-Sept saw $654 billion of deals, nearly $4.5 billion per business day, largely reflecting Canal Boom borrowing for Telecoms and late cycle M&A activity. One quarter of all such borrowing this year has been for Telecoms, one quarter of that has been provided by US banks, with another 20% being sourced from the UK and Germany.

How much of that is still good debt? How much of that is parked in special-purpose funding vehicles away from regulatory scrutiny and mark-to-market discipline. How much has been repackaged into CLO's and sold on to unsuspecting mutual funds? Who knows, but the erosion of collateral values has brought the cavalry riding to the rescue once again, as it has roughly every six months in the last five years of the Bubble.

The Fed's participation this time is an especially interesting escalation, since the Fed is still the only central bank which can gamble on strengthening its currency by providing reserves, rather than undermining it. It is still a gamble, though, and one which the Plunge Protection Team only rarely undertakes so openly. Matters are indeed serious.

Europe still fails badly on this count, of course, as the balance of payments figures once again illustrate. Year-to-date, Europe has suffered a portfolio outflow of EUR127.6 billion. However, this aggregate disguises the somewhat remarkable fact that Europe bought a net EUR243 billion in foreign equity in these nine months, of which up to EUR38 billion might represent a counterpart to stock-financed direct investment flows. Against that balance of over EUR200 billion, the banking sector raised EUR155 billion abroad, EUR143.5 billion of that at short-term, while other money market instruments to the tune of EUR37.3 billion were sold to foreign holders.

Europe has effectively run a EUR200 billion margin trade this year – this most horrifyingly expensive of all years – the bulk of it has been financed through the monetary sector and the ECB has underwritten the trade in its weekly refinancing tenders. It is the combination of the two – not the first alone and not any uncritical Keynesian rubbish about growth differentials or official interest rate disparities - which has combined to send the Euro into its death spiral.

So why does this not apply to the Fed, when it starts printing money? Can Alan Greenspan alone make the difference in perception? Can Larry Summers bully the rest of the world into holding onto surplus dollars whatever the circumstances?

Here we must remember the old adage that if you owe the bank a hundred dollars, that's your problem, while if you owe it a million, it's the bank's.

In 1989, the BIS estimates that it captured most extant foreign official exchange reserves in its $403 billion total of global official sector USD holdings. At end-1999, it thinks that the $993 billion it can easily identify understates the true sum of around $1.4 trillion in Uncle Sam's costless IOUs, out of a $1.7 trillion worldwide pot.

In other words, a trillion dollars more of everyone else's reserves are now dependent on Greenspan's whim than at the peak of the last US cycle. It would not do to be too mechanistic, especially as some central banks sequester such holdings in reserve valuation accounts and since multpliers vary from country to country and from period to period, but after adding back in the Fed's own $600 billion balance sheet, the two trillion US Dollars sitting in central banks around the globe could be the foundation of something of the order of $20-30 trillion in banking sector assets - a whole year's reported national product for Planet Earth.

Imagine what would happen if those holdings were to lose 10-15% of their value as private sector holders lost faith in their own substantial pile of the credit notes they lodged with American consumers. We feel sure this is the bogeyman whose frightening visage the US Treasury describes for the rest of G7 at bedtime. The Euro, it seems, was launched too late to stand a chance of competing with the Almighty Dollar, a mere garage Dot.com against a monetary Cisco Systems.

The US Dollar - on the BOE index – last week nosed above its Summer peak and is threatening to make new 14-year highs. It has already staged a Fibonacci retracement of the 1985-1995 decline mapped out on the ebb from the highwater mark of Reaganomics.

If it were to sustain this move, any decent technician, blindfold and led to an unmarked chart, would start from the behavioral shift in mid-1995 at 88.60, work via a high-volume area centrally-placed in the post-Asian crisis range at 108.80 (where the H2'2000 move also began) and project all the way up to 129.00 – almost another 10% from here.

To many, that would be unthinkable. To most it would be highly damaging. It is not what most would forecast using conventional 'wisdom'. However, it could be rationalized.

Imagine that, like some Sci-Fi conflict being fought out in the stupefying silence of the interstellar void, the world is noiselessly engaged on another struggle for supremacy between a potential debt deflation cycle, set in train as a vast raft of assets and the shaky enterprises behind them goes sour, and another wave of 'financial stability' activism from the BIS institutions.

To switch metaphors, in that battle, the Dollar plays the role of the Black King on the chessboard. It may be the weakest piece, but its survival is the paramount concern of all those around it, whether they will it or not. The Queen – Gold – has long since been sacrificed for position. It may be that to avoid a 'defeat' (in truth a painful transition to what may be a more stable system, though a vastly different political order) the Euro Bishops, the Sterling Knights and the Yen Rooks – not to mention the lesser currency pawns – will also be offered up in turn.

One of the reasons the USD has continually confounded its critics is that there is simply no consensus as to where to hide from its influence. All paper currencies are vulnerable, most equity markets are still historically rich, many societies have become overburdened with debt. The system has no anchor but the USD itself and the corruption of money per se means that 'managed' currencies are nothing but a euphemism for competitive devaluation by stealth, that the free riders end up driving the bus.

Against such a backdrop, it might require a series of major blunders on the part of the US authorities or a series of misfortunes restricted to the American economy alone to begin a fracture in the linchpin. It does need would need the bravery to accept an appreciation of one's own exchange rate elsewhere to see the trend reversed. Do you think the British would not respond to a US-led slowdown by clamouring for monetary relaxation in the UK, that the Europeans would not switch to even more stimulus, that the Swiss would not go with the 'counter-cyclical' tide?

Stay with major government bonds for now while the initial manoeuvres unfold and the troops are marshalled. If equities give way on a big scale, the need to bail out banks will reward you immensely. But, if lesser credits begin to stabilize and equity breaks the Bears' hearts once more, be quick to shift. Your cheapest equity call is a put on bonds, financed out of your gains to date. Remember that resources are already scarce and wages and rents are rising along with fuel. Consumer psychology is shifting and if they are spared pain, they will spend the newly-minted cash quickly. Barring a recession, we will witness the Death of the Death of Inflation.

If central banks win once more, this time they are likely to deliver up the worth of fixed income assets to an inflationary aftermath whose flames will make the bond crash of 1999 look tame.

Sean Corrigan

Capital Insight

29 November 2000

-- jax (jax@borg.com), November 28, 2000.