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Japan Should Scrap U.S. Debt; Dollar May Plummet, Mikuni Says

Stanley White and Shigeki Nozawa, Bloomberg
Japan should write-off its holdings of Treasuries because the U.S. government will struggle to finance increasing debt levels needed to dig the economy out of recession, said Akio Mikuni, president of credit ratings agency Mikuni & Co.

The dollar may lose as much as 40 percent of its value to 50 yen or 60 yen from the current spot rate of 90.40 today in Tokyo unless Japan takes “drastic measures” to help bail out the U.S. economy, Mikuni said. Treasury yields, which are near record lows, may fall further without debt relief, making it difficult for the U.S. to borrow elsewhere, Mikuni said.

“It’s difficult for the U.S. to borrow its way out of this problem,” Mikuni, 69, said in an interview with Bloomberg Television broadcast today. “Japan can help by extending debt cancellations.”
(24 December 2008)

How to keep on financing wind farms when banks have no money left.

Jerome a Paris, European Tribune
… The wind sector requires long term funding in order to spread out the initial investment over a long enough period (so that the levelized cost per MWh is low enough) and it was a massive user of debt finance to get investments done. This means that it is an industry particularly vulnerable to the credit crunch. And indeed, expectations are that the fourth quarter will show a severe drop in new activity.

… The interesting question is: how did we find $60 million in December 2008 for a project in what is hard to call a priority location for any hard-pressed European bank (and with clients who are small developers – while highly experienced and competent, they could not be described as strategic customers, an increasingly strict requirement these days for banks to commit any funds)?

The answer is simple: we did not. My bank is not actually lending a cent of its own. The ways this has been possible is thanks to the involvement of two other entities…

The project has sound economics and can bear that additional financing cost; if markets change for the better in the future, they will also be able to reduce the funding costs via a renegotiation or a refinancing (in addition, by then, the project will be built and operating and will be seen as an even smaller risk).

I literally had to harass my senior management to get them to agree to do the deal; I’m not sure if getting noticed by the top management is what you should do when your employer is preparing a massive plan of layoffs, but to me this project just had to be done. It’ a good risk that would have been a no-brainer at any other time, it’s the kind of activity that banks should support now in so many ways: it promotes economic activity at home, it’s a good deal for the buyer of electricity, it’s good for the climate, it’s good if you worry about peak oil, the risks are understood and thus it’s nicely profitable for everybody. And we found a way to do it without requiring my bank to come up with its own funding.
(23 December 2008)

Falling Prices and Scarce Energy

Byron King, Whiskey & Gunpowder
Lately I’ve been discussing concept of scarcity in the energy and natural resource sectors. In one recent note, I discussed how the idea of scarcity has transformed from a “geological” basis to an “above ground” basis. In another note I discussed how the financial system of the world has broken down. This breakdown has damaged many a portfolio. But I still believe that an investment focus that is based on future scarcity of energy and mineral resources is basically correct.

In the future there will still be profound restraints on the availability of energy and natural resources. So owning shares in firms that “do energy” or “do resources” is still a good idea over the medium and long term.

We Still Have a Big Problem

We still have a big problem. The credit system is broken (and that’s the nicest thing you can say about it). Many large banks in the world are broken too (ditto). The investment model of the modern era, starting back in the 1860s during the U.S. Civil War, has almost ground to a halt. That is, the idea and method of “floating capital” is not functioning. Indeed, capital no longer seems to float. Actually, it seems like capital has been sinking like a stone.

The lack of capital (at least, in the forms that we’ve come to utilize it for large scale investments) means that it is difficult – impossible in some cases – to go forward with the new energy and resource projects that are designed to mitigate the present depletions in older oil fields and other resource provinces.

In the face of this, most governments of the world are trying just to look good for the TV cameras.
(16 December 2008)