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Economics headlines - Oct 22

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Economics

Arab Times: solution to high oil prices - cut taxes

Editorial, Arab Times
THE developed world protests loudly that high oil prices will seriously damage growth in the globalized economy. The warnings conclude by demanding that OPEC and other producing countries boost their oil output. However, as Custodian of the Two Holy Mosques King Abdullah made clear Wednesday, this is not a correct analysis of the problem.

The stability of oil prices in the current volatile market is not solely dependent on the supply of crude. Governments in consumer countries, especially Europe, have the power themselves to ease the economic burden, by reducing high fuel duties. In the UK, fully 75 percent of the cost of a gallon of fuel is tax which goes straight to the treasury.

If there is genuine concern about the impact markedly higher fuel prices are having on economic performance, the solution is simple: Governments should cut the tax.

...There is an argument that finance ministries in Europe could go even further in reducing their fuel duties. If they cut deeply into at-the-pump taxes, so positively reducing the price, rather than merely pegging them at current high levels, the economic stimulus could prove dramatic.
(21 October 2005)


High fuel costs strain mass-transit systems

Mark Johnson, Associated Press via Seattle Times
ALBANY, N.Y. — Mass-transit systems nationwide are considering cutting service, laying off staff, raising fares and delaying capital spending to meet rising diesel-fuel prices. The spike at the pumps could cost public-transportation systems as much as $750 million more a year.

While most public-transit authorities are not raising fares yet, they have explored ways to cut costs. Some have eliminated routes or run them less often, ended overtime, reduced travel expenses and cut other parts of their budgets, said William Millar, president of the American Public Transportation Association.

...Authorities also fear raising fares will drive away business and cost them more in the long run. Transit authorities around the country have reported increased ridership with the record-high gasoline prices.
(20 October 2005)


Chavez helps Motley Fool pick oil stocks
Venezuelan President Hugo Chavez says oil is running out. Could that be true?

Robert Aronen, Motley Fool via MSNBC
Sometimes, investment inspiration comes from strange sources. This past weekend, Venezuelan President Hugo Chavez poured gasoline on the Peak Oil argument by claiming that "prices will continue to rise, but oil is running out. ... The world right now is producing petroleum at maximum capacity. In Venezuela, for example, we can't produce a single barrel more." These comments made me think about how larger oil companies have been increasing their own production capacity.

... However, reserves and production capacity are two vastly different things, and right now the world is making huge investments to increase production capacity. Looking at it from a company perspective, there are only two options for increasing capacity -- through the drill or through acquisitions. Increasing capacity through the drill generally results in lower production costs. The lower cost, however, is offset by drilling risk -- the possibility of hitting a dry hole. Drilling also entails long lead times -- often four years from discovery to full production on a new well.

While there is certainly plenty of drilling activity taking place, oil companies are also expanding through acquisition.

...I normally do not listen to someone like Hugo Chavez for my investment advice. However, if the world really is producing oil at maximum capacity, I would expect more buyouts in the months and years ahead, as the larger companies try to maximize their share of the pie.
(20 October 2005)


Threat to privatised £56bn UK nuclear clean-up

Jean Eaglesham, Financial Times
Plans to privatise the clean-up of Britain's nuclear waste legacy - at an estimated cost of £56bn - face potentially insurmountable opposition, regulatory and industry insiders warn. ...

The government is optimistic the deal will be cleared. But an adverse ruling would scupper the BNG sale and raise a question mark over the government's nuclear strategy, which centres on ring-fencing historic liabilities to pave the way for the potential building of new nuclear stations.
(18 October 2005)

More Simmons: Oil guru says crude could hit $190 this winter
Reuters
Consumers should brace for crude oil and natural gas prices possibly doubling or tripling this winter, Matthew Simmons, a best-selling author and oil-supply bear, said on Wednesday.

"Prices are really cheap today and they need to go a lot higher, and they probably will go a lot higher," Simmons said in Ottawa.

"I am very concerned, given the destructive damage done by (Hurricanes) Katrina and Rita, that the United States must be closer to starting to see significant product shortages than we've seen since 1979."

Too much got destroyed and too little has been brought back on stream, the Houston-based analyst said.

He also said that cold weather this winter could bring a very high risk of natural gas curtailment in the United States.
(19 October 2005)


France's consumer spending fell in September on oil

Simone Meier, Bloomberg
French consumer spending on manufactured goods fell in September for the first month in four after oil prices reached a record.

Purchases accounting for about 15 percent of the economy slipped 0.6 percent from August, when they climbed a revised 1.5 percent, Paris-based statistics office Insee said today. Economists had expected a drop of 1.2 percent, the median of 30 forecasts showed. From a year ago, spending rose 4.2 percent.

Today's report is adding to signs of slowing growth in the fourth quarter. French consumers are holding back spending as a 43 percent gain in oil prices this year eroded their purchasing power and a decline in unemployment stalled. Groupe Danone, the world's largest maker of yogurt, is among French companies that have been hurt by sluggish sales.

``It's the first symptom of the effect in oil prices,'' said Stephane Deo, chief European economist at UBS AG in London. ``I would be very surprised to see strong consumption over the next months.''
(21 October 2005)


IEA meets to discuss possible further oil release

Reuters, Hindustan Times
The International Energy Agency was meeting in Paris on Thursday to consider whether to release more emergency oil onto a world market that has been disrupted by hurricanes, a spokeswoman said.

The IEA board of governors will decide in a regular meeting whether to extend an initial 30-day oil rescue plan, its first coordinated release in 15 years, ordered on September 2 to help cover shortages in the United States after Hurricane Katrina hit its oil facilities.
(20 October 2005)


Energy costs sting rural residents

R.A. Dillin, Fairbanks News-Miner (Alaska)
The high cost of energy and its impact on life in rural Alaska was the main issue of concern among delegates and speakers on the official opening day of the Alaska Federation of Natives convention.

While the state has reaped enormous benefits from $60-a-barrel oil, the increased cost of gasoline and heating oil has pushed up the cost of everything from groceries to airline tickets in communities that rely on barges and cargo planes to deliver supplies. "Everything that has to be freighted in is getting more expensive," said Simeon John of Toksook Bay. "It's just getting outrageous."

John was among the nearly 2,500 delegates in attendance Wednesday who heard reports on a number of issues including subsistence, low-income housing, rural law enforcement, education and health care. The fiscal fallout from skyrocketing energy costs, however, was at the top of everyone's list.

..."It's so expensive just to go out and harvest the subsistence foods we rely on," John said. "Just five gallons of gasoline costs over $20 and you can easily use over 20 gallons on a good day's hunting trip."
(21 October 2005)


Back to hewers of wood and drawers of water
Energy, trade and the demise of petrochemicals in Alberta
(924-KB PDF)
Terisa E. Turner and Diana Gibson, Parkland Institute (University of Alberta)
Canadians are questioning the logic of having traded away our energy sovereignty with NAFTA, the North American Free Trade Agreement. The cost of these concessions has been high: Canada no longer has the ability to adequately manage price or supply of natural gas or regulate exports. Consequently, oil and natural gas prices have been rising dramatically and fluctuating wildly while conventional reserves are on the decline. These price and supply changes are having impacts across the economy and are causing job loss.

This study focuses on one example – Celanese, one of Alberta’s oldest petrochemicals plants, is closing its operations in Edmonton and relocating where production is cheaper. In this report we tie this closure to natural gas price and supply changes. We then place the closure in the context of broader trends in the petrochemicals industry ...

Celanese is not unique: the petrochemicals industry as a whole is heavily reliant on natural gas as both an input and an energy source. Consequently, much of the petrochemicals industry is feeling the pressure of increased prices. Supply is also a concern. As supplies of conventional gas dwindle, the petrochemicals industry has raised concern with prioritising natural gas use in the tar sands and domestic heating. As Ramesh Ramachandran, the CEO of Dow Chemical Canada, put it, “We currently use a significant portion of Alberta’s gas to extract oil! This is akin to using $100 bills to light the candles at the dinner table.” Dwindling supply, coupled with higher prices, is driving new investments elsewhere, such as to Asia and the Middle East.

...This report recommends that the citizens of the province and the country engage in serious debate on the development of a national energy security strategy. Albertans require a sovereign energy strategy that prioritizes Alberta’s needs first, and Canadian needs next, before exporting any surpluses. It must also focus on long-term supply as well as conservation, reducing dependence on fossil fuels, and building an economic transition plan for high wage industries. This report proposes creative solutions for a renewed export strategy, environmental strategy, energy strategy, industrial strategy, and fiscal strategy. It is hoped that these proposals will form the basis for discussions leading to an alternative path of development provincially and nationally – one that prioritises the interests of the majority of citizens, rather than those of a few large multinational corporations; one that aims to conserve non-renewable resources as much as possible, rather than selling them off fast; one that shifts away from burning our resources, and instead using them to provide quality jobs that support families and communities over the long term.
(September 2005)
A 40-page report by two Alberta researchers for the Parkland Institute, "an Alberta research network situated within the Faculty of Arts at the University of Alberta. It operates within the established and distinctive tradition of Canadian political economy and is non-partisan." Article suggested by reader DC.


Peak corn? As Wal-Mart shifts from petroleum to corn, farmers flee the crop

Ethan Genauer, Philly Beyond Oil
Attended by over 100 companies, this week Philadelphia hosted the inaugural conference of the Sustainable Packaging Coalition. The biggest news of the Oct. 17 - 19 event was made when Wal-Mart executive Matt Kistler announced that the retail giant, which is also America's largest grocery seller, is beginning to switch from petroleum-based to corn-based plastic packaging.

The first substitution, The Philadelphia Inquirer reported, starting Nov. 1, involves 114 million clear-plastic clamshell containers used annually by the retailer for cut fruit and herbs.

"With this change to packaging made from corn, we will save the equivalent of 800,000 gallons of gasoline and reduce more than 11 million pounds of greenhouse gas emissions," said Kistler. "This is a way to make a change, positive for the environment and for business," he said at the Sustainable Packaging Forum.

The decision comes as high oil and natural gas prices - the sources for most plastics - are ramping up the cost of plastic materials. Kistler did not say whether the new plastic costs more or less than the materials it replaces, but said Wal-Mart expects the price of corn-based plastics to be less volatile than those of petroleum-based plastics, the Inquirer reported.

But recent reports from America's cornbelt suggest that Wal-Mart's expectation of less volatile prices for corn-based plastics may be wrong. The high price of natural gas has forced farmers to pay record-high costs for fertilizers. Natural gas is the energy source used in 95% of fertilizers to produce its main ingredients, such as ammonia and nitrates. And, compared to wheat and soybeans, corn is the most fertilizer-hungry crop harvested by America's industrial-sized farmers.
(21 October 2005)


Agriculture facing its own Katrina

Jimmy Westerfeld, Texas Agriculture
Agriculture today is facing a major catastrophe not experienced since the Dust Bowl days of the Great Depression. Based on expert economic projections, for the first time in decades, many U.S. farmers cannot possibly "cash flow" a crop or crops for the year 2006. Bankers are saying "No." Many of us will not be able to farm this year or the next. The doubling and tripling of fuel and petrochemical prices are the last link in a chain of bad economic events.

Since Aug. 29, the entire world has been focused on the aftermath of the terrible destruction of Hurricane Katrina. Then, to make a terrible tragedy even worse, Hurricane Rita slammed into Southeast Texas and Western Louisiana on Sept. 24.

These two storms had an impact on the nation's fuel refining capacity, increasing prices beyond an already dismal situation. In agriculture, we cannot pass these prices along as other industries do. Ultimately, it means the numbers don't add up. If we can't show positive cash flow, we won't get our operating loans.

For farmers, a Katrina-like disaster is building. It will soon swamp many family farming operations. Astronomical fuel prices, fertilizer and chemical costs have reached the point that even a modest profit is impossible.

Farmers are receiving the lowest price for commodities that myself or most farmers can remember. Farmers are a proud group, usually not willing to protest. This time, I hope someone is listening. We are literally at the end of the turn row. That's a metaphor for desperation. Agriculture is in serious trouble.

...Granted, food can and will be imported. If we allow American agriculture to wither and die, that will be our only choice. If this sounds familiar, it's exactly what we did with energy. Does anyone like what they are paying at the pump now? Do we really want our food supply at the mercy of producers outside our own borders?
Jimmy Westerfeld is president of the McLennan County Farm Bureau (Texas).
(21 October 2005)
Suggested by Jon S. Peak Energy - Seattle who got it from ResourceInvestor.

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