by Jerome a Paris
Thu Oct 5th, 2006 at 10:38:08 AM EST
A few indirectly linked headlines from today, straddling economic and energy news (sources below the fold).
for the first time in at least 90 years, the United States is now paying noticeably more to foreign creditors than it receives from its investments abroad.
After trading at an average of 26p a therm through September, the spot price for gas delivered immediately fell to -5p during the course of the day, meaning traders are paying to get rid of it.
So far nothing has been formalised but Opec members have agreed they need to take at least 1m barrels - at least 4 per cent - out of the oversupplied world oil market.
Deeper and Deeper (NYTimes editorial)
For the first time during President Bush's tenure, the government's interest bill is expected to rise in 2006, from $184 billion in 2005 to $220 billion this year, up nearly 20 percent. That increase -- $36 billion -- makes interest the fastest-growing component of federal spending, and continued brisk growth is likely. According to projections by Congress's budget office, the interest bill will grow to $249 billion in 2007, and $270 billion in 2008.
Bayern Munich has an excellent (Rescued) diary on this topic (The Republican-led Borrowing Orgy) which explains in very clear terms how US foreign debt has increased, and why foreign creditors have been happy to keep on lending increasing amounts of money.
But the result is stark: ever increasing debt (including if you adjust for inflation, as in the graph below):
And yet, until this year, despite having a increasingly negative net position (i.e. having borrowed more from other countries than lent to them), the USA still had a positive financial income:
This came from the fact that US money overseas is usually invested in productive assets (factories, affiliates, etc...) which provide good returns, whereas a lot of the money invested by foreigners in the USA is in the form or low-paying Treasuries.
But as the NY Times editorial notes, that period is coming to an end and, with rising interest rates, the "switch" to negative financial income is going to be quite abrupt.
This matters to the Countdown diaries because that debt has increasingly been used in the past couple years to pay for oil:
America's wealth has been drained to pay for precious oil which is used in vast volumes with no awareness of how precious and costly it actually is.
Gas traders start giving it away (BBC)
A glut of natural gas supplies in Britain has seen prices collapse and left traders having to pay for it to be taken off their hands.
Wholesale gas prices for immediate delivery turned negative on Tuesday as supplies surged in from the new Langeled pipeline from Norway.
Britain's gas storage capacity is 96% full so firms need to offload supplies.
After hitting more than 100p/therm (the equivalent of $240/boe) last winter, natural gas prices are now negative! While some of you will no doubt use such numbers to make fun of my Countdown to $100 oil diaries, this episode underliens a point that I have been making repeatedly: energy is not a business like others. Electricity is extremely hard to store, and natural gas is hardly better. The whole sector is an infrastructure business, and it needs to be able to be flexible enough to tolerate wild variations between peaks and troughs. It needs short term balancing nechanisms, it needs long term storage capacity, and it needs enough spare capacity to face all situations - in order never to have supplies interrupted, something that neither citizens nor the economy tolerate well.
Market mechanisms can supply that, provided that there is decent regulation AND that prices are allowed to fluctuate wildly, i.e. including to extremely high peaks (10 or 1,000 times higher than average prices) or to very low (including negative) levels. But such wild variations are unpalatable politically and thus politicians have never pushed liberalisation to its full logic, which includes high prices to get marginal supplies to kick in and marginal demand (by those that can least afford it, i.e. usually the poorest households) to be given up. and we end up with partial, and faulty, liberalisation.
So long as politicians are not willing to justify extravagantly high prices at times and the occasional negative prices, energy markets will be a huge hypocritical mess.
"Opec is going to defend a price floor for its oil of $50-$55 a barrel," said one Opec official. The price of Opec's crude oil on Wednesday fell to $55.27 while Brent oil futures traded in London slipped 33 cents to $58 a barrel, 26 per cent below their July peak.
Prices have fallen as demand in the US has waned and the likelihood of a supply shortage caused by Iran's stand-off with the west has diminished.
Saudi Arabia, Opec's most important member, is unhappy with the move towards voluntary cuts, but at the same time the kingdom has already quietly cut its production by 200,000 barrels a day over the past two months.
Oil prices jump after Opec cuts output
Oil prices rallied on Thursday after the Organisation of the Petroleum Exporting Countries announced it would cut output by at least 1m barrels as soon as possible.
All Opec countries were to take part in the production cuts, with Saudi Arabia, the world's top exporter, reducing its output by 300,000bpd. The production cuts are the first since April 2004.
People have been crowing about the lower oil prices and (see my comment above) mocking my Countdown diaries. But one interesting thing in the past 2 years is that everybody appears to agree on the fact that OPEC had become irrelevant and toothless, and unable to influence the oil prices.
But the fact is, they are unable to bring oil prices down, because that would have required pushing production up, which they are evidently unable to do. They remain, however, perfectly capable of pushing prices up, by reducing production, as they have decided to do today.
And in fact, the ratchet is going up. 5 years ago, they came up with the $22-28 band for oil prices. Then they stated that prices should not return below $40; then below $50, and now they are effectively sayign that $60 is their new floor (for Brent or WTI - their own basket of prices is a few dollars below due to quality differences or transport costs).
Negative financial income
Negative natgas prices
Negative production change for OPEC
There are a lot of news below zero...
Earlier "Countdown" Diaries:
Countdown to $100 oil (32) - peak oil is, like, so over. Not!
Countdown to $100 oil (31) - $15 oil? The cornucopians are fighting back
Countdown to $100 oil (30) - senior politico fears looming oil wars
Countdown to $100 oil (29) - Alaska joins axis of evil (unreliable oil suppliers)
Countdown to $100 oil (28) - New records suggest more to come
Countdown to $100 oil (27) - 'Mission Accomplished' - High oil prices are here to stay
Countdown to $100 oil (26) - Time to bet again (eurotrib)
Countdown to $100 oil (26) - Time to bet again (dKos)
Countdown to $100 oil (25) - Iran vows that oil prices will not go down
Countdown to $100 oil (24) - What markets are telling us about future energy prices
Countdown to $100 oil (23) - Running out of natural gas in North America
Countdown to 100$ oil (22) - gas shortages in the UK - 240$/boe
Countdown to $100 oil (21A) - The 4 biggest oil fields in the world are in decline
Countdown to 100$ oil (21bis) - long term vs short term worries (dKos)
Countdown to 100$ oil (21) - 8-page extravaganza in the Independent: 'we're doomed'
Countdown to 100$ oil (20) - Meteor Blades is Da Man in 2005
Countdown to 100$ oil (19) - Your bets for 2006 (Eurotrib)
Countdown to 100$ oil (19) - Your bets for 2006 (DailyKos)
Countdown to 100$ oil (18) - OPEC happy with oil above 50$
Countdown to 100$ oil (17) - Does it matter politically? A naked appeal for your support
Countdown to 100$ oil (16) - We'll know on Monday
Countdown to 100$ oil (15) - the impact on your electricity bill
Countdown to 100$ oil (14) - Greenspan acknoweldges peak oil
Countdown to 100$ oil (13) - Katrina strikes / refinery crisis
Countdown to 100$ oil (12) - Al-Qaeda, oil and Asian financial centers
Countdown to 100$ oil (11) - it's Greenspan's fault!
Countdown to 100$ oil (10) - Simmons says 300$ soon - and more
Countdown to 100$ oil (9) - I am taking bets (eurotrib)
Countdown to 100$ oil (9) - I am taking bets (dKos)
Countdown to 100$ oil (8) - just raw data
Countdown to 100$ oil (7) - a smart solution: the bike
Countdown to 100$ oil (6) - and the loser is ... Africa
Countdown to 100$ oil (5) - OPEC inexorably raises floor price
Countdown to 100$ oil (4) - WSJ wingnuts vs China
Countdown to 100$ oil (3) - industry is beginning to suffer
Countdown to 100$ oil (2) - the views of the elites on peak oil
Countdown to 100$ oil (1) (eurotrib)
Countdown to 100$ oil (1) (dKos)