ODAC News
Sunday 12 Aug
The Oil Depletion Analysis Centre
The next newsletter will be Sunday,
19 August.
Economy -
1/ Europe narrowly avoids
financial meltdown, for now
1a/ ECB injects €95bn to help markets (Financial
Times, Thu 09 Aug)
1b/ ECB injects emergency funds for first time since 9/11 (The
Telegraph, Fri 10 Aug)
1c/ Europe slammed by U.S. credit crisis
(International Herald Tribune, Thu 09 Aug)
1d/ The derivatives vacuum
(Financial Times, Thu 09 Aug)
1e/ Credit crisis puts global finance to test
(International Herald Tribune, Thu 09 Aug)
1f/ ECB steps in as lending rates rocket (The Telegraph, Fri 10
Aug)
1g/ Business Comment: ECB's confidence trick
won't restore faith in market
(The Telegraph, Fri 10 Aug)
1h/ Shaky markets stir rumors of who is in
trouble
(International Herald Tribune, Fri 10 Aug)
Iraqi Oil
2/ Iraqi Oil Update
(Energy Intelligence, Thu 09 Aug)
Economy -
3a/ China threatens to
trigger US dollar crash (The Telegraph [
3b/ Toll warns on deepening
[US] housing slump (Financial Times, Wed 08 Aug)
4a/ Increased North Sea oil
production shrinks UK trade deficit (The Guardian,
Thu 09 Aug)
4b/ UK trade gap narrows as oil
exports jump (Financial Times, Thu 09 Aug)
Electricity/Coal -
5/ Ontario Walks Tightrope
on Plan to End Coal Use (
Economy -
6a/ More expensive borrowing the
only credible outlook (The Times, Thu 09 Aug)
6b/ Why the Bank [of England]
will raise rates, and soon (The Telegraph, Wed 08 Aug)
7/ Potential storm helps
oil rebound (Houston Chronicle, Fri 10
Aug)
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1/
Comment: One knock-on effect of Peak
Oil that many Peak Oil commentators expect to happen could be described as
“economic meltdown”, or “The Second Great Depression”. One mechanism, for
example, could be higher oil prices leading to higher inflation, leading
central banks to raise interest rates to control inflation, and finally
interest rates rising to a level where so many people cannot keep up with their
mortgage/credit card payments that the economy goes pop. ODAC News has been
reporting on all these trends of recent, but so far no-one has reported that
the economic system is about to go pop.
In parallel, the newsletter has also been reporting on
the so-called US subprime fiasco, which is hundreds of billions of dollars that
have been lent out to the subprime market, essentially to people that cannot
afford mortgages but nonetheless were given them and now can no longer afford
to meet the interest payments, especially now that interest rates are going up.
A combination of the subprime fiasco (which has led to several Hedge Funds
going bankrupt), rising interest rates and other problems has to led to what is
colloquially called a credit squeeze – banks not keen to lend out money. All
sorts of financial institutions, including big banks, need to borrow money to
keep going, but at the end of last week there was little money to borrow in
1a/ ECB injects €95bn to help markets
(Financial Times, Thu 09 Aug)
Comment: Interpreting this article, it
looks as though the European Central Bank took emergency measures yesterday
(Thursday) to prevent financial meltdown in
“The European Central Bank scrambled to head off a
potential financial crisis on Thursday ... It was designed to ensure that money
markets continued to function…”
Article: The European Central Bank
scrambled to head off a potential financial crisis on Thursday by pumping an
emergency €94.8bn ($131bn) into the region’s banking system after liquidity in
the interbank market started to dry up, threatening
banks’ access to short-term funds.
The cash injection was the biggest in the ECB’s history, exceeding the €69bn provided the day after
the terrorist attacks of September 11 2001. The ECB also made an unprecedented
one-day pledge to meet 100 per cent of all funding requests from financial
institutions.
The ECB action followed a sharp increase in the rate
at which banks are prepared to lend overnight to each other. It was designed to
ensure that money markets continued to function.
The rise in the interbank
rate swiftly spilled over into the
... The $24bn injected into US markets by the New York
Fed came in two scheduled open market operations
The total is roughly double the normal amount the Fed
lends to the markets, but is not remarkably high and suggests the Fed is not in
outright crisis fighting- mode.
Some traders warned that market unease was unlikely to
dissipate soon. Edwin Rood, global head of money markets at ABN Amro, said: “The underlying problem cannot be addressed
directly by the ECB.”
1b/ ECB injects emergency funds for first time since 9/11
(The Telegraph, Fri 10 Aug)
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/09/bcnecb109.xml
Comment: Just when you thought news
could not get much worse, it has. A “leveraged position“ means a position taken
with borrowed money. For example, a Hedge Fund can buy a lot more stocks or
derivatives with borrowed money (the leveraging), but if the stocks/derivatives
fall in value, the lenders will want their lent/borrowed money back.
“… Traders speculated that the ECB [European Central
Bank] may have knowledge of serious problems that have yet come to light. The
markets were mystified last week when Jochen Sanio, head of Germany's financial regulator BaFin, said Germany faced the worst banking crisis since
1931 - the year when Austria's Kredit Anstaldt famously collasped,
setting off a wave of bank failures across Central Europe.
… Just over a week ago, BNP chief executive Baudouin Prot sought to reassure the market that the bank
had only minimal exposure to the
It is not first bank to admit to serious problems just
days after denying them, raising concerns among investors that they are not
being told the full truth.
... The admission that France's biggest bank [BNP
Paribas] was struggling to value its funds with exposure to US sub-prime has
been deeply unsettling, prompting fears that hedge funds could start to unwind
their own leveraged positions, and set off a chain reation.”
Article: The European Central Bank has
injected emergency liquidity into the European credit markets for the first
time since the 9/11 terrorist attacks, acting to prevent contagion from the US
sub-prime mortgage slump spreading through the German, French, Dutch, and
Spanish banking systems.
In a dramatic move, the ECB injected €95bn of special
liquidity tender into the banking sector and said it was "closely
monitoring the situation and stands ready to act to assure orderly conditions
in the euro money market".
It is the biggest one day shot of emergency funds ever
carried out by the European authorities.
... The move came as BNP Paribas, France's largest
bank, halted withdrawls from three funds with €2bn
(£1.35bn) invested in US sub-prime debt and a mix of collateralized debt
obligations (CDOs).
BNP said it had acted to forestall forced liquidation
of assets in a disorderly market where almost all bids had dried up as
investors stood on the sidelines.
... BNP's fund suspension
came as WestLB, the German bank, was forced to deny
rumours of large sub-prime losses at its
EU officials in
... Traders speculated that the ECB may have knowledge
of serious problems that have yet come to light. The markets were mystified
last week when Jochen Sanio,
head of Germany's financial regulator BaFin, said
Germany faced the worst banking crisis since 1931 - the year when Austria's Kredit Anstaldt famously collasped, setting off a wave of bank failures across Central
Europe.
Bernard Connolly, global strategist at Banque AIG, said the ECB had acted to stave off a looming
credit crunch in
... Just over a week ago, BNP chief executive Baudouin Prot sought to reassure the market that the bank
had only minimal exposure to the
It is not first bank to admit to serious problems just
days after denying them, rasing concerns among
investors that they are not being told the full truth.
The German bank IKB was rescued last week in a
state-led bail-out just ten days after it claimed to be in rude good health,
with minimal exposure to the
It now requires an €8.1bn taxpayer gaurantee
to cover its misadventures in the murkier areas of the credit markets.
... The admission that France's biggest bank [BNP
Paribas] was struggling to value its funds with exposure to US sub-prime has
been deeply unsettling, prompting fears that hedge funds could start to unwind
their own leveraged positions, and set off a chain reaction.
1c/ Europe slammed by
http://www.iht.com/articles/2007/08/09/business/subprime.php?page=1
Comment: IHT take on events. Pretty
grim reading.
Article: Fears of a credit crisis in
Europe deepened Thursday, as a big French bank announced it would close three
investment funds, and the European Central Bank injected emergency funds into
the market for the first time since the aftermath of the Sept. 11, 2001
terrorist attacks.
... The European Central Bank's intervention, which
came after overnight borrowing rates spiked to their highest levels since 2001,
was intended to soothe the markets. But analysts said it may have had the
opposite effect, stoking fears that the worst of the fallout has yet to be felt
in
...
... "Someone must have called them [ECB] and said
'we need liquidity now,' " said Erik Nielsen, the chief European economist
at Goldman Sachs. "They did what a central bank is supposed to do."
Still, the bank's extraordinary response - its first
since Sept. 12, 2001, the day after the terrorist attacks in
"The ECB ignited a fear that there is something
really bad going on that the markets don't yet know about," said Jacob de Tusch-Lec, a fund manager at Artemis Investment Management
in
While several big European banks, including Credit
Suisse, Société Générale of
France, and Deutsche Bank, have recently reported robust profits, the list of
European banks with problems is also growing.
In the
West LB, a major regional lender, insisted it did not
face the massive losses that threatened another German bank, IKB Deutsche Industriebank, which has $24 billion in investments in the
mortgage market.
... There are plenty of rumors
about how many subprime mortgages, and related financial products, ended up on
the books of European banks. But there is very little reliable data, analysts
said.
Still, it is clear that European banks loved the high
yields of these investments, at a time when interest rates were low and
1d/ The derivatives vacuum (Financial Times, Thu
09 Aug)
Comment: A good, and short, explanation
of what happened to the two US-based Bear Stearns funds that crashed last
month. And why others are likely to follow. One way of interpreting derivatives
is they are a means to gamble (the word ‘bets’ is used below), and potentially
lose, very, very large sums of money on the stock markets. Complex derivatives
are involved in the sub-prime scam, and this article explains why worse is
probably still to come.
Article: The recent collapse of two
hedge funds at Bear Stearns Asset Management raises two questions few people
can answer. How did they lose so much money so quickly? And where else are
similar problems buried? The unsatisfying answers illustrate why markets
suddenly have become so volatile.
First, it has been widely reported that the Bear
Stearns hedge funds lost money on highly rated derivative securities based on
subprime mortgages. Essentially, these securities, known as collateralised debt
obligations (CDOs), were complex bets on how many
people would repay the money they borrowed to buy homes. Although Bear Stearns
has not yet admitted which versions of these derivatives it held, one can glean
some characteristics from letters the funds sent to investors months ago.
On May 15, the newer of the two funds reported it was
down 6.5 per cent for the year. By contrast, the value of many subprime-linked
securities had been sliced in half as early as February.
... On June 7, losses climbed to 19 per cent.
Investors asked how the newer fund lost so much money, when the subprime
markets were rebounding and many commentators, including Ben Bernanke, the Federal Reserve chairman, suggested a crisis
had been avoided.
... Then came the whopper: on July 18, Bear Stearns
admitted it could not figure out how much money it had lost... Less than two
weeks later, they filed for bankruptcy protection.
This is not the first time smart people have bought
complex derivatives and later said they could not calculate their losses.
Bankers Trust, the most sophisticated derivatives firm of the 1990s, made
similar mistakes. In 2001, the chief executive of American Express shocked
investors when he admitted the company “did not comprehend the risk” when it
lost $826m on CDOs. Freddie Mac and Fannie Mae have
taken years to value derivatives losses, as did Enron.
... Some institutions argue that accounting rules
permit them to hold derivatives at cost. Others say they need not reflect a
loss until there is compelling evidence of a decline in value, such as a
downgrade of the investments’ credit rating. As a result, it is virtually
impossible for investors to understand how much exposure an institution really
has to the subprime markets.
The common denominator of derivatives fiascos such as
that of the Bear Stearns funds is that the answer to the above questions is:
“No one knows.” Subprime exposure can remain buried and unexplained for months.
Now that investors seem to understand this, the
markets are swinging wildly. Volatility is highest when people realise they
cannot figure out what investments are worth.
1e/ Credit crisis puts global finance to test
(International Herald Tribune, Thu 09 Aug)
http://www.iht.com/articles/2007/08/09/business/liquidity.php
Comment: Analysis from the IHT. In a
nutshell, so-called derivatives based on US subprime mortgages are worth much
less than previously thought, and European financial institutions may be holding
them in large quantities, but apparently no-one knows for sure.
1f/ ECB steps in as lending rates rocket
(The Telegraph, Fri 10 Aug)
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/10/ccecb110.xml&DCMP=EMC-mcn_10082007
Comment: “In essence, $2,000bn
(£1,000bn) in securities held by funds and banks may be falsely priced on the
books.”
The figure most commonly quoted in the media is $100
billion dollars. If it is nearer to $2,000 billion, then the fun really starts.
Article: Whether it was news that BNP
Paribas had suspended three funds caught in the US sub-prime swamp, or wild
rumours about Goldman Sachs's hedge funds, or the delayed fallout from the
€8.1bn (£5.5bn) state rescue of Germany's IKB bank, global confidence has
finally buckled and led to a near total seizure of the credit markets.
... The relentless drip-drip of bad news has been
straining nerves for two months, ever since two Bear Stearns hedge funds began
to implode on
The Bear Stearns debacle led to a forced sale of
assets, exposing the dirty secret that sub-prime and similar "Alt-A"
mortgage debt is worth far less than its face value. In essence, $2,000bn
(£1,000bn) in securities held by funds and banks may be falsely priced on the
books. The rating agencies have since been scrambling to downgrade the bonds,
raising fears of a cascade effect.
A lot of dominoes have already fallen hard.
1g/ Business Comment: ECB's confidence trick won't
restore faith in market
(The Telegraph, Fri 10 Aug)
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/10/ccom110.xml&DCMP=EMC-mcn_10082007
Comment: Editorial from the business
section of the Telegraph. Points out that the fundamental problem which will
ensure the current economic problems are long-term is “consumers and investors
having borrowed too much”, that defaults on mortgage payments in the UK are
increasing, and how close we came to economic disaster yesterday (Thursday):
“Controversially the ECB has now stepped in and lowered the price of money by
supplying €95bn of the folding stuff. Why? Because the alternative would have
been simply too awful to contemplate.”
1h/ Shaky markets stir rumors of who is in trouble
(International Herald Tribune, Fri 10 Aug)
http://www.iht.com/articles/2007/08/10/business/banks.php
Article: … Analysts said that because
these securities were held by so many investors, the pain would be spread
widely instead of taking down one large financial institution.
The bad news, said Stuart Gabriel, a finance professor
at the University of California, Los Angeles, "is because of the
difficulties in valuing these mortgage pools and the high levels of uncertainty
and panic that have set into these markets, we have a situation where there is
a severe lack of liquidity in the mortgage market and that has created an
extremely dangerous situation for our economy and the global economy."
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2/
Iraqi Oil Update
(Energy Intelligence, Thu 09 Aug)
No link. From newsletter.
Comment: From the commentary section, ‘World
Watch -- Comment & Interpretation on Today's News’, of the daily
newsletter.
Article: Iraqi oil minister al-Shahristani is in
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3a/
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/08/cnchina108.xml
Comment: This article is about Chinese
hints that it will sell some/all of its
Article: The Chinese government has
begun a concerted campaign of economic threats against the
Two Chinese officials at leading Communist Party
bodies have given interviews in recent days warning, for the first time, that
Beijing may use its $1,330bn (£658bn) of foreign reserves as a political weapon
to counter pressure from the US Congress. Shifts in Chinese policy are often
announced through key think tanks and academies.
Described as
It would also cause a spike in US bond yields,
hammering the
It is estimated that
... Simon Derrick, currency strategist at the Bank of
New York Mellon, said the comments were a message to the US Senate as Capitol
Hill prepares legislation for the autumn session.
"The words are alarming and unambiguous. This
carries a clear political threat and could have very serious consequences at a time
when the credit markets are already afraid of contagion from the sub-prime
troubles," he said.
A bill drafted by a group of US senators, and backed
by the Senate Finance Committee, calls for trade tariffs against Chinese goods
as retaliation for alleged currency manipulation.
The yuan has appreciated 9pc
against the dollar over the last two years under a crawling peg but it has
failed to halt the rise of
Henry Paulson, the US Treasury secretary, said any
such sanctions would undermine
3b/ Toll warns on deepening [US] housing slump
(Financial Times, Wed 08 Aug)
Comment: Login required. Are we about
to enter a recession? Will crude oil demand therefore drop, and with it oil
prices, much more than has happened over the last week? The track record of the
last couple of years suggests media interest in, and scepticism of, Peak Oil is
directly related to the price of crude oil…
Article: The chief executive of Toll
Brothers said buyer interest in its homes in the latest quarter was at the
lowest in 20 years, as the largest
Six weeks in the earlier part of the quarter, which
ran until the end of July, saw the “lowest traffic on a per community basis
that we have ever had”, Robert Toll said, meaning the company’s housing
developments had received on average fewer visitors than at any time since it
went public in 1986.
… The rate of new home sales in June was at its second
lowest since September 1999.
The cautionary note is particularly troubling because
the company mainly sells high-end homes, which have fared better in avoiding
the subprime crisis…
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4a/ Increased North Sea oil production shrinks
http://business.guardian.co.uk/story/0,,2145068,00.html
Comment: This article is spun, oddly,
as a good news story - the
Article: The
The shortfall in goods in narrowed to £6.266bn from an
upwardly revised £6.433bn in May, the Office for National Statistics said.
Analysts had forecast a widening in the deficit to £6.5bn.
Full production at the new Buzzard oil field in the
North Sea led to a jump in oil volumes and drove the improvement in
4b/
http://www.ft.com/cms/s/8dacf164-465a-11dc-a3be-0000779fd2ac.html
Article: … After adding the surplus of £2.7bn
for trade in services, the UK’s total balance of trade was in the red by
£3.6bn, down from £3.7bn in May…
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5/
http://www.planetark.com/dailynewsstory.cfm/newsid/43597/story.htm
Comment: Both the
Article: The province of Ontario,
Canada's biggest energy user, aims to close its last coal-fired power plant in
2014 and become the only jurisdiction in North America to completely phase out
coal, a strategy that some critics deride as reckless and others say is overly
timid.
The coal plan is the major plank in the climate change
policy of
But greenhouse gas-emitting coal now supplies about a
fifth of the province's electricity demand and some critics fear that
Heading into an October election, the opposition
Progressive Conservative Party warns the plan risks more mass blackouts during
peak summer periods such as the one that paralyzed
... A coalition of environmental groups put forward an
alternative, 20-year plan last week that they say would shut the coal plants in
the next couple of years and replace nuclear power with renewable sources.
"What we found is that the greener models can cut
greenhouse gas emissions in half compared to the current plan, and it can save
money in the end," said Cherise Burda, spokeswoman for the Pembina
Institute, one of the groups behind the 20-year plan.
... The Liberal government, elected in 2003, wants to
refurbish existing nuclear plants, which now represent about 37 percent of
installed power, and possibly build new ones. It also plans to push
conservation, reinvest in renewable supply sources such as wind power, and
boost by 15 percent its reliance on natural gas to supplement what's lost from
coal.
... Benjamin Tal, a senior
economist at CIBC World Markets, wrote in a recent study the government's plan
for re-balancing
But he warned in an interview that the coal shutdown
is slated to happen around the same time that four reactors at the Pickering
nuclear station, supplying 2,000 megawatts, are to be shut down for
refurbishment, and that any transmission glitch could jeopardize supply.
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6a/ More expensive borrowing the only credible outlook
(The Times, Thu 09 Aug)
http://business.timesonline.co.uk/tol/business/columnists/article2224922.ece
Comment: The article explains why
Article: Unless the energetic British
consumer succumbs to a Damascene conversion to the virtues of thrift, or there
is a major financial market shock,
... It is possible that the transmission of past base
rate rises is at last about to be passed on with a vengeance, as fixed-rate
borrowers negotiate fresh deals on less attractive terms and as banks price
risk more realistically by fattening up margins.
But continuing to underestimate the inflationary
threat would look worse for the Bank than being accused of overkill. To borrow
its own coinage, the risks to its own credibility lie on the upside. For that
reason alone, rates are going higher.
6b/ Why the Bank [of
http://www.mediaplayer.telegraph.co.uk/?item=120E977E-4DFE-4479-A5A4-F67F68329495
Comment: Audio – 4 mins
23 secs.
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7/ Potential storm helps oil rebound
(Houston Chronicle, Fri 10 Aug)
http://www.chron.com/disp/story.mpl/business/5045879.html
Comment: Commentators have been saying
for some time how unstable oil prices are. Economic meltdown is likely to make
them fall substantially, another Katrina/Rita and they will go thro the roof.
One day (Thursday) the European Central Bank bails out European financial
institutions, prices go down, the next day (Friday) news that a storm headed
for the
Article: Energy futures rebounded from
earlier lows Friday as traders bought on news a tropical storm is forming in
the
Forecasts show the disturbance has the potential to
develop into a tropical storm and strike the Gulf of Mexico within two weeks,
said Addison Armstrong, an analyst at TFS Energy Futures in
The news injected some buying into a market that has
been dominated by selling lately. Still, the new "storm premium" was
moderate as the same credit and liquidity concerns roiling equity markets
continued to weigh against storm forecasts.
Prices were also supported by news a ConocoPhillips facility
in
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