For those who are interested in investing in oil......
Oil-backed ETF makes US debut
By Kevin Morrison, Commodities Correspondent
Financial Times
Updated: 9:11 p.m. ET April 10, 2006
The first fund to be listed in the US to track the price of oil made its market debut on Monday on the American Stock Exchange.
The United States Oil Fund (AMEX:USO), an oil-backed exchange traded fund, will aim to tap into the growing appetite for commodity investments.
ETFs are designed to provide a cheap and direct alternative to investing directly into the underlying commodity. Instead of buying the physical oil, investors buy units in the ETF which represent an underlying barrel of oil.
The United States Oil Fund tracks the price of the West Texas Intermediate, which is a premium crude oil traded on the New York Mercantile Exchange.
The unit price of the fund opened and continued to trade at a discount to the benchmark WTI futures contract. The US Oil fund was quoted at $67.80 a unit with each unit representing a barrel of oil. On Nymex, WTI was trading 81 cents higher at $68.20 a barrel in early afternoon New York trade. A distortion in the price can reflect a lack of liquidity.
The US is home to the most popular commodity-backed ETF, the StreetTRACKS gold ETF, which is listed on the New York Stock Exchange. Barclays Investors plans to launch its iShares Silver Trust, a silver-backed ETF on the American Stock Exchange this year after the US Securities and Exchange Commission allowed the American Stock Exchange to change its listing rules.
John Hyland, director of portfolio research at the US Oil Fund, said the fund planned to attract both professional and private investors to the fund.
"We are the first to market, and we think there is a big investment vein to tap into," said Mr Hyland.
The US Oil Fund is managed by Victoria Bay Asset Management, a fund manager associated with Ameristock Funds, which is a California-based mutual fund founded by Nicholas Gerber with funds under management of $240m.
In spite of investor interest in the oil markets, which has seen oil futures trading volumes soar to record levels in recent months, oil-backed ETFs have not taken off with investors.
The Brent oil ETF launched on the London Stock Exchange by ETF Securities last year is in the process of being overhauled in order to widen its investment appeal after a sluggish start. So far, only gold-backed ETFs have attracted reasonable investment demand.
Copyright The Financial Times Ltd. All rights reserved.
© 2006 MSNBC.com
More about the ETF
完整模式：Oil News
no underscore this time?
too lazy 
I think I'll do it on other longer articles... just to highlight important points
I think I'll do it on other longer articles... just to highlight important points
Paris and London consider Mideast oil trip
Britain and France are considering a joint visit to the Middle East by Gordon Brown and Thierry Breton, the countries』 finance ministers, to press oil producers for action to bring down prices.
French officials told the FT that the ministers would act as representatives of the Group of Seven leading industrial nations, which last week expressed concern at developments in the oil market and called for efforts to boost transparency and investment.
The idea is to follow up an earlier joint trip by the two ministers as G7 representatives to Saudi Arabia last year.
British officials warned that the plan, proposed by the French, for a second visit had not yet been confirmed.
Both nations are pushing for a bigger role for international financial institutions in dealing with energy.
Mr Brown told the FT at the weekend that he would step up pressure for a $20bn (16.8bn, £11.6bn) fund to help developing countries adopt clean energy technologies.
Mr Breton told the FT he wants the World Bank to play a bigger role in financing energy sector development, including refining.
Jamal Saghir, director of energy and water at the World Bank, said on Tuesday that the bank』s current role in refining was 「limited」, but that it would be willing to step up investment if client countries requested it.
The biggest refining needs are in the Middle East and the industrialised world, rather than in the poorest countries.
The World Bank has already increased investment in energy-related projects from about $500m a year four years ago to an expected $2.3bn this year.
Britain and France are considering a joint visit to the Middle East by Gordon Brown and Thierry Breton, the countries』 finance ministers, to press oil producers for action to bring down prices.
French officials told the FT that the ministers would act as representatives of the Group of Seven leading industrial nations, which last week expressed concern at developments in the oil market and called for efforts to boost transparency and investment.
The idea is to follow up an earlier joint trip by the two ministers as G7 representatives to Saudi Arabia last year.
British officials warned that the plan, proposed by the French, for a second visit had not yet been confirmed.
Both nations are pushing for a bigger role for international financial institutions in dealing with energy.
Mr Brown told the FT at the weekend that he would step up pressure for a $20bn (16.8bn, £11.6bn) fund to help developing countries adopt clean energy technologies.
Mr Breton told the FT he wants the World Bank to play a bigger role in financing energy sector development, including refining.
Jamal Saghir, director of energy and water at the World Bank, said on Tuesday that the bank』s current role in refining was 「limited」, but that it would be willing to step up investment if client countries requested it.
The biggest refining needs are in the Middle East and the industrialised world, rather than in the poorest countries.
The World Bank has already increased investment in energy-related projects from about $500m a year four years ago to an expected $2.3bn this year.
The big question: Should we fear Kremlin control of Europe's energy supply?
By Michael Harrison, Business Editor
Published: 27 April 2006
What is Gazprom?
Gazprom is the world's biggest gas producer. It supplies 20 per cent of global demand and holds about 25 per cent of world gas reserves - some 18 trillion cubic metres of the stuff, worth $84bn (£47bn). That is more than North America, South America, Europe and Africa contain put together and is equivalent to about a third of Middle East gas reserves.
Gazprom is also controlled by the Russian government. Although the company is traded on the Moscow stock exchange, where it is valued at R7,300bn (£149bn), the Kremlin owns 51 per cent of the shares and appoints the senior management. If any institution could be said to be the engine of the Russian economy, it is Gazprom.
The company alone accounts for 8 per cent of the nation's GDP and employs nearly 400,000 people. It also accounts for some 90 per cent of Russia's total gas production and 60 per cent of its reserves.
Why is Gazprom so important to the West?
The importance of Gazprom, and Russia more generally, lies in those vast hydrocarbon reserves. Gazprom supplies about a quarter of the European Union's gas.
About a third of the 540 billion cubic metres of gas produced by Gazprom is exported, virtually all of it to European countries or former parts of the Soviet Union. Its biggest export customer is Ukraine, which bought 34 billion cubic metres last year. The next biggest export market is Germany, which relies upon Gazprom for about 30 per cent of its gas. Italy, Turkey and France are also big customers.
In total, some 27 European countries buy gas from Gazprom. Britain only sources about 2 per cent of its gas from Russia, but Gazprom has big plans to change all that. It has set its sights on capturing 20 per cent of the UK market and suggested that one way of achieving that could be to buy Centrica, the company which owns British Gas and supplies more than half our domestic gas market.
Should Europe be wary of Gazprom?
Yes, the company has form. In January this year it cut off supplies to Ukraine. Ostensibly, the dispute was over the price being paid by the Ukrainians for their gas, but most observers saw it as a politically-motivated act to punish Ukraine's citizens for voting in a government which was not well-disposed towards the Kremlin. Gazprom's actions had a knock-on effect on some western European countries as Ukraine serves as a conduit for their Russian gas supplies.
More recently, Gazprom's chief executive, Alexei Miller, has warned the EU that it will divert gas supplies to developing markets such as China and Asia if its plans for expanding into the EU market are blocked.
However, Mr Miller's comments were regarded as a hollow threat since Gazprom makes all its profits from Europe - its domestic Russian gas business loses R5bn each year.
Why is Gazprom so keen on Britain?
We are seen by the Russians as a market ripe for expansion. The UK has become a net importer of gas as production from the North Sea has gone into steep decline. This year, we will import 10-12 per cent of our gas.
By 2015 that figure will be nearer 75 per cent. Gazprom itself is building a new North European pipeline to serve a number of markets including the UK, which is due to be complete by 2010. Buying Centrica would give Gazprom 40 per cent of the UK gas market in one fell swoop. It would also make the Russians the gas supplier to 13 million British homes.
Should the UK be worried?
A lot of people, including several members of the Government, think the answer to that is "yes". Could it really be in the interests of the UK for more than half its domestic energy market to be under the control of a company run from the Kremlin? A takeover of Centrica by Gazprom would raise serious questions about transparency and accountability, given the propensity for state-owned companies to make decisions on political rather than commercial grounds.
What would happen to UK gas supplies if there was a sudden and serious breakdown in diplomatic relations between London and Moscow? Moreover, it would create a vertically-integrated business which both produced and sold gas, enabling it, if it so wanted, to wipe out the competition by subsidising its marketing arm with cheap gas.
In addition, the UK would become heavily dependent on Russian gas when the strategy of Centrica is to diversify its supplies across a wide range of production sources, including Norway, the Netherlands, Malaysia, North Africa and its own gas fields. The supporters of Gazprom argue that this is conspiracy theory taken to its hysterical extreme.
The company is a commercial business and would hardly want to do anything which jeopardised its profitability. In any case, it already has well-established strategic partnerships with a number of very big western energy companies, including Shell, Eni, Enel and E.ON. If that is not enough, then there is always UK competition law, which prohibits market abuse and predatory pricing.
What is going to happen?
The Russian bear hug of Centrica began more than 12 months ago, when its deputy chief executive, Alexander Medvedev, let it be known that Gazprom was interested in expanding into the UK. It has been testing the political waters regularly since then, most recently this week when Mr Medvedev said on a visit to London that Centrica was on Gazprom's "watch list".
UK merger law prohibits ministers from intervening, except where defence or the national interest is at stake. The Department for Trade and Industry is said to have examined whether the law could be changed to allow a ministerial veto of energy takeovers. Downing Street appears to have concluded, however, that it would be the height of hypocrisy for Britain to be lecturing the rest of Europe about the need to liberalise their energy markets, only to pull up the drawbridge when Russia comes calling.
Tony Blair is reported to have decided that any bid for Centrica can be dealt with "satisfactorily" by the competition authorities. The cynics interpret this as meaning the Prime Minister is satisfied they will find sufficient grounds to block Gazprom without his fingermarks being on the decision. The rise in the Centrica share price continues to point to a bid, so we may not have to wait too long to find out.
So should Gazprom be allowed to buy Centrica?
Yes...
* The deal would give Britain secure and competitive gas supplies for the next 50 years
* It would show the rest of Europe that the UK is leading by example in calling for liberalised energy markets
* It would help to foster further UK investment in the Russian energy industry
No...
* Gazprom is controlled by the Kremlin and is therefore dictated to by political whim
* It could abuse its market power to drive out competition and force up prices
* Gazprom would make the UK far too reliant on Russian gas at a time when government policy is to diversify energy supplies
By Michael Harrison, Business Editor
Published: 27 April 2006
What is Gazprom?
Gazprom is the world's biggest gas producer. It supplies 20 per cent of global demand and holds about 25 per cent of world gas reserves - some 18 trillion cubic metres of the stuff, worth $84bn (£47bn). That is more than North America, South America, Europe and Africa contain put together and is equivalent to about a third of Middle East gas reserves.
Gazprom is also controlled by the Russian government. Although the company is traded on the Moscow stock exchange, where it is valued at R7,300bn (£149bn), the Kremlin owns 51 per cent of the shares and appoints the senior management. If any institution could be said to be the engine of the Russian economy, it is Gazprom.
The company alone accounts for 8 per cent of the nation's GDP and employs nearly 400,000 people. It also accounts for some 90 per cent of Russia's total gas production and 60 per cent of its reserves.
Why is Gazprom so important to the West?
The importance of Gazprom, and Russia more generally, lies in those vast hydrocarbon reserves. Gazprom supplies about a quarter of the European Union's gas.
About a third of the 540 billion cubic metres of gas produced by Gazprom is exported, virtually all of it to European countries or former parts of the Soviet Union. Its biggest export customer is Ukraine, which bought 34 billion cubic metres last year. The next biggest export market is Germany, which relies upon Gazprom for about 30 per cent of its gas. Italy, Turkey and France are also big customers.
In total, some 27 European countries buy gas from Gazprom. Britain only sources about 2 per cent of its gas from Russia, but Gazprom has big plans to change all that. It has set its sights on capturing 20 per cent of the UK market and suggested that one way of achieving that could be to buy Centrica, the company which owns British Gas and supplies more than half our domestic gas market.
Should Europe be wary of Gazprom?
Yes, the company has form. In January this year it cut off supplies to Ukraine. Ostensibly, the dispute was over the price being paid by the Ukrainians for their gas, but most observers saw it as a politically-motivated act to punish Ukraine's citizens for voting in a government which was not well-disposed towards the Kremlin. Gazprom's actions had a knock-on effect on some western European countries as Ukraine serves as a conduit for their Russian gas supplies.
More recently, Gazprom's chief executive, Alexei Miller, has warned the EU that it will divert gas supplies to developing markets such as China and Asia if its plans for expanding into the EU market are blocked.
However, Mr Miller's comments were regarded as a hollow threat since Gazprom makes all its profits from Europe - its domestic Russian gas business loses R5bn each year.
Why is Gazprom so keen on Britain?
We are seen by the Russians as a market ripe for expansion. The UK has become a net importer of gas as production from the North Sea has gone into steep decline. This year, we will import 10-12 per cent of our gas.
By 2015 that figure will be nearer 75 per cent. Gazprom itself is building a new North European pipeline to serve a number of markets including the UK, which is due to be complete by 2010. Buying Centrica would give Gazprom 40 per cent of the UK gas market in one fell swoop. It would also make the Russians the gas supplier to 13 million British homes.
Should the UK be worried?
A lot of people, including several members of the Government, think the answer to that is "yes". Could it really be in the interests of the UK for more than half its domestic energy market to be under the control of a company run from the Kremlin? A takeover of Centrica by Gazprom would raise serious questions about transparency and accountability, given the propensity for state-owned companies to make decisions on political rather than commercial grounds.
What would happen to UK gas supplies if there was a sudden and serious breakdown in diplomatic relations between London and Moscow? Moreover, it would create a vertically-integrated business which both produced and sold gas, enabling it, if it so wanted, to wipe out the competition by subsidising its marketing arm with cheap gas.
In addition, the UK would become heavily dependent on Russian gas when the strategy of Centrica is to diversify its supplies across a wide range of production sources, including Norway, the Netherlands, Malaysia, North Africa and its own gas fields. The supporters of Gazprom argue that this is conspiracy theory taken to its hysterical extreme.
The company is a commercial business and would hardly want to do anything which jeopardised its profitability. In any case, it already has well-established strategic partnerships with a number of very big western energy companies, including Shell, Eni, Enel and E.ON. If that is not enough, then there is always UK competition law, which prohibits market abuse and predatory pricing.
What is going to happen?
The Russian bear hug of Centrica began more than 12 months ago, when its deputy chief executive, Alexander Medvedev, let it be known that Gazprom was interested in expanding into the UK. It has been testing the political waters regularly since then, most recently this week when Mr Medvedev said on a visit to London that Centrica was on Gazprom's "watch list".
UK merger law prohibits ministers from intervening, except where defence or the national interest is at stake. The Department for Trade and Industry is said to have examined whether the law could be changed to allow a ministerial veto of energy takeovers. Downing Street appears to have concluded, however, that it would be the height of hypocrisy for Britain to be lecturing the rest of Europe about the need to liberalise their energy markets, only to pull up the drawbridge when Russia comes calling.
Tony Blair is reported to have decided that any bid for Centrica can be dealt with "satisfactorily" by the competition authorities. The cynics interpret this as meaning the Prime Minister is satisfied they will find sufficient grounds to block Gazprom without his fingermarks being on the decision. The rise in the Centrica share price continues to point to a bid, so we may not have to wait too long to find out.
So should Gazprom be allowed to buy Centrica?
Yes...
* The deal would give Britain secure and competitive gas supplies for the next 50 years
* It would show the rest of Europe that the UK is leading by example in calling for liberalised energy markets
* It would help to foster further UK investment in the Russian energy industry
No...
* Gazprom is controlled by the Kremlin and is therefore dictated to by political whim
* It could abuse its market power to drive out competition and force up prices
* Gazprom would make the UK far too reliant on Russian gas at a time when government policy is to diversify energy supplies
Chinese President Finalizes Kenya Oil Deal
By ELIZABETH A. KENNEDY, Associated Press Writer
NAIROBI, Kenya - Chinese President Hu Jintao signed an oil exploration contract with Kenya on Friday, the latest in a series of deals designed to keep Africa's natural resources flowing to China's booming economy.
But critics said China, in pursuit of energy, is enriching corrupt and abusive regimes.
The deal allows for China's state-controlled offshore oil and gas company, CNOOC Ltd., to prospect for oil in Kenya, which is just beginning to drill its first exploratory wells on the borders of Sudan and Somalia and in coastal waters. No oil has been produced yet, and there has been no formal estimate of the possible reserves.
China has a keen interest in Africa's oil and minerals as its economy heads into a fourth year of 10 percent growth: Earlier this week, Hu signed a series of major business deals with Nigeria, Africa's biggest oil producer.
China's hunt for African oil has generated criticism. Unlike Western countries also interested in Africa's markets and resources, China steers away from pressuring nations on their human and political rights records. Critics say China is abetting pariah nations by doing business with countries like Sudan and Zimbabwe.
Human Rights Watch executive director Kenneth Roth wrote in an International Herald Tribune opinion piece on the eve of Hu's trip, which also took him to Washington and Saudi Arabia, that "as China's quest for new markets and natural resources spreads around the world, its de facto support for repression has become increasingly common."
"When Western governments try to use economic pressure to secure human rights improvements, China's no-strings rule gives dictators the means to resist," Roth wrote.
Jian-Chao Liu, a spokesman for the Chinese delegation in Kenya, said Friday that his nation's dealings in Africa are aimed at "improving the livelihoods of people in these countries."
"We don't think (they are) aimed at providing any kind of excuse for human rights abuses in these countries," he said.
Roth singled out China's investment in Sudan, whose government is accused of urging militias from nomadic Arab tribes to attack ethnic African farming villages in the Darfur region — a charge it denies. The conflict has caused about 180,000 deaths — most from disease and hunger — and displaced 2 million people.
A veto-wielding U.N. Security Council member, China — itself the object of much human rights criticism — has offered key diplomatic support to Sudan and other countries shunned by the West.
"In our dealings with African countries we have all along followed the principle that we have to respect ... the political model followed by African countries," Hu said Friday, appearing with Kenyan President Mwai Kibaki on the lawn of the State House.
Hu said his government follows a policy of "non-interference" in other countries' affairs.
Kibaki, who faces mounting pressure to respond to allegations of high-level corruption in his own administration, said he was satisfied with China's approach.
"Africa will do trade with China and there is no problem whatsoever," Kibaki said.
China's oil firms began investing abroad in the late 1990s, after double-digit economic growth outstripped supplies from domestic fields. In the last five years, the communist nation's trade with Africa has grown fourfold, to $40 billion in 2005.
And the continent has become a new market for Chinese exporters.
The boom has caused some problems in areas besides human rights: Africans complain about being flooded with cheap Chinese goods that kill livelihoods here.
By ELIZABETH A. KENNEDY, Associated Press Writer
NAIROBI, Kenya - Chinese President Hu Jintao signed an oil exploration contract with Kenya on Friday, the latest in a series of deals designed to keep Africa's natural resources flowing to China's booming economy.
But critics said China, in pursuit of energy, is enriching corrupt and abusive regimes.
The deal allows for China's state-controlled offshore oil and gas company, CNOOC Ltd., to prospect for oil in Kenya, which is just beginning to drill its first exploratory wells on the borders of Sudan and Somalia and in coastal waters. No oil has been produced yet, and there has been no formal estimate of the possible reserves.
China has a keen interest in Africa's oil and minerals as its economy heads into a fourth year of 10 percent growth: Earlier this week, Hu signed a series of major business deals with Nigeria, Africa's biggest oil producer.
China's hunt for African oil has generated criticism. Unlike Western countries also interested in Africa's markets and resources, China steers away from pressuring nations on their human and political rights records. Critics say China is abetting pariah nations by doing business with countries like Sudan and Zimbabwe.
Human Rights Watch executive director Kenneth Roth wrote in an International Herald Tribune opinion piece on the eve of Hu's trip, which also took him to Washington and Saudi Arabia, that "as China's quest for new markets and natural resources spreads around the world, its de facto support for repression has become increasingly common."
"When Western governments try to use economic pressure to secure human rights improvements, China's no-strings rule gives dictators the means to resist," Roth wrote.
Jian-Chao Liu, a spokesman for the Chinese delegation in Kenya, said Friday that his nation's dealings in Africa are aimed at "improving the livelihoods of people in these countries."
"We don't think (they are) aimed at providing any kind of excuse for human rights abuses in these countries," he said.
Roth singled out China's investment in Sudan, whose government is accused of urging militias from nomadic Arab tribes to attack ethnic African farming villages in the Darfur region — a charge it denies. The conflict has caused about 180,000 deaths — most from disease and hunger — and displaced 2 million people.
A veto-wielding U.N. Security Council member, China — itself the object of much human rights criticism — has offered key diplomatic support to Sudan and other countries shunned by the West.
"In our dealings with African countries we have all along followed the principle that we have to respect ... the political model followed by African countries," Hu said Friday, appearing with Kenyan President Mwai Kibaki on the lawn of the State House.
Hu said his government follows a policy of "non-interference" in other countries' affairs.
Kibaki, who faces mounting pressure to respond to allegations of high-level corruption in his own administration, said he was satisfied with China's approach.
"Africa will do trade with China and there is no problem whatsoever," Kibaki said.
China's oil firms began investing abroad in the late 1990s, after double-digit economic growth outstripped supplies from domestic fields. In the last five years, the communist nation's trade with Africa has grown fourfold, to $40 billion in 2005.
And the continent has become a new market for Chinese exporters.
The boom has caused some problems in areas besides human rights: Africans complain about being flooded with cheap Chinese goods that kill livelihoods here.
LOOKING OUT FOR THE LITTLE GUY
by Roger Conrad
Editor, Utility & Income
April 28, 2006
There』s nothing like sagging election-year poll numbers to get politicians talking about standing up for 「the little guy.」
Unfortunately, when they do, it』s the little guy who』d better look out.
Barely five months before the November 2006 elections, the top target for Washington bluster is clearly the soaring cost of energy.
Of course, even $3-plus per gallon gas prices here are but a fraction of the $7 or so Europeans and others are paying for the equivalent. And, despite being a downer, rising energy prices are still far from pushing the American economy into recession.
Recent polls, however, show some 75 percent of Americans disapprove of the Bush administration』s handling of gasoline prices. Meanwhile, approval of the job Congress is doing has sunk to just 22 percent from 33 percent last month, according to this week』s Wall Street Journal/NBC News polling. Those numbers are reminiscent of the months before the 1994 Congressional elections, when Republicans booted Democrats from power for the first time in a generation.
Ironically--compared to the country』s other problems, such as the busted federal budget, the unraveling of Iraq, continued devastation in Hurricane Katrina-ravaged areas, etc.--the government has relatively little control over energy prices. But with their jobs in jeopardy, Republicans are anxious to be seen as taking decisive action to help American consumers, and increasingly desperate for prices to back off before November 7.
This week, no lesser a personage than President Bush weighed in with a series of actions reminiscent of the so-called 「Nixon shocks」 of the 1970s, which were designed to halt a run on the nation』s gold reserves. Specifically, the president suspended additions of oil to the US Strategic Petroleum Reserve, relaxed the environmental rules on switching to ethanol as a primary ingredient in reformulated gasoline, proposed increasing mandatory gas mileage standards--particularly for SUVs--and threatened to scale back subsidies for deepwater drilling.
The president also called for stiffer enforcement of anti-gouging laws and unspecified action against market manipulation. And he suggested for the first time that oil companies aren』t investing enough of their profits in activities to boost energy supplies.
Some members of the Republican Congressional majority have tried to turn the issue back on Democrats, charging today』s high prices are in large part due to their opposition to opening Alaska』s Arctic National Wildlife Refuge to drilling. Others are backing a $100 tax credit for consumers to offset higher oil prices, a measure that would be deadly to their parallel efforts to close the yawning budget deficit.
BASHING BIG OIL
The easiest course is to train sights on the oil industry itself.
Senator Charles Grassley (R-Iowa), for example, is demanding the IRS cough up the past five years』 financials of major oils. Democrats, for their part, have proposed punitive measures such as eliminating all $10 billion in planned subsidies for the next five years to encourage production--both in the US and overseas--and imposing a windfall profits tax.
We』ve seen all this before in the energy industry, in particular during the last major bull market for energy during the 1970s and early 1980s. Then, as now, oil companies were accused of gouging consumers on a massive scale. Then, as now, industry practices were scrutinized, from raw capital expenditures to executive salaries.
And then, as now, Congress and the president had relatively little power to control the price of energy.
Lack of real influence, however, didn』t stop government from trying to take dramatic action that time around. President Jimmy Carter, for example, imposed a windfall profits tax on US energy producers at the same time he decontrolled the price of domestically produced oil.
Instead, energy prices were stopped by a combination of four factors. First, people gradually starting using less energy as they trading in their gas-guzzling autos for fuel-efficient cars. Second, alternative energies like nuclear power started to replace the use of oil in generating electricity. Third, there was a major discovery in the North Sea of conventional energy supplies. And fourth, the world was gripped by a major recession, which particularly slowed demand in the developing world.
Of the actions taken by the Carter administration, the only really effective ones were those encouraging new production and the use of conservation and alternatives. But the real catalyst for bringing down energy prices was high prices. Only high oil and gas prices encouraged consumers to buy fuel-efficient cars, utilities to go nuclear and oil companies to develop new supplies outside of the Middle East cartel.
Nothing has changed this time around either. Politicians will fume and flounder around to save their jobs. But only high gasoline prices are going to convince Americans to at least demand a more fuel efficient SUV. And until they do, gasoline is going to be very expensive.
DOING DAMAGE
Unfortunately, a vote-hungry Congress (and executive) can do a lot to delay market forces from taking full effect, thereby prolonging the high price environment. Encouraging a search for scapegoats--rather than a hard look by Americans at how we use energy--is obviously one way to postpone hard choices needed to swing market power back to consumers from producers.
More ominous, however, are steps to punish the industry for alleged unfair profits. EXXONMOBIL』S (NYSE: XOM) retirement package for former CEO Lee Raymond and its first quarter profits of $8.4 billion make it an obvious target for an industry critique. Looking beyond those headline numbers, however, the company clearly faces a rapidly rising cost profile, with the bulk of a massive ramp up in capital spending going to meeting rising rig rents and other developing costs.
As my colleague Neil George points out (http://www.bygeorge.biz/archives/1117-Inquisition.html), measures of financial performance such as return on capital and dividend growth are nothing to write home about either. The company』s earnings, for example, rose just 7 percent in the first quarter from year earlier levels on an 8.4 percent increase in revenue, relatively paltry gains compared to what』s happening in other industries.
If Exxon is feeling the bite of rising costs, its smaller rivals are similarly afflicted, several times over. Rising royalties and taxes from shared revenue deals with foreign governments are also pushing costs markedly higher. Moreover, the halving of natural gas prices in the first quarter--and continuing forecasts for a drop in oil prices--is a stark reminder that energy is a volatile commodity.
Overly aggressive bets to expand production when prices are high have all too often ended in disaster.
In an environment of soaring energy prices, the fact that taxpayers are dishing out any subsidies for the oil and gas industry sounds incongruous. And in fact, the subsidies are of no great consequence to the likes of ExxonMobil and other giants, who have done little to defend the $2.7 billion in tax breaks from last year』s energy bill against attacks in Congress. The breaks are, however, tremendously important to oil industry little guys.
Simply put, federal subsidies for the oil and gas industry are a drop in the bucket to cash-rich super oils. And as America』s fields have matured, the big boys have done less and less production here and more overseas. In contrast, output here has moved increasingly to smaller producers, precisely the kind of company that depends on subsidies to smooth out the ups and downs of a volatile market.
JOINING FORCES
At this point, it』s too early to see just what Republican Washington will do. The more dramatic the action against the industry, however, the worse smaller companies will likely be hit, this coming at a time when the fry are being increasingly pressured by rising costs.
One impact is likely to be a further acceleration of industry mergers, particularly involving smaller players. By joining forces, a pair of small players can dramatically improve their access to capital, thereby boosting their odds of being able to develop their reserves in a volatile environment. In addition, small companies can often get a better price for rigs and oil services needed to develop those reserves. And improved balance sheets and larger production bases can enable better hedging, locking in the price of future output.
Over the past couple of weeks, we』ve started to see a dramatic acceleration of consolidation in the Canadian oil and gas trust sector, where four deals have been announced in the last two weeks alone. One such deal involves ADVANTAGE ENERGY (NYSE: AAV) and KETCH ENERGY (TSX: KER.UN, OTC: KERFF), neither of which is particularly strong on its own but together stand a better chance of dealing with rising costs and other challenges. In contrast, for small producers that don』t merge, the environment will only get more difficult, even if Congress and the president take no action.
For conservative investors, the best course is still to stick with larger players. That includes CHEVRON (NYSE: CVX), which posted very strong first quarter numbers on a 10 percent increase in oil equivalent production. The results are a clear vindication of the company』s oft-criticized purchase of Unocal last year. It also includes CONOCOPHILLIPS (NYSE: COP), which was just as roundly panned for its now-completed merger with BURLINGTON RESOURCES.
If you own ExxonMobil, stick with it. For one thing, there aren』t that many other AAA-rated companies out there in an industry with virtually guaranteed demand and in such a powerful uptrend. And come what may in the political arena, it will likely come out a winner.
If energy prices continue to move higher, super oils like these are well positioned to absorb the rising cost of production and development. If prices fall, they』ll be far better positioned to absorb the blow, as well as to buy out the remaining small producers at much lower prices than today. Mergers between Canadian trusts is the focus of the May issue of Canadian Edge (http://www.canadianedge.com), to be e-mailed to subscribers a week from today.
RATES RUN
Interest rates keep running higher. Mortgage rates soared to a four-year high this week, while the benchmark 10-year Treasury note yield closed the week well above the 5 percent mark.
Relatively robust first quarter GDP growth of 4.8 percent has done little to cool inflation fears. Neither did Federal Reserve Chairman Ben Bernanke』s comments that the Fed may take a breather in its now 15-month-long streak of raising rates. And neither did the continuing row over Iran』s nuclear capability, which pressured oil and gold prices upward.
In addition, the Dow Industrials touched a six-year high this week.
That suggests the stock market is taking the bond market』s pain in stride. Historically, we haven』t seen a real turn in bond yields until the stock market takes a hit. That was certainly the case with the rate spikes of summer 2003, spring 2004 and spring 2005.
The real surprise of this rate spike is how the various rate-sensitive investments have been holding up. That』s despite extremely high valuations in some areas, particularly commercial real estate investment trusts. And it』s in stark contrast to what occurred when rates were spiking the past three years.
This could indicate one of two things. The better case is it』s a portent that the ongoing rise in interest rates will prove temporary. The other is there are a lot of yield chasers out there who have not the first clue what it is they own, and so will be prone to panic if rates continue much higher.
My view is we should be prepared for both possibilities. If you』ve been following my advice to 「buy the business」 when you shop for yield, you should have little problem as long as your companies continue to perform. First quarter earnings season is an ideal time for assessing that.
Aside from making sure your companies are first rate, it』s also a good idea to keep some cash on hand. If rates continue to rise, so will your rate of interest. And you』ll have the means to scoop up bargains when this cycle ultimately reverses.
© 2006 Roger Conrad
Editorial Archive
by Roger Conrad
Editor, Utility & Income
April 28, 2006
There』s nothing like sagging election-year poll numbers to get politicians talking about standing up for 「the little guy.」
Unfortunately, when they do, it』s the little guy who』d better look out.
Barely five months before the November 2006 elections, the top target for Washington bluster is clearly the soaring cost of energy.
Of course, even $3-plus per gallon gas prices here are but a fraction of the $7 or so Europeans and others are paying for the equivalent. And, despite being a downer, rising energy prices are still far from pushing the American economy into recession.
Recent polls, however, show some 75 percent of Americans disapprove of the Bush administration』s handling of gasoline prices. Meanwhile, approval of the job Congress is doing has sunk to just 22 percent from 33 percent last month, according to this week』s Wall Street Journal/NBC News polling. Those numbers are reminiscent of the months before the 1994 Congressional elections, when Republicans booted Democrats from power for the first time in a generation.
Ironically--compared to the country』s other problems, such as the busted federal budget, the unraveling of Iraq, continued devastation in Hurricane Katrina-ravaged areas, etc.--the government has relatively little control over energy prices. But with their jobs in jeopardy, Republicans are anxious to be seen as taking decisive action to help American consumers, and increasingly desperate for prices to back off before November 7.
This week, no lesser a personage than President Bush weighed in with a series of actions reminiscent of the so-called 「Nixon shocks」 of the 1970s, which were designed to halt a run on the nation』s gold reserves. Specifically, the president suspended additions of oil to the US Strategic Petroleum Reserve, relaxed the environmental rules on switching to ethanol as a primary ingredient in reformulated gasoline, proposed increasing mandatory gas mileage standards--particularly for SUVs--and threatened to scale back subsidies for deepwater drilling.
The president also called for stiffer enforcement of anti-gouging laws and unspecified action against market manipulation. And he suggested for the first time that oil companies aren』t investing enough of their profits in activities to boost energy supplies.
Some members of the Republican Congressional majority have tried to turn the issue back on Democrats, charging today』s high prices are in large part due to their opposition to opening Alaska』s Arctic National Wildlife Refuge to drilling. Others are backing a $100 tax credit for consumers to offset higher oil prices, a measure that would be deadly to their parallel efforts to close the yawning budget deficit.
BASHING BIG OIL
The easiest course is to train sights on the oil industry itself.
Senator Charles Grassley (R-Iowa), for example, is demanding the IRS cough up the past five years』 financials of major oils. Democrats, for their part, have proposed punitive measures such as eliminating all $10 billion in planned subsidies for the next five years to encourage production--both in the US and overseas--and imposing a windfall profits tax.
We』ve seen all this before in the energy industry, in particular during the last major bull market for energy during the 1970s and early 1980s. Then, as now, oil companies were accused of gouging consumers on a massive scale. Then, as now, industry practices were scrutinized, from raw capital expenditures to executive salaries.
And then, as now, Congress and the president had relatively little power to control the price of energy.
Lack of real influence, however, didn』t stop government from trying to take dramatic action that time around. President Jimmy Carter, for example, imposed a windfall profits tax on US energy producers at the same time he decontrolled the price of domestically produced oil.
Instead, energy prices were stopped by a combination of four factors. First, people gradually starting using less energy as they trading in their gas-guzzling autos for fuel-efficient cars. Second, alternative energies like nuclear power started to replace the use of oil in generating electricity. Third, there was a major discovery in the North Sea of conventional energy supplies. And fourth, the world was gripped by a major recession, which particularly slowed demand in the developing world.
Of the actions taken by the Carter administration, the only really effective ones were those encouraging new production and the use of conservation and alternatives. But the real catalyst for bringing down energy prices was high prices. Only high oil and gas prices encouraged consumers to buy fuel-efficient cars, utilities to go nuclear and oil companies to develop new supplies outside of the Middle East cartel.
Nothing has changed this time around either. Politicians will fume and flounder around to save their jobs. But only high gasoline prices are going to convince Americans to at least demand a more fuel efficient SUV. And until they do, gasoline is going to be very expensive.
DOING DAMAGE
Unfortunately, a vote-hungry Congress (and executive) can do a lot to delay market forces from taking full effect, thereby prolonging the high price environment. Encouraging a search for scapegoats--rather than a hard look by Americans at how we use energy--is obviously one way to postpone hard choices needed to swing market power back to consumers from producers.
More ominous, however, are steps to punish the industry for alleged unfair profits. EXXONMOBIL』S (NYSE: XOM) retirement package for former CEO Lee Raymond and its first quarter profits of $8.4 billion make it an obvious target for an industry critique. Looking beyond those headline numbers, however, the company clearly faces a rapidly rising cost profile, with the bulk of a massive ramp up in capital spending going to meeting rising rig rents and other developing costs.
As my colleague Neil George points out (http://www.bygeorge.biz/archives/1117-Inquisition.html), measures of financial performance such as return on capital and dividend growth are nothing to write home about either. The company』s earnings, for example, rose just 7 percent in the first quarter from year earlier levels on an 8.4 percent increase in revenue, relatively paltry gains compared to what』s happening in other industries.
If Exxon is feeling the bite of rising costs, its smaller rivals are similarly afflicted, several times over. Rising royalties and taxes from shared revenue deals with foreign governments are also pushing costs markedly higher. Moreover, the halving of natural gas prices in the first quarter--and continuing forecasts for a drop in oil prices--is a stark reminder that energy is a volatile commodity.
Overly aggressive bets to expand production when prices are high have all too often ended in disaster.
In an environment of soaring energy prices, the fact that taxpayers are dishing out any subsidies for the oil and gas industry sounds incongruous. And in fact, the subsidies are of no great consequence to the likes of ExxonMobil and other giants, who have done little to defend the $2.7 billion in tax breaks from last year』s energy bill against attacks in Congress. The breaks are, however, tremendously important to oil industry little guys.
Simply put, federal subsidies for the oil and gas industry are a drop in the bucket to cash-rich super oils. And as America』s fields have matured, the big boys have done less and less production here and more overseas. In contrast, output here has moved increasingly to smaller producers, precisely the kind of company that depends on subsidies to smooth out the ups and downs of a volatile market.
JOINING FORCES
At this point, it』s too early to see just what Republican Washington will do. The more dramatic the action against the industry, however, the worse smaller companies will likely be hit, this coming at a time when the fry are being increasingly pressured by rising costs.
One impact is likely to be a further acceleration of industry mergers, particularly involving smaller players. By joining forces, a pair of small players can dramatically improve their access to capital, thereby boosting their odds of being able to develop their reserves in a volatile environment. In addition, small companies can often get a better price for rigs and oil services needed to develop those reserves. And improved balance sheets and larger production bases can enable better hedging, locking in the price of future output.
Over the past couple of weeks, we』ve started to see a dramatic acceleration of consolidation in the Canadian oil and gas trust sector, where four deals have been announced in the last two weeks alone. One such deal involves ADVANTAGE ENERGY (NYSE: AAV) and KETCH ENERGY (TSX: KER.UN, OTC: KERFF), neither of which is particularly strong on its own but together stand a better chance of dealing with rising costs and other challenges. In contrast, for small producers that don』t merge, the environment will only get more difficult, even if Congress and the president take no action.
For conservative investors, the best course is still to stick with larger players. That includes CHEVRON (NYSE: CVX), which posted very strong first quarter numbers on a 10 percent increase in oil equivalent production. The results are a clear vindication of the company』s oft-criticized purchase of Unocal last year. It also includes CONOCOPHILLIPS (NYSE: COP), which was just as roundly panned for its now-completed merger with BURLINGTON RESOURCES.
If you own ExxonMobil, stick with it. For one thing, there aren』t that many other AAA-rated companies out there in an industry with virtually guaranteed demand and in such a powerful uptrend. And come what may in the political arena, it will likely come out a winner.
If energy prices continue to move higher, super oils like these are well positioned to absorb the rising cost of production and development. If prices fall, they』ll be far better positioned to absorb the blow, as well as to buy out the remaining small producers at much lower prices than today. Mergers between Canadian trusts is the focus of the May issue of Canadian Edge (http://www.canadianedge.com), to be e-mailed to subscribers a week from today.
RATES RUN
Interest rates keep running higher. Mortgage rates soared to a four-year high this week, while the benchmark 10-year Treasury note yield closed the week well above the 5 percent mark.
Relatively robust first quarter GDP growth of 4.8 percent has done little to cool inflation fears. Neither did Federal Reserve Chairman Ben Bernanke』s comments that the Fed may take a breather in its now 15-month-long streak of raising rates. And neither did the continuing row over Iran』s nuclear capability, which pressured oil and gold prices upward.
In addition, the Dow Industrials touched a six-year high this week.
That suggests the stock market is taking the bond market』s pain in stride. Historically, we haven』t seen a real turn in bond yields until the stock market takes a hit. That was certainly the case with the rate spikes of summer 2003, spring 2004 and spring 2005.
The real surprise of this rate spike is how the various rate-sensitive investments have been holding up. That』s despite extremely high valuations in some areas, particularly commercial real estate investment trusts. And it』s in stark contrast to what occurred when rates were spiking the past three years.
This could indicate one of two things. The better case is it』s a portent that the ongoing rise in interest rates will prove temporary. The other is there are a lot of yield chasers out there who have not the first clue what it is they own, and so will be prone to panic if rates continue much higher.
My view is we should be prepared for both possibilities. If you』ve been following my advice to 「buy the business」 when you shop for yield, you should have little problem as long as your companies continue to perform. First quarter earnings season is an ideal time for assessing that.
Aside from making sure your companies are first rate, it』s also a good idea to keep some cash on hand. If rates continue to rise, so will your rate of interest. And you』ll have the means to scoop up bargains when this cycle ultimately reverses.
© 2006 Roger Conrad
Editorial Archive
Petro-Euro: A reality or distant nightmare for the U.S.?
4/30/2006 1:50:00 PM GMT
Advertisement
Ads by alClick - Middle East Advertising
Will big international oil trading companies agree to accept deals in Euros?
In the current 『crisis』 over Iran』s plans to develop nuclear technology, the real reason for open U.S. hostility towards Iran is often over-looked. For the past few years, Iran has been planning to open its own oil exchange — the Iranian Oil Bourse (IOB) — with the alleged goal of becoming the dominant centre of the Middle East oil trade. Currently there are only two oil trading centres in the world; New York and London and both trade only in U.S. Dollars. What will make the proposed IOB different is that it has stated that it will trade in Euros not Dollars.
The dollar has long been the dominant currency for international oil trade and the U.S. economy has benefited hugely from this status as it has led to being the world』s largest reserve currency kept by State Banks the world over. It is an open secret that since the 1970』s, OPEC (i.e. Saudi Arabia) has been instructed by the U.S. to only trade in US Dollars.
The debate over the ultimate financial impact of trading oil in Euros rather than dollars is a complex one, but according to many experts, such a move could lead to a collapse in value for the American currency, potentially putting the U.S. economy in its greatest crisis since the depression era of the 1930s. The IOB has been on Iran's agenda for quite some time and different dates have informally been announced for its opening, all which have been quietly dropped as the deadline neared. The question is whether Iran wishes to have the nuclear issue resolved before taking on the US Dollar in the IOB or whether Iran has been intimidated by U.S. pressure and threats of possible nuclear strikes and decided to postpone the IOB indefinitely.
March 20, the latest rumoured date, would have coincided with the Persian calendar year. The Iranian Oil Ministry's public relations department has denied that the date corresponded to the opening of the bourse, and has mostly remained silent about the existence of such a program.
Of course, the effectiveness of the IOB will depend on whether the big international oil trading companies decide to accept deals in euros or not. China, which is emerging as Iran』s largest customer, would have no objection to paying Iran in Euros and thus begin the move from the dollar to the euro.
"The weapon of oil in the hands of Iran's regime is more dangerous than any other weapon," said a recently published article in Italy's Panorama newsmagazine. Iran's Deputy Oil Minister Mohammad Javad Assemipour, director of the IOB program, told Panorama that the oil trading centre, due to open in a few months, will turn Iran into a major oil exchange point.
"Iran's oil exchange with the region's countries and also some of the East Asia states will take place in Euros instead of U.S. dollars," said Assemipour.
Some of the major oil-producing countries such as Venezuela (which has boosted its economic ties with Iran) and a few of the larger oil consuming countries, most notably China and India, have already announced their support for the IOB. There is speculation that the IOB represents Iran's plan to escape any possible future economic sanctions spearheaded by the U.S. However, some postulate that the plan could also endanger the continued existence of Iran's regime. William Clark, an American security expert, predicted that if Iran threatened the hegemony of the U.S. dollar in the international oil market, the White House would immediately order a military attack against it.
Experts point to the fact that the Iraq invasion in 2003 took place after Saddam Hussein refused to accept dollars as a payment medium for Iraq』s oil exports and Oil for Food programme, choosing Euros instead. After discovering no Weapons of Mass Destruction in Iraq, speculation naturally moved onto the real cause of the invasion; many now are convinced that was the White House's fear of the possible financial repercussions of Saddam Hussein's plan to substitute Dollars for Euros.
Even more worrying than Iran』s statements, however, were those recently made by the Russian Finance Minister, Alexei Kudrin, in a recent meeting of the World Bank and International Monetary Fund in Washington. Kudrin caused his American hosts huge discomfort by openly questioning the dollar's pre-eminence as the world's "absolute" reserve currency.
The greenback's recent volatility and the yawning U.S. trade deficit "are definitely causing concern with regard to its reserve currency status," he said. "The international community can hardly be satisfied with this instability." The U.S. Federal Reserve, in particular, has been forced to take drastic action - raising interest rates 15 times since June 2004 to keep inflation in check.
Given the fact that Iraq』s oil production is now lower than before the U.S. invasion and that the country is now a net importer of oil (incredible for a country sitting on the world』s second largest known reserves) and its oil effectively not available in the international market despite the presence of over 130,000 U.S. troops, it is little wonder if finance ministers and governors of State Banks all over the world are getting nervous about the U.S. military』s ability to ensure oil supplies; a task it has been charged with exclusively since the First Gulf War of 1991.
Russia with its huge oil and gas reserves could present an even bigger challenge to the U.S. and the dollar's supremacy and could not be threatened by any American political or military retaliation same way as Iran. The irony of the situation is that Iran and Russia are both in a much stronger bargaining position given the U.S. failure in Iraq to increase or protect oil supplies, thereby leading to a huge increase in oil prices, making both Iran and Russia much richer in the process.
The dollar』s current position is due to the fact that the U.S. currency accounts for more than two thirds of all central bank reserves worldwide and the fact that all international oil transactions have to be in US Dollars, thereby making the dollar the international oil currency. This reserve status means that the dollar is constantly in demand, whatever the underlying strength of the U.S. economy. And now, with massive trade and budget deficits to finance, America is increasingly reliant on this status. The unprecedented weight of U.S. liabilities means that any threat to the dollar's dominance could result in a currency collapse, plunging the world's largest economy into recession.
Recently Sweden has cut its dollar holdings, from 37 per cent of central bank reserves to 20 per cent, with the Euros share rising to 50 per cent. Central banks in some Gulf States have also lately mooted a shift into the Euro. Such sentiments helped push the dollar to a seven-month low against the single currency last week.
Another important point is that the EU is Russia's main trading partner. More than two thirds of Russia's oil and gas is exported to the EU, which makes Russia a strong candidate to become the first major oil exporter to start trading in Euros. The reality is that as long as most of Opec's oil - read Saudi Arabia - is priced in dollars, the U.S. currency will retain its hegemony. But the opening of an oil bourse in Tehran, which looks likely sooner or later, will signal at least tacit Saudi consent for euro-based oil trading.
The U.S. knows this, which is why it is very sensitive to any debate on the dollar』s position. The next 12 months will decide if Russia or Iran will take the first meaningful steps to challenge the dollar and whether the Petro-Euro will become a reality rather than just a distant nightmare for the U.S. government.
4/30/2006 1:50:00 PM GMT
Advertisement
Ads by alClick - Middle East Advertising
Will big international oil trading companies agree to accept deals in Euros?
In the current 『crisis』 over Iran』s plans to develop nuclear technology, the real reason for open U.S. hostility towards Iran is often over-looked. For the past few years, Iran has been planning to open its own oil exchange — the Iranian Oil Bourse (IOB) — with the alleged goal of becoming the dominant centre of the Middle East oil trade. Currently there are only two oil trading centres in the world; New York and London and both trade only in U.S. Dollars. What will make the proposed IOB different is that it has stated that it will trade in Euros not Dollars.
The dollar has long been the dominant currency for international oil trade and the U.S. economy has benefited hugely from this status as it has led to being the world』s largest reserve currency kept by State Banks the world over. It is an open secret that since the 1970』s, OPEC (i.e. Saudi Arabia) has been instructed by the U.S. to only trade in US Dollars.
The debate over the ultimate financial impact of trading oil in Euros rather than dollars is a complex one, but according to many experts, such a move could lead to a collapse in value for the American currency, potentially putting the U.S. economy in its greatest crisis since the depression era of the 1930s. The IOB has been on Iran's agenda for quite some time and different dates have informally been announced for its opening, all which have been quietly dropped as the deadline neared. The question is whether Iran wishes to have the nuclear issue resolved before taking on the US Dollar in the IOB or whether Iran has been intimidated by U.S. pressure and threats of possible nuclear strikes and decided to postpone the IOB indefinitely.
March 20, the latest rumoured date, would have coincided with the Persian calendar year. The Iranian Oil Ministry's public relations department has denied that the date corresponded to the opening of the bourse, and has mostly remained silent about the existence of such a program.
Of course, the effectiveness of the IOB will depend on whether the big international oil trading companies decide to accept deals in euros or not. China, which is emerging as Iran』s largest customer, would have no objection to paying Iran in Euros and thus begin the move from the dollar to the euro.
"The weapon of oil in the hands of Iran's regime is more dangerous than any other weapon," said a recently published article in Italy's Panorama newsmagazine. Iran's Deputy Oil Minister Mohammad Javad Assemipour, director of the IOB program, told Panorama that the oil trading centre, due to open in a few months, will turn Iran into a major oil exchange point.
"Iran's oil exchange with the region's countries and also some of the East Asia states will take place in Euros instead of U.S. dollars," said Assemipour.
Some of the major oil-producing countries such as Venezuela (which has boosted its economic ties with Iran) and a few of the larger oil consuming countries, most notably China and India, have already announced their support for the IOB. There is speculation that the IOB represents Iran's plan to escape any possible future economic sanctions spearheaded by the U.S. However, some postulate that the plan could also endanger the continued existence of Iran's regime. William Clark, an American security expert, predicted that if Iran threatened the hegemony of the U.S. dollar in the international oil market, the White House would immediately order a military attack against it.
Experts point to the fact that the Iraq invasion in 2003 took place after Saddam Hussein refused to accept dollars as a payment medium for Iraq』s oil exports and Oil for Food programme, choosing Euros instead. After discovering no Weapons of Mass Destruction in Iraq, speculation naturally moved onto the real cause of the invasion; many now are convinced that was the White House's fear of the possible financial repercussions of Saddam Hussein's plan to substitute Dollars for Euros.
Even more worrying than Iran』s statements, however, were those recently made by the Russian Finance Minister, Alexei Kudrin, in a recent meeting of the World Bank and International Monetary Fund in Washington. Kudrin caused his American hosts huge discomfort by openly questioning the dollar's pre-eminence as the world's "absolute" reserve currency.
The greenback's recent volatility and the yawning U.S. trade deficit "are definitely causing concern with regard to its reserve currency status," he said. "The international community can hardly be satisfied with this instability." The U.S. Federal Reserve, in particular, has been forced to take drastic action - raising interest rates 15 times since June 2004 to keep inflation in check.
Given the fact that Iraq』s oil production is now lower than before the U.S. invasion and that the country is now a net importer of oil (incredible for a country sitting on the world』s second largest known reserves) and its oil effectively not available in the international market despite the presence of over 130,000 U.S. troops, it is little wonder if finance ministers and governors of State Banks all over the world are getting nervous about the U.S. military』s ability to ensure oil supplies; a task it has been charged with exclusively since the First Gulf War of 1991.
Russia with its huge oil and gas reserves could present an even bigger challenge to the U.S. and the dollar's supremacy and could not be threatened by any American political or military retaliation same way as Iran. The irony of the situation is that Iran and Russia are both in a much stronger bargaining position given the U.S. failure in Iraq to increase or protect oil supplies, thereby leading to a huge increase in oil prices, making both Iran and Russia much richer in the process.
The dollar』s current position is due to the fact that the U.S. currency accounts for more than two thirds of all central bank reserves worldwide and the fact that all international oil transactions have to be in US Dollars, thereby making the dollar the international oil currency. This reserve status means that the dollar is constantly in demand, whatever the underlying strength of the U.S. economy. And now, with massive trade and budget deficits to finance, America is increasingly reliant on this status. The unprecedented weight of U.S. liabilities means that any threat to the dollar's dominance could result in a currency collapse, plunging the world's largest economy into recession.
Recently Sweden has cut its dollar holdings, from 37 per cent of central bank reserves to 20 per cent, with the Euros share rising to 50 per cent. Central banks in some Gulf States have also lately mooted a shift into the Euro. Such sentiments helped push the dollar to a seven-month low against the single currency last week.
Another important point is that the EU is Russia's main trading partner. More than two thirds of Russia's oil and gas is exported to the EU, which makes Russia a strong candidate to become the first major oil exporter to start trading in Euros. The reality is that as long as most of Opec's oil - read Saudi Arabia - is priced in dollars, the U.S. currency will retain its hegemony. But the opening of an oil bourse in Tehran, which looks likely sooner or later, will signal at least tacit Saudi consent for euro-based oil trading.
The U.S. knows this, which is why it is very sensitive to any debate on the dollar』s position. The next 12 months will decide if Russia or Iran will take the first meaningful steps to challenge the dollar and whether the Petro-Euro will become a reality rather than just a distant nightmare for the U.S. government.
Iran oil bourse next week
Apr 26, 2006
Oil Minister Kazem Vaziri Hamaneh said on Wednesday that the establishment of Oil Stock Exchange is in its final stage and the bourse will be launched in Iran in the next week.
He told reporters, upon arrival from Qatar where he attended the 10th General Assembly of International Energy Agency and consultations with OPEC member states, that registration of the Oil Stock Exchange is underway and the entity will operate after being approved by by Council of Stock Exchange.
He rejected a statement attributed to him saying that Oil Stock Exchange will bring to the ground the US economy and said, "I don't know who has speculated that I've not talked about US economy." Asked about conference on energy in Doha, he said that more than 60 countries and 30 oil companies and consultants took part in the conference.
Vaziri Hamaneh said that serious discussions were held including security of supply and demand, security of investment in energy and environment issues.
"The best method for security of demand in the oil sector is that consumers should be given opportunity to enter into partnership with the suppliers in investment in oil industry."
He said that the conference called for diversifying energy resources and cooperation of the developed states with the countries possessing oil and gas resources.
Asked about the oil price rise, Vaziri-Hamaneh said that oil price is being influenced by political situation, whereas it should be freed from political impacts and economic and technical fundamentals should determine the oil prices.
"As long as political impacts dominate the oil market, price hike will continue," he concluded.
Apr 26, 2006
Oil Minister Kazem Vaziri Hamaneh said on Wednesday that the establishment of Oil Stock Exchange is in its final stage and the bourse will be launched in Iran in the next week.
He told reporters, upon arrival from Qatar where he attended the 10th General Assembly of International Energy Agency and consultations with OPEC member states, that registration of the Oil Stock Exchange is underway and the entity will operate after being approved by by Council of Stock Exchange.
He rejected a statement attributed to him saying that Oil Stock Exchange will bring to the ground the US economy and said, "I don't know who has speculated that I've not talked about US economy." Asked about conference on energy in Doha, he said that more than 60 countries and 30 oil companies and consultants took part in the conference.
Vaziri Hamaneh said that serious discussions were held including security of supply and demand, security of investment in energy and environment issues.
"The best method for security of demand in the oil sector is that consumers should be given opportunity to enter into partnership with the suppliers in investment in oil industry."
He said that the conference called for diversifying energy resources and cooperation of the developed states with the countries possessing oil and gas resources.
Asked about the oil price rise, Vaziri-Hamaneh said that oil price is being influenced by political situation, whereas it should be freed from political impacts and economic and technical fundamentals should determine the oil prices.
"As long as political impacts dominate the oil market, price hike will continue," he concluded.
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