Thursday, October 16, 2008

Oil Prices Slip Below $70 a Barrel


Oil prices dropped below $70 a barrel for the first time in 14 months Thursday, prompting the OPEC cartel to call for an emergency meeting next week to establish some stability in prices that have plummeted recently after rising for months.
David McNew/Getty Images

The instability of prices may discourage long-term projects to develop new sources of oil.

Oil prices have tumbled by nearly $40 a barrel in just three weeks as indications grow that demand for energy will slow along with weakening economies around the world. As recently as July, oil was trading at a record of $145 a barrel.

The decline in oil prices could provide a form of stimulus to the economy as consumers pay less to fill up their tanks. If oil prices stay at current levels, consumers would have $250 billion more, over a year, to save or spend elsewhere, according to Lawrence Goldstein, an energy economist. Some analysts expect oil prices to keep declining, perhaps to as low as $50 a barrel in coming months.

Americans will probably see lower energy bills this winter, as gasoline and heating oil futures also dropped sharply on Thursday. Gasoline prices now average $3.08 a gallon, down from a summer peak of $4.11 a gallon, according to AAA.

The decline in oil prices came after a government report showed domestic crude oil stockpiles rose more than expected as Americans use less oil, in part because they are driving less. In the last month, domestic oil demand has fallen to its lowest level since June 1999, at 18.6 million barrels a day, according to the Energy Department.

Oil settled down $4.69 a barrel, at $69.85. The drop, along with other promising signs on the inflation front, was among the reasons investors bid stocks higher, with the Dow Jones industrial average closing up 401.35 points at 8,979.26.

Natural gas prices have also tumbled since their summer peak of $13.58 per thousand cubic feet. On Thursday, natural gas futures rose 19 cents, to $6.81, after a report showed that stockpiles rose less than expected.

While consumers may have reason to cheer the falling oil prices after such a sharp run-up, the wild roller coaster of volatility is a nightmare for oil producers and petroleum executives who say they need more stability to plan long-term projects to develop new sources of oil.

If they cannot be confident that they will get a stable return on their investment, they may hold back. That in turn could set the stage for possible shortages of oil and higher prices when global demand picks up again.

The sharp drop-off has forced OPEC’s hand. The cartel said just last week that it would meet in mid-November, after the United States elections. But on Thursday, it rescheduled its emergency session for next Friday, Oct. 24.

The cartel’s producers, which control 40 percent of global exports, could curb their output by about a million barrels a day to try to stem the drop in prices, according to analysts.

It is unclear what price range for oil the cartel wants to establish. But the meeting “sends a clear signal that OPEC is concerned about the speed with which oil prices are slipping away from a preferred price of around $80 a barrel,” said Lawrence Eagles, an oil analyst at JPMorgan.

Iran’s oil minister, Gholamhossein Nozari, told reporters in Tehran on Tuesday, “I think the low price is a real damage to the future of production.”

From its inception, the oil industry has gone through countless cycles, with oil companies cutting investments when prices fell. The price collapse of the 1980s forced companies to slash investments and prompted a wave of large mergers through the industry. But this retrenchment left the world scrambling for oil when demand from Asian and Latin American economies soared.

Concerns that this pattern might be repeated were mentioned frequently during an industry conference in Venice last weekend, where oil executives said they worried that a prolonged recession, tighter credit and lower energy consumption would mean slower growth in energy supplies in coming years.

The credit freeze has already forced some projects to be scaled back, some energy analysts and executives said. “This is a real test,” said Jeroen van der Veer, the chief executive of Royal Dutch Shell, in an interview at the conference. “Some people will be overstretched, and there will be some delays in some projects.”

Over the last decade, growth in oil consumption has outpaced the ability of producers to meet that demand with more production. Many experts have predicted a new squeeze within the next five years that could once again propel oil prices over $100 a barrel.

The drop in prices has already created problems for oil producers. Iran and Venezuela both need oil prices at $95 a barrel to balance their national budgets, Russia needs $70 and Saudi Arabia needs $55 a barrel, according to Deutsche Bank estimates. Algeria’s oil minister, Chakib Khelil, said on Thursday that the “ideal” price for crude oil was $70 to $90 a barrel.

In Russia, which is not part of OPEC, the drop in prices is threatening the country’s ability to increase production. The Russian government has reportedly agreed to allocate $9 billion to its four major producers — Lukoil, Gazprom, Rosneft and TNK-BP — to help them cope with investment needs amid the credit crisis.

In the United States, Chesapeake Energy, a gas producer, has recently indicated it will reduce its capital investments over the next few years in response to falling prices.

Global oil demand is undeniably slowing down, particularly in developed nations. Japanese oil consumption tumbled by 12 percent in August over the same month a year ago, while in the United States, demand fell by 8 percent in September.

Consumption is still growing in developing nations, but at a slower pace than in recent years. The International Energy Agency expects global oil demand to grow by just 400,000 barrels a day this year, to 86.5 million barrels a day. The agency, which had been revising downward its predictions all year, forecast growth of 2 million barrels a day for 2008 when the year started.

The two-day energy meetings last week were held in private in the baroque setting of the island of San Giorgio Maggiore, home to a 10th-century Benedictine monastery. In many conversations with senior executives outside of the conference meetings, they voiced concerns about their industry becoming increasingly vulnerable to a slowing economy.

“We pretty much know where supplies are going to come from in future years, but today the biggest uncertainty is demand,” said Christophe de Margerie, chief executive of Total, the French oil company.

Some executives, though, are still holding out hope that Asian economies may weather the economic storm and help the global economy recover faster. Lower oil prices could also make it harder for some companies to survive on their own, leading to a new wave of mergers and acquisitions.

“This new environment is not all doom and gloom,” said Mr. van der Veer, of Shell. “It can also provide some opportunities. Certain assets may become available.”

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Don't Blame Capitalism

By Peter Schiff

Amid the chaos of recent days, as the federal government has taken gargantuan steps to stabilize the financial markets, realigning the U.S. economic system in the process, comes a nearly universal consensus: This crisis resulted from government reluctance to regulate the unbridled greed of Wall Street. Many economists and market participants who were formerly averse to government interference agree that a more robust regulatory framework must be constructed to cage the destructive forces of capitalism.

For the political left, which has long championed the need for such limits, this crisis is the opportunity of a lifetime.

Absent from such conclusions is the central role the government played in creating the crisis. Yes, many Wall Street leaders were irresponsible, and they should pay. But they were playing the distorted hand dealt them by government policies. Our leaders irrationally promoted home-buying, discouraged savings, and recklessly encouraged borrowing and lending, which together undermined our markets.


Just as prices in a free market are set by supply and demand, financial and real estate markets are governed by the opposing tension between greed and fear. Everyone wants to make money, but everyone is also afraid of losing what he has. Although few would ascribe their desire for prosperity to greed, it is simply a rose by another name. Greed is the elemental motivation for the economic risk-taking and hard work that are essential to a vibrant economy.

But over the past generation, government has removed the necessary counterbalance of fear from the equation. Policies enacted by the Federal Reserve, the Federal Housing Administration, Fannie Mae and Freddie Mac (which were always government entities in disguise), and others created advantages for home-buying and selling and removed disincentives for lending and borrowing. The result was a credit and real estate bubble that could only grow -- until it could grow no more.

Prominent among these wrongheaded advantages are the mortgage interest tax deduction and the exemption of real estate capital gains from taxable income. These policies create unnatural demand for home purchases and a (tax-free) incentive to speculate in real estate.

Similarly, the FHA, Fannie and Freddie were created to encourage lending by allowing primary lenders to turn their long-term risk over to the government. Absent this implicit guarantee, lenders would probably have been much more conservative in approving borrowers and setting interest terms, and in requiring documentation of incomes and higher down payments. Market forces would have kept out unqualified buyers and prevented home-price appreciation from exceeding the growth in household income.

Interest rates contributed the most to creating the housing boom. After the dot-com crash and the slowdown following the attacks of Sept. 11, 2001, the Federal Reserve took extraordinary steps to prevent a shallow recession from deepening. By slashing interest rates to 1 percent and holding them below the rate of inflation for years, the government discouraged savings and practically distributed free money.

Artificially low interest rates invigorated the market for adjustable-rate mortgages and gave birth to the teaser rate, which made overpriced homes appear affordable. Alan Greenspan himself actively encouraged home buyers to avail themselves of these seeming benefits. As monetary policy caused houses to become more expensive, it also temporarily provided buyers with the means to overpay. Cheap money gave rise to subprime mortgages and the resulting securitization wave that made these loans appear safe for investors.

And even today, as market forces deflate the credit bubble, the government is stepping in to re-inflate it. First came the Treasury's $700 billion plan to purchase mortgage assets that no one in the private sector would buy. Now it has recapitalized banks to the tune of $250 billion, guaranteeing loans between banks and fully insuring non-interest-bearing accounts. Policymakers say that absent these steps, banks would not be able to extend loans. But given our already staggering debt burden, perhaps more loans are not the answer. That's what the free market is telling us. But the government cannot abide solutions that ask for consumer sacrifice.

Real credit can be supplied only by savings, so artificial steps to stimulate lending will only produce inflation. By refusing to allow market forces to rein in excess spending, liquidate bad investments, replenish depleted savings, fund capital investment and help workers transition from the service sector to the manufacturing sector, government is resisting the cure while exacerbating the disease.

The United States reached its economic preeminence on the strength of its free markets. So far, the economic disaster exacerbated by government policies is creating opportunities for further government interference, which will lead to bigger catastrophes. Binding the country to a tangle of socialist ideals will seal our fate as a second-rate economic power.

The writer, who was economic adviser for Ron Paul's 2008 presidential campaign, is president of Euro Pacific Capital. He is the author of "The Little Book of Bull Moves in Bear Markets."

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AIG executives spent thousands during hunting trip


CHARLOTTE, N.C. (AP) — A handful of top executives from American International Group Inc. spent thousands of dollars during a recent English hunting trip, even as the New York-based insurer asked for an additional $37.8 billion loan from the Federal Reserve.

The news comes as New York Attorney General Andrew Cuomo on Wednesday told the insurance giant to do away with golden parachutes for executives, golf outings and parties while taking government money to stay afloat.

Cuomo said he has the power under state business law to review and possibly rescind any inappropriate AIG spending as long as the Federal Reserve is propping up the huge insurer with almost $123 billion in loans announced since Sept. 16.

"This was an annual event for customers of the AIG property casualty insurance companies in the U.K. and Europe, and planned months before the Federal Reserve Bank of New York's loan to AIG," company spokesman Peter Tulupman said Wednesday morning.

In a prepared statement later in the day, the company said, "We will continue to take all measures necessary to ensure that these activities cease immediately. AIG's priority is to continue focusing on actions necessary to repay the Federal Reserve loan and emerge as a vital, ongoing business."

AIG officials declined to say which AIG executives attended the trip, which reports have said racked up an $86,000 tab. News of the hunting trip surfaced just days after AIG received an additional $37.8 billion loan from the Federal Reserve, on top of a previous $85 billion emergency loan granted last month.

The company said last week it would stop "all non-essential conferences, meetings and activities that do not clearly maximize value and service given the current conditions."

Last month, and just days after the U.S. government stepped in to save AIG with a $85 billion taxpayer-funded loan, the company picked up a $440,000 tab for a week-long retreat at a posh California resort for top-performing insurance agents.

Lawmakers investigating AIG's meltdown said they were enraged that executives of AIG's main U.S. life insurance subsidiary spent a lavish amount on the retreat, complete with spa treatments, banquets and golf outings. Last week, White House Press Secretary Dana Perino called the event "despicable."

At that time, AIG issued a statement saying that the "business event" was planned months before the Sept. 16 bailout and that it was held for top-producing independent life insurance agents, not AIG employees. Of the 100 attendees, only 10 worked for the AIG unit hosting the event, it said.

The insurer said Chief Executive Edward Liddy sent a letter to Treasury Secretary Henry Paulson "clarifying the circumstances" of the event. In the letter, Liddy assured Paulson that AIG is "reevaluating the costs of all aspects of our operations in light of the new circumstances in which we are all operating."

The insurer then said it canceled a future California retreat that was to be held later this month.

Regarding the recent hunting trip, "We regret that this event was not canceled," Tulupman said Wednesday.

Shares of AIG fell 37 cents, or 13.2 percent, to $2.43 in trading Wednesday.

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Joe the Plumber: Not a Licensed Plumber

Plumber Joe Wurzelbacher watches the presidential candidate debate in his home in Ohio on Oct. 15, 2008. (Lori King/Toledo Blade)

By Robert Barnes
Joe the Plumber is not exactly a plumber, he's "not even close" to making the kind of money that would result in higher taxes from Democrat Barack Obama's proposals and has such an aversion to taxes that a lien was filed against him by the state of Ohio.

Such is the whirlwind of information that has come out about Joe Wurzelbacher of Holland, Ohio, since Republican John McCain made him famous in last night's debate. McCain mentioned him more than 20 times to use him as a symbol of hard-working Americans who would be hurt by Obama's tax policies. Obama and Wurzelbacher met earlier in the week in Toledo, where Wurzelbacher said Obama's plans to raise taxes on those making $250,000 a year or more would penalize him in his plans to buy the plumbing business for which he works.

Wurzelbacher since then has been on Fox News, interviewed by CBS's Katie Couric and appeared on ABC's "Good Morning America."

Not all the attention has been welcomed. Wurzelbacher, 34, told the Associated Press that he was not a licensed plumber. Because he works for a small company that does residential work, he said, he doesn't need to be licensed.

Wurzelbacher, whose legal name is Samuel Joseph Wurzelbacher, owes the state of Ohio $1,182 in personal income taxes, according to tax records that show a lien for that amount filed against him in January 2007.

Wurzelbacher said he is of modest means, but worried Obama's tax plans would eventually hurt him. "You see my house. I don't have a lot of bells and whistles in here, really. My truck's a couple of years old and I'm going to have it for the next 10 years probably. So I don't see [Obama] helping me out,'' he told reporters this morning.

He also sounded concerned about the attention he is receiving. "I'm completely flabbergasted with this whole thing and just hope I'm not making too much of a fool of myself and hope I can get my message out there," he said.

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Just stop paying your mortgage

If you are a mortgage holder who is either struggling with crushing payments, bitter for having overpaid for your home during the bubble, or who has extravagantly refinanced when prices were rising, the government's landmark $700 billion bailout package has an important message for you: stop making your mortgage payments . . . immediately. Furthermore, if you believe that with some planning and sacrifice you may be able to meet your mortgage obligations, the government's message is clear: relax, don't bother.

While angry voters have labeled the package as a bailout for Wall Street, it is more akin to a “Get out of Jail Free” card for anyone who acted irresponsibly during the boom. Here's why.

Nobody likes foreclosure, least of all politicians. The new law clearly indicates that the government will make major efforts to reduce foreclosures through “term extensions, rate reductions and principal write-downs” of the troubled mortgages that it buys from the private sector. In other words, your new landlord will bend over backward to keep you in your home. The legislation telegraphs this by including a provision that extends until 2013 the exclusion of loan reductions from taxable income.

When a financial institution holds a mortgage, homeowners must live with the fear of foreclosure. Private institutions only have obligations to shareholders. In the case of a defaulting borrower, they will look to recover as much of their principal as possible. If foreclosure is their best option, they will take it in a heartbeat.

The government has no such obligations. Its only goal is to keep voters happy. After supposedly bailing out the fat cats on Wall Street, no politician wants to be accused of evicting struggling families. Once you understand this, all of your anxiety should melt away. Why pay your mortgage if foreclosure is off the table, and if you know that lower payments, and possibly a reduced loan amount, would result? A tarnished a credit rating is a small price to pay for such a benefit.

Unfortunately, this boon will not extend to those foolish individuals who either made large down payments or resisted the temptation of cashing out equity. The large amount of home equity built up by these suckers, I mean homeowners, means that in the case of default foreclosure remains a financially attractive option. As a result, these loans will be much less likely to be turned over to the government.

If your mortgage does become the property of Uncle Sam, the growingly popular impulse to “just walk away” should be replaced by “just stay and stop paying.” No one will throw you out. After a few months, or years, of living payment free, you will get a call from a motivated government agent eager to adjust your loan into something affordable.

To bolster your bargaining position it will help to be able to claim poverty. As a result, if you have any savings, spend it soon, before they call. Buy a bigger TV, a new wardrobe, or better yet, take a vacation. After the hardship of spending all of your refi cash, you probably deserve it. If you have any guilt just remember, Washington argues that consumer spending is the best way to stimulate the economy. Living beyond your means is a patriotic duty.

If you do get the opportunity to live for a while with no mortgage payment, don't make the tragic mistake of using your extra cash to pay down your credit cards. As the growing level of credit card defaults will soon push credit card companies into bankruptcy, we can expect a similar bailout plan for American Express and Discover Financial. When that happens, expect massive balance reductions for Americans who can demonstrate the inability to pay. The bigger your balance, the greater the benefit.

Taxpayers, however, will not be so lucky. The savvy investment strategists who see the government turning a tidy profit on its mortgage purchases have not factored in the incentives that will discourage nonpayment. The only way the government will be able to profit would be to buy the mortgages at deep discounts to actual loan values. However, if the purchase prices are too low, the plan will bankrupt the institutions it is trying to bail out. On the other hand, if it substantially overpays, which seems far more likely, it will bankrupt the nation.

In any event, as more and more borrowers succumb to the allure and safety of nonpayment, look for the number of troubled assets to swell. This will ensure that the $700 billion merely represents the first installment in what will be a multitrillion-dollar plan. Just as government policies provided the primary impetus in blowing up the housing bubble earlier in the decade, its latest attempt at market manipulation will only result in making a terrible problem far worse.

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Market surges, Gates predicts 9% unemployment ... and you're overworked

Bill Gates

Yesterday's 11% surge on Wall Street is gathering most of the headlines this morning -- and any good news on the economy is welcome news -- but there is clearly a risk of putting too much stock in any single indicator.

As a counterweight, industry leaders speaking at a Harvard Business School symposium yesterday warned that the ongoing economic turmoil is likely to morph into an unemployment crisis that Microsoft's Bill Gates, for one, predicted could push the jobless rate above 9% for the first time in a quarter century.

Moreover, life promises to be no bed of roses for those who do manage to hang on to their jobs, particularly in the IT field, according to experts interviewed last week by Network World.

From this morning's Boston Globe:

"Consumer sentiment has never been so low," Gates said, despite the efforts in Washington and other world capitals to get credit flowing. "So no matter how quickly this gets fixed, you're still going to have an economic cycle with a fairly significant recession."

Gates was one of several speakers who addressed the risks of the spreading economic turmoil at a long-planned event that had been intended to celebrate Harvard's contributions to management education over the past 100 years. Coming in the midst of the worst economic crisis since the Great Depression, however, much of the talk centered on the fallout.

"Little did we imagine two years ago when we began planning this event what the world would look like today," Harvard Business School dean Jay O. Light said in his opening remarks.

Even mighty Cisco finds itself cutting jobs.

And where companies do not trim staff, the economic difficulties are likely to result in expanded roles and workloads for those who do remain employed. From Monday's story in Network World headlined: "Economic crisis means double duty for IT pros."

"For the average company, the trend is a lot of caution going forward. There is too much uncertainty around the bailout and the national election for IT leaders to be confident in new investments," says John Estes, a vice president with IT staffing and consulting firm Robert Half Technology. ...

"No one is losing a job necessarily, but everyone is tight now so we are trying to get more out of the staff we have," says Bruce Meyer, director of network services at ProMedica Healthcare in Toledo, Ohio. "Consolidating this Layer 1 functionality -- a jack is a jack and cable is cable and it's all in the same closet now -- prevents us from having two people doing the same thing and adds more efficiency to our staff."

A survey cited in that story reports 6 in 10 IT executives are re-evaluating 2009 budgets and putting non-essential projects on hold.

Care to look at the bright side? Gartner says this mess isn't going to be as bad for the IT sector as the burst of the dot-com bubble in 2001.

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Obama's Iraq plans vindicated as US agrees to pull out by 2011

By Patrick Cockburn in Baghdad

Iraq and the United States have finally agreed on a security pact which would mean that US forces would withdraw from Iraq by 2011, American and Iraqi officials said yesterday.

The accord became a major test of strength between the Iraqi government and Washington since negotiations began in March with the Iraqi Prime Minister, Nouri al-Maliki, pictured below, demanding US concessions on the date of the troop withdrawal and immunity for US troops. The pact replaces the UN Security Council resolution enacted after the American invasion of 2003.

The agreement still needs to be approved by the council of Iraqi leaders, the cabinet and the Iraqi parliament. Mr Maliki saw the highly influential Shia religious leader, the Grand Ayatollah Ali al-Sistani, last week and was assured that he would not stand in the way of the pact if approved by parliament.

The accord has been on the verge of being signed several times in the past only for fresh objections to be made by the Iraqi government, which has become increasingly confident of its own strength. A compromise has been reached on whether or not US troops can be tried by an Iraqi court if they commit crimes while not engaged in operations. US troops are to withdraw from Iraqi towns and villages by the middle of next year and from Iraq entirely by the middle of 2011 said the government's spokesman, Ali Dabbagh.

He said: "The withdrawal is to be achieved in three years. In 2011, the government at that time will determine whether it needs a new pact or not, and what type of pact will depend on the challenges it faces."

The US administration will present the pact as a sign of its success in Iraq but in fact the accord is very different from originally envisaged by Washington which would largely have continued the occupation as before.

President Bush was opposed to timelines or dates for an American withdrawal and the US is still stressing that this is conditional on improved security in Iraq. But it is unlikely that the Shia majority will want to share power with the US.

Iraqi politicians have always assumed that Washington's insistence on signing a new accord before the presidential election was motivated by the White House's hope that the accord would be seen as a sign that its Iraq policy had at last produced a success. The Republican contender, Senator John McCain, started off his campaign by saying that US troops might stay for 100 years and there should be no date for their withdrawal. The Democratic candidate, Senator Barack Obama, wants combat troops home by the middle of 2010, which was also the date originally proposed by Mr Maliki.

Iraq has faded as an issue in the presidential election as the financial crisis worsened. However, claims that the Republicans had won a victory in Iraq looked increasingly unreal as it became clear that a withdrawal date would be determined by Mr Maliki, and not by the US.

The US has given ground on crucial issues. On the legal immunity of American troops Mr Dabbagh said: "Inside their bases, they will be under American law. Iraqi judicial law will be implemented in case these forces commit a serious and deliberate felony outside their military bases and when off duty." Contractors, who have more men in Iraq than the US army, will no longer have immunity.

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