OPEC has maintained all along that the market is well supplied with oil and conditions don't call for an increase in output. They say oil prices are rising due to a weak US dollar and because speculators are driving up prices.
Both President Bush and his deputy Vice President Cheney have visited the Middle East this year, to try and persuade OPEC, particularly the Saudis, to help control prices by increasing production. But so far OPEC has only repeated its earlier argument that there aren't enough buyers to justify an increase in production. At their last meeting in March, OPEC members ignored calls from the US and other G-7 members to increase output and decided to leave production unchanged. Oil prices rose to $126.25 a barrel in New York Friday, before finally closing at $125.96 a barrel.
Although high oil prices are hurting consumers worldwide, the US consumer is particularly hard hit because in most emerging economies such as China and India oil prices are highly subsidized, with state controlled refiners foregoing a part of their profits. In contrast oil companies in the US will make an estimated profit of $200 billion this year. Clinton's call that these companies should either pay a 'windfall tax' or invest in developing alternative sources of energy seems to be a fairly reasonable suggestion after all.
There are finally signs that despite the obvious economic benefits of soaring oil revenues and increasing geo-political influence, OPEC is getting uneasy over runaway oil prices. They are fully aware that if world economic growth slows down, as it most certainly will if oil prices do not come down soon to reasonable levels, and oil prices start moving downwards, they would be able to do very little to stop the slide. After all in 1998 after the Asian economic crisis prices went down all the way to $11 a barrel. It is all a question of sentiment really. Presently traders fret about tight supplies and drive up prices. If they start focusing on a global slowdown instead, they can just as easily drive prices down. Oil is not an infinite resource. Most OPEC members will be without oil in another 20 to 30 years.They must understand that it is in their interest as well to have a stable world economic order. Violent fluctuations have historically destroyed wealth. They are particularly vulnerable as they are bankers to the world, lacking the geographical size as well as the population to absorb all this wealth. They need a steady and predictable stream of income from investments to sustain their population in the absence of any other worthwhile resource or technical skills.
Before President Bush leaves yet again for the Middle East next week, a senior Libyan oil official Shokri Ghanem has made a statement that OPEC may not be inflexible in future about increasing output.'We would consider among other options the possibility of increasing output as a way to ensure market stability. I expect a meeting before September. I am not calling for one, but I would support one,' he said. It is estimated that OPEC would have to increase output by at least 500,000 barrels per day to have any significant impact on prices. This should not be difficult as OPEC members currently have about 2 million barrels per day of spare capacity available with them.
Where Do Oil Prices Go From Here.
Crude oil prices have hit another record high on Friday, trading at almost $126 a barrel. Anticipating increased demand during the American driving season, and tight supplies, crude reached $125.98 a barrel in European trade this afternoon. What is most surprising is that oil prices go up even on days when the US dollar gains versus other currencies and irrespective of whether US weekly inventories show a build up. What's more US refinery capacity utilization has fallen to 85.4% this year from 87.6% last year. Although most of it is due to regular 'spring maintenance', refiners say that part of it is due to falling demand for gasoline and heating oil.The latest trade figures released today seem to confirm this as they show that the US foreign oil bill fell by 5.9% for the month of March this year.
Many experts would have us believe that pries are increasing simply because supply is unable to keep pace with demand. They explain that unlike the energy crises of the 1970's and 80's which were caused by supply disruptions, the present crisis is led by a surge in demand. World demand, they argue, is increasing, and any minor fall in US demand is more than offset by rising demand in China, India, and the Middle East. They point out that non-OPEC supply has fallen below expectations, primarily because of a fall in Russian output. They go on to warn that without any meaningful additions to production capacity somewhere in the world, or without development of viable alternative energy sources, oil prices are not going to decline.
But there is a growing number of analysts who don't buy the above argument. They are convinced that oil is now trading 'ex-fundamentals.' So what is really going on? They say that oil is now in a ridiculous bubble. They pin the blame for the present rise on the prediction by Goldman Sachs that oil will hit $200 a barrel in a couple of years.This is conceded by many traders in the Nymex pit. Speculative momentum has built up in oil futures to such an extent that computerized buying kicks in on every dip in prices.Investors today seem to feel more comfortable holding oil futures rather than holding financial instruments, real estate or even the US dollar.They have lost faith in both the US economy as well as the US dollar. The state of the US economy is a subject of daily discussion. As far as the dollar is concerned , it has lost almost 84% in value against the euro since 2000! Bush's economic policies and the Iraq war are finally beginning to take their toll. Nevertheless these factors alone cannot explain the extent and the speed of the rise in oil prices. Oil was trading at about $25 a barrel shortly before the US invasion of Iraq in March 2003. Even last year in April it was around $70 a barrel. The extent and speed of the price increase, without an apparent change in fundamentals, has taken everyone by surprise.
It is this behavior of oil prices which raises the suspicion that powerful cartels are manipulating oil prices in much the same way as companies such as Bear Stearns and others manipulated the financial markets across the world. Most experts predict that this bubble will also burst like all bubbles do, and oil prices will finally settle well below $100 a barrel.
Many experts would have us believe that pries are increasing simply because supply is unable to keep pace with demand. They explain that unlike the energy crises of the 1970's and 80's which were caused by supply disruptions, the present crisis is led by a surge in demand. World demand, they argue, is increasing, and any minor fall in US demand is more than offset by rising demand in China, India, and the Middle East. They point out that non-OPEC supply has fallen below expectations, primarily because of a fall in Russian output. They go on to warn that without any meaningful additions to production capacity somewhere in the world, or without development of viable alternative energy sources, oil prices are not going to decline.
But there is a growing number of analysts who don't buy the above argument. They are convinced that oil is now trading 'ex-fundamentals.' So what is really going on? They say that oil is now in a ridiculous bubble. They pin the blame for the present rise on the prediction by Goldman Sachs that oil will hit $200 a barrel in a couple of years.This is conceded by many traders in the Nymex pit. Speculative momentum has built up in oil futures to such an extent that computerized buying kicks in on every dip in prices.Investors today seem to feel more comfortable holding oil futures rather than holding financial instruments, real estate or even the US dollar.They have lost faith in both the US economy as well as the US dollar. The state of the US economy is a subject of daily discussion. As far as the dollar is concerned , it has lost almost 84% in value against the euro since 2000! Bush's economic policies and the Iraq war are finally beginning to take their toll. Nevertheless these factors alone cannot explain the extent and the speed of the rise in oil prices. Oil was trading at about $25 a barrel shortly before the US invasion of Iraq in March 2003. Even last year in April it was around $70 a barrel. The extent and speed of the price increase, without an apparent change in fundamentals, has taken everyone by surprise.
It is this behavior of oil prices which raises the suspicion that powerful cartels are manipulating oil prices in much the same way as companies such as Bear Stearns and others manipulated the financial markets across the world. Most experts predict that this bubble will also burst like all bubbles do, and oil prices will finally settle well below $100 a barrel.
Credit Card Industry Protests Against Proposed Regulation.
Several regulatory agencies, including the office of Thrift Supervision, are expected to issue their own regulations to cover narrower segments of the banking industry. Edward Yingling, president of the American Bankers Association has said in a statement that the Fed's proposals represent "an unprecedented regulatory intrusion into marketplace pricing and product offerings." He said the measures would "result in less competition, higher consumer prices, fewer consumer choices and reduced consumer access to credit cards." In other words, if the industry has to follow the proposed rules, they will offer fewer credit cards to people!
The proposed regulations in addition to other things, would require card issuers to mail out statements at least 21 days before a payment's due date and prohibit issuers from applying partial payments only to balances with the lowest interest rates thus leaving costlier, higher rate balances intact.
The credit card industry is unlikely to be able to carry out its threat. Last year it sent out 5 billion solicitations to U.S. households. How far can it scale back? In fact if banks decided to stop issuing cards to people with poor credit histories it might do a lot of good. Americans today carry $951.7 billion in revolving credit card debt, up 5.9% from a year ago. The average credit card debt is about $8,000. Yingling considers the Fed's proposals to be "particularly perplexing" because they would result in "a reduction in credit availability at the very time the Fed is working to increase credit in the marketplace."
This is only an idle threat. The banks make good money in credit card penalty fees. Last year they collected a record $18.1 billion on this account. They aren't going to do anything that hurts their interests. The sooner the regulations are in place, the better it will be for everybody. The banks have had it their way for far too long.
Bernanke Warns White House Over Mortgage Crisis
Fed Chairman Ben Bernanke said Monday in a dinner speech to Columbia Business School that "High rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets, and the broader economy." He added, "Therefore, doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It's in everybody's interest."
Bernanke called on Congress to give the Federal Housing Administration more flexibility to help borrowers at risk of losing their homes. He also called for a strengthening of government sponsored mortgage finance enterprises Fannie Mae and Freddie Mac. "Finding ways to avoid preventable foreclosures is a legitimate and important concern of public policy," he said.
Bernanke's comments must be viewed against the backdrop of a bill passed last week by a congressional panel, which would enable the government to finance $300 billion in distressed mortgages. The bill is supposed to prevent 2 million foreclosures. But the Bush Administration is opposed to the measure saying that the burden of the bailout will fall on the ordinary taxpayer if a significant part of the loans refinanced by the government go bad.
It is exactly this attitude of the White House that has invited criticism from everybody. The Democrats have claimed time and again that the Bush administration has been willing to consider policies that help companies and not troubled homeowners. They are quick to point out that the economic policies followed by the present government have only benefited big business and the rich, while ignoring the common man.
Now it seems that Bernanke too is saying that the Democrats may well have a point. Although he stopped short of endorsing the bill in his speech, his message is loud and clear. Act now or it may be too late.
Bernanke called on Congress to give the Federal Housing Administration more flexibility to help borrowers at risk of losing their homes. He also called for a strengthening of government sponsored mortgage finance enterprises Fannie Mae and Freddie Mac. "Finding ways to avoid preventable foreclosures is a legitimate and important concern of public policy," he said.
Bernanke's comments must be viewed against the backdrop of a bill passed last week by a congressional panel, which would enable the government to finance $300 billion in distressed mortgages. The bill is supposed to prevent 2 million foreclosures. But the Bush Administration is opposed to the measure saying that the burden of the bailout will fall on the ordinary taxpayer if a significant part of the loans refinanced by the government go bad.
It is exactly this attitude of the White House that has invited criticism from everybody. The Democrats have claimed time and again that the Bush administration has been willing to consider policies that help companies and not troubled homeowners. They are quick to point out that the economic policies followed by the present government have only benefited big business and the rich, while ignoring the common man.
Now it seems that Bernanke too is saying that the Democrats may well have a point. Although he stopped short of endorsing the bill in his speech, his message is loud and clear. Act now or it may be too late.
US Economic Outlook Presents Confusing Picture.
Economic activity in the non-manufacturing sector expanded in April, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report on Business. The Non-Manufacturing Index or NMI increased 2.4% to52%,indicating expansion within the non-manufacturing sector for the month of April 2008. This comes after three consecutive months of decline. Twelve non-manufacturing industries reported growth in April. The comments of the members are mixed and vary by industry. The inflationary pressures of rising energy and commodity prices are of major concern to the members.
Economists had expected the April index to come in at 49.3. Areading below 50 indicates contraction.So what do the present numbers indicate?When viewed alongside last week's rise in April factory orders you get a somewhat confused economic picture. On the one hand the services and factory indicators say that the economy is not as weak as it was perceived to be.On the other hand the housing slump continues , and along with the weakness in the financial sector, threatens to be a drag on economic growth in the coming quarters. Fed Chairman Bernanke warned Monday:' High rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets, and the broader economy.' He added that a widespread decline in home prices is a relatively novel phenomenon, and lenders and loan servicers will have to devise new and flexible strategies to deal with the issue.Bernanke called on Congress to move quickly on legislation expanding the Federal Housing Administration and strengthening government sponsored motgage finance enterprises Fannie Mae and Freddie Mac. 'Finding ways to avoid preventable foreclosures is a legitimate and important concern of public policy,' he said.
Economists had expected the April index to come in at 49.3. Areading below 50 indicates contraction.So what do the present numbers indicate?When viewed alongside last week's rise in April factory orders you get a somewhat confused economic picture. On the one hand the services and factory indicators say that the economy is not as weak as it was perceived to be.On the other hand the housing slump continues , and along with the weakness in the financial sector, threatens to be a drag on economic growth in the coming quarters. Fed Chairman Bernanke warned Monday:' High rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets, and the broader economy.' He added that a widespread decline in home prices is a relatively novel phenomenon, and lenders and loan servicers will have to devise new and flexible strategies to deal with the issue.Bernanke called on Congress to move quickly on legislation expanding the Federal Housing Administration and strengthening government sponsored motgage finance enterprises Fannie Mae and Freddie Mac. 'Finding ways to avoid preventable foreclosures is a legitimate and important concern of public policy,' he said.
Do Our Financial Institutions Need Greater Regulation?
The US mortgage meltdown has been grabbing world business news headlines for months now. There was a time in mid March this year when the world financial system seemed to be at risk.The extent of the crisis came to light when Bear Stearns was about to go bust, and would have almost certainly done so, had not the Fed stepped in. Bear Stearns has disappeared for good, taken over by JP Morgan, but the financial system has survived. The Fed took a bold decision and became a lender of last resort to investment banks also, in addition to commercial banks.It offered hundreds of billions of dollars worth of liquid securities in exchange for illiquid securities, that these banks were saddled with, as collateral. Other measures were also taken to boost liquidity in the financial system.
The net result has been that the financial crisis no longer appears as threatening as it once was. Warren Buffet said Saturday,'The worst of the crisis in Wall Street is over.' He supported the action of the Fed in bailing out Bear Stearns, terming it to be 'proper.' While revealing losses on derivative contracts at the annual meeting of shareholders of Berkshire Hathaway, he said he was confident that these contracts would return substantial profits in the long run.
Since on March 16th the Fed became the lender of last resort to investment banks, it follows that these securities firms must start working as safely as commercial banks. This implies greater supervision of their activities, particularly of their SIV's , or structured investment vehicles. It must be understood by everyone that risky assets held off balance sheet pose as big a risk to their parent companies as similar assets on the balance sheets. They are held off balance sheet only to avoid regulatory supervision.The example of Enron is not very old, and the present crisis has thrown up numerous instances from Citigroup to Merrill Lynch, who have survived only by selling part of themselves to sovereign wealth funds from the Middle East and Asia.
The next issue which needs to be addressed is of excessive leverage. Bear Stearns had leverage of about 35 to 1, while the normal leverage for banks is 10 or 12 to 1. It had built up total positions of about $13.4 trillion,which is greater than the US national income , or equal to a quarter of world GDP. All this was built up on an asset base of about $80 billion only! The moment the value of the underlying asset base declined slightly, the entire structure collapsed, as investors pulled out their money.If such activities are controlled this would drastically reduce the profitability of such investment banks and also reduce their size, but it would be a small price to pay for the security and stability of the financial system.
The net result has been that the financial crisis no longer appears as threatening as it once was. Warren Buffet said Saturday,'The worst of the crisis in Wall Street is over.' He supported the action of the Fed in bailing out Bear Stearns, terming it to be 'proper.' While revealing losses on derivative contracts at the annual meeting of shareholders of Berkshire Hathaway, he said he was confident that these contracts would return substantial profits in the long run.
Since on March 16th the Fed became the lender of last resort to investment banks, it follows that these securities firms must start working as safely as commercial banks. This implies greater supervision of their activities, particularly of their SIV's , or structured investment vehicles. It must be understood by everyone that risky assets held off balance sheet pose as big a risk to their parent companies as similar assets on the balance sheets. They are held off balance sheet only to avoid regulatory supervision.The example of Enron is not very old, and the present crisis has thrown up numerous instances from Citigroup to Merrill Lynch, who have survived only by selling part of themselves to sovereign wealth funds from the Middle East and Asia.
The next issue which needs to be addressed is of excessive leverage. Bear Stearns had leverage of about 35 to 1, while the normal leverage for banks is 10 or 12 to 1. It had built up total positions of about $13.4 trillion,which is greater than the US national income , or equal to a quarter of world GDP. All this was built up on an asset base of about $80 billion only! The moment the value of the underlying asset base declined slightly, the entire structure collapsed, as investors pulled out their money.If such activities are controlled this would drastically reduce the profitability of such investment banks and also reduce their size, but it would be a small price to pay for the security and stability of the financial system.
First Round To Yahoo As Microsoft Blinks.
About a month ago Steve Ballmer had issued a threat to Jerry Yang of Yahoo. Accept Microsoft's unsolicited buy out offer of $31 per share or be prepared for the consequences! Ballmer had given Yang till April 26th to accept the offer or face a hostile takeover. He had hinted that in case of the latter event Microsoft may even lower the price offered. 'If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal,' he wrote in a letter to Yahoo.
26th April came and went and nothing happened. In the meantime Jerry Yang said nothing except that his company was worth much more and that he expected its cash flow to double over the next three years to $3.7 billion.
Now the news is out that Microsoft has boosted its offer 'by several dollars a share,' lending weight to the prediction by many analysts that Microsoft can afford to pay up to $35 a share.
How has Yahoo managed to outwit Yahoo so far? Jerry Yang has played his cards remarkably well.To start with he has protected his company with a 'poison pill' takeover defense which makes a hostile takeover very expensive. He also has an employee payout plan that will be triggered by a change in ownership, raising the cost of acquisition. There were also rumors that Yahoo was close to a deal with AOL. He also entered into an agreement with Google, allowing it to serve its ads on Yahoo's search pages. He gave a clear signal that if pushed too far he would not hesitate to sell off a part of his company and use the cash for a share buy back, driving up their price. This would have both appeased disgruntled shareholders , as well as raised Microsoft's purchase price.
Microsoft on its part had entered into some sort of an agreement with Rupert Murdoch's News Corp, so that Yahoo may not find a rival buyer for itself. This strategy seems to have failed.
It is rumored that several Yahoo shareholders would be satisfied with $35 a share. Microsoft had offered $40 a share for Yahoo in early 2007, but given Yahoo's troubles since then it is unlikely that price will be offered again.
There is still a long way to go. Even if a deal is reached, Google will continue to dominate the internet search market in the US where it has an almost 2/3rd share compared with 9.45% of Microsoft and 21.3% of Yahoo. Meanwhile Yahoo shares jumped almost 7% to $28.67 a share in trading Friday, as the news broke. Microsoft shares closed almost flat at $29.24 a share.
26th April came and went and nothing happened. In the meantime Jerry Yang said nothing except that his company was worth much more and that he expected its cash flow to double over the next three years to $3.7 billion.
Now the news is out that Microsoft has boosted its offer 'by several dollars a share,' lending weight to the prediction by many analysts that Microsoft can afford to pay up to $35 a share.
How has Yahoo managed to outwit Yahoo so far? Jerry Yang has played his cards remarkably well.To start with he has protected his company with a 'poison pill' takeover defense which makes a hostile takeover very expensive. He also has an employee payout plan that will be triggered by a change in ownership, raising the cost of acquisition. There were also rumors that Yahoo was close to a deal with AOL. He also entered into an agreement with Google, allowing it to serve its ads on Yahoo's search pages. He gave a clear signal that if pushed too far he would not hesitate to sell off a part of his company and use the cash for a share buy back, driving up their price. This would have both appeased disgruntled shareholders , as well as raised Microsoft's purchase price.
Microsoft on its part had entered into some sort of an agreement with Rupert Murdoch's News Corp, so that Yahoo may not find a rival buyer for itself. This strategy seems to have failed.
It is rumored that several Yahoo shareholders would be satisfied with $35 a share. Microsoft had offered $40 a share for Yahoo in early 2007, but given Yahoo's troubles since then it is unlikely that price will be offered again.
There is still a long way to go. Even if a deal is reached, Google will continue to dominate the internet search market in the US where it has an almost 2/3rd share compared with 9.45% of Microsoft and 21.3% of Yahoo. Meanwhile Yahoo shares jumped almost 7% to $28.67 a share in trading Friday, as the news broke. Microsoft shares closed almost flat at $29.24 a share.
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