Entries from July 2008 ↓

As Americans grapple with record oil and gas prices, politicians facing angry voters have offered up a variety of solutions on Solving the Energy Crisis. Lets look at them…

1. Expanding domestic drilling
   
   Supporters, mostly Republican lawmakers, say the United States has vast untapped oil reserves right here at home — mostly in Alaska’s Arctic National Wildlife Refuge and off the East and West coasts.
   Opening these areas to drilling would cause oil prices to fall immediately, proponents say, as oil traders would fret less about future production. They also say it would lessen U.S. dependence on foreign oil.

   Critics — along with the government’s Energy Information Administration — say any price drop would take years to materialize and be minimal at best — maybe 2 or 3 cents off a gallon of gas.

   Moreover, they say focusing on more oil drilling misses the point: The country should be figuring out a way to use less oil, not drill more, and that it’s counterproductive when it comes to reducing greenhouse gas emissions.

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2. Limiting Wall Street money into oil markets
   
   The correlation of a four-fold increase of investment money into oil futures and a four-fold increase in oil prices since 2004 has not gone unnoticed. Many lawmakers, consumer rights advocates and even some oil industry analysts say speculation is at least partly to blame.

   The commoditiy prices would continue to rise as long as the FED keeps printing money out of thin air and keeps interest rates artificially low

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3. A windfall profits tax on Big Oil
   
   Barack Obama would impose a windfall profits tax on the big oil companies whenever oil crossed the $80 a barrel mark. Some analysts feel $80 a barrel is what oil ’should’ be priced at, factoring out investment money and unfounded supply fears. The cash would be given to low income people to help them offset their energy costs.

   Another idea along these lines is eliminating oil company tax breaks and using the money to fund research into renewable sources.

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4. Capping Carbon Emissions & Carbon Trading
   
   The idea is to reduce greenhouse gases by capping carbon dioxide emissions from burning fossil fuels.The government would issue permits to emit carbon dioxide, and the number of permits each year would decline — that’s the cap part. Industry could then either invest in cleaner technology, or buy the permits from one another — that’s the trade.

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5. Creating an Apollo project (or Marshall Plan) for renewable energy
   
   Some say a real solution for the energy crisis depends on the government embarking on a massive effort to fund renewable energy — something akin to the Apollo program that put a man on the moon in the 1960s.

   Supporters are calling for the government to boost funding from about $4 billion a year now to $30 billion a year — every year for the next few decades.

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6. Getting serious about Energy conservation
   
   Ideas for promoting conservation include lowering the speed limit to 55 miles per hour, more government investments in mass transit, and tax incentives for workers to telecommute.

   It also includes plans by the government to raise mandatory efficiency levels in vehicles produced and sold in the US. But more fuel efficient cars will likely come with a trade off — namely, smaller and less powerful vehicles.

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7. Using more biofuels
   
   US Congress wants to displace the oil we use with biofuels. They plan to replace upto 1 million barrels per day of oil with home-grown plants, in the form of biofuels.

   But critics say biofuels are partly responsible for the surge in food prices, groundwater depletion and pollution, and pressure on topsoil. They also say it’s perverse to put food in gas tanks when people are starving.

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8. Tapping the Strategic Petroleum Reserve
   
   Democrats are pushing for oil to be released from the Strategic Petroleum Reserve — located in giant salt caverns along the Gulf of Mexico and holding over 700 million barrels of oil. They say it would send a message to traders that the government is not willing to let oil prices go up forever.But critics of this plan, including the Bush administration — say the reserve serves an important role as a buffer against supply disruptions from overseas, and traders would bid up prices if the reserve were smaller.

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9. Suspending the gas tax
   Analysts said doing away with the 18.4 cent per gallon federal gas tax over the summer would leave road repair dangerously underfunded, and could even lead to higher gas prices as people drove more.

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10. Lifting the ethanol tariff

    Ethanol from places like Brazil, made with sugar cane that is more efficient to make than U.S. corn-based ethanol, is currently subject to a 54-cent a gallon tariff, designed to protect the domestic ethanol industry from foreign competition.

    Since ethanol is a required component in gasoline, critics of the tariff say lifting it would mean cheaper gas for everyone.

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11. Forcing utilities to buy renewable power
    
    Currently about half the states require their utilities to buy a certain percent of their electricity from renewable sources — usually 10% to 20%.

    In addition to cutting greenhouse gas emissions, supporters say it provides a guaranteed market for renewable power, thereby spurring investment in the sector and helping reduce costs as renewable technologies develop economies of scale. They are pushing for a federal law requiring utilities in all states to buy renewable power.

    Opponents say a federal law is unfair, as some states (think Arizona for solar or North Dakota for wind) are more blessed with renewable energy sources than others.

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12. Easing refining restrictions
    
    Refiners currently have to make over 40 types of gasoline blends to meet clean air requirements in different areas, and a new one hasn’t been built in this country in over 30 years.

    Easing clean air requirements or reducing the number of blends made might bring down prices. And there have been plans floated to require the industry to build more refineries.

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13. Building more nuclear plants
    
    In a world concerned about greenhouse gas emissions and imported oil, many say nuclear power is the way to go.  Nuclear power is cheap, and produces no carbon emissions. Availability of Uranium can become a problem, though…

The Natural Resources Defense Council released a report yesterday stating that Ohio ranks second-worst among all states for its polluted beaches. The source: sewage overflows and polluted stormwater runoff from government-run systems. And, get this, the state and the various local governments do not always provide a warning to swimmers and bathers. Yuck! So much for government and collective ownership as defenders of the environment.

Here in Central Ohio, a local city regularly releases sewage and runoff into the Scioto River during heavy rains. Sure, the city gets fined, but the fine is simply passed on to the taxpayer. What a racket. But don’t try this if you run a for-profit business — clean water is a federal issue.

The New York Times is reporting that the Bush administration is giving away jobs to people who are Bush fanatics and dedicated Republican loyalists, while striking people off the list who are not. I know this isn’t news, but when you consider that the whole ghastly apparatus of the civil service and its appointed division was created by the progressives who believed that these agencies would be staffed by socially minded scientists who served the public rather than private interests, the irony is striking. Is there any theory that has gone as wrong in practice as the theory of government?

In any case, what kind of fool would take a political job in the executive branch right now, at the tail end of one of the most disastrous presidencies in modern history? Well, I guess the answer is: a Bush fanatic and dedicated Republican loyalist.

The Federal Reserve’s decision today to extend loans to investment banks into 2009 is one more hurdle to an eventual tightening cycle that now appears unlikely to begin before next year.

It’s not an insurmountable one, Fed watchers said, especially if inflation were to worsen further. But like the November elections, it’s the type of symbolic barrier that would put officials in a tight spot if they tried to raise interest rates before the end of the year.

“The presence of these facilities does not absolutely prevent the Fed from tightening, because the Fed has made some separation between its monetary policy tools and its liquidity tools,” former Fed governor Laurence Meyer and former Fed economist Brian Sack, both with Macroeconomic Advisers, wrote in a research note. “However, in our view, it leans the Fed in that direction.”

In a statement, the Fed cited “continued fragile circumstances in financial markets,” adding “these [lending] facilities would be withdrawn should the Board determine that conditions in financial markets are no longer unusual and exigent.”

“There’s some intellectual case to be made [that] they can’t be tightening when they’re declaring that financial conditions are bad,” said Stephen Stanley, economist at RBS Greenwich Capital Markets. He expects the Fed to start raising rates next April.

Brian Bethune, economist at Global Insight, agreed. “It wouldn’t make sense for the Fed to raise rates if they’re trying to expand liquidity,” he said. “That would basically push up all the rates people would pay on these facilities. It would be an exercise in futility.”

The Federal Open Market Committee will meet Aug. 5 and is universally expected to hold the target federal-funds rate for interbank loans unchanged at 2% for a second-straight meeting. Officials cut the fed-funds rate by 3.25 percentage points between September and April to ease the fallout from a housing and credit crunch.

Yet the rest of the year remains in doubt. Some Fed officials, particularly regional bank presidents, have grown more antsy about inflation and want rate hikes sooner rather than later. And while weak, the economy has shown no sign yet of sliding into a severe recession. Indeed, in a policy statement on June 25, officials said growth risks “appear to have diminished somewhat” while inflation risks “have increased.”

“The FOMC might want to see how the markets function without the [liquidity facilities] before deciding whether it is time to [raise rates],” said Macroeconomic Advisers’ Meyer and Sack.

The new Jan. 30, 2009, end-date for the measures “is quite convenient for our policy call,” they noted, since they expect the Fed to start raising rates at its first meeting after that, in March 2009. –Brian Blackstone and Meena Thiruvengadam

The economic slowdown in the U.S. is extending to the country’s southern border.

Family Remittances to Mexico. Blue line is seasonally adjusted number.
Source: Bank of Mexico

The Bank of Mexico reduced its forecast for economic growth due in part to a bleaker employment picture both at home and in the U.S.

Family remittances to Mexico in the second quarter of the year totaled $6.28 billion, down 1.1% from the second quarter of 2007, while in the first six months of the year, remittances were $11.6 billion, a 2.2% decline from the first half of 2007. Remittances were a record $24 billion in 2007.

In its second-quarter inflation report, the Bank of Mexico said a sharper slowdown or prolonged weakness in the U.S. economy could bring about a significant drop in remittances as labor conditions deteriorate in that country.

Migrant workers have been particularly hard hit by the slump in U.S. housing, which affects construction jobs, but also by the overall economic slowdown and tighter controls on migrant labor.

The Bank of Mexico was also less optimistic than before about the prospects for the labor market in Mexico, where it lowered its estimate for net job creation in the formal economy to 370,000 this year from its previous estimate of 530,000.

“The deceleration in economic activity in the first half of the year meant a loss of momentum for job creation in the overall economy, but especially in the formal sector,” the Bank of Mexico said.

The bank nudged down its 2008 economic-growth estimate for Mexico to 2.25%-2.75% from 2.4%-2.9% previously, while raising its inflation forecast for the fourth quarter to 5.5%-6% from 4.25%-4.75%.–Anthony Harrup

Among an array of changes the Federal Reserve announced today to ensure liquidity in credit markets was a proposal for options to borrow from the Term Securities Lending Facility that harks back to a similar program used around Y2K.

The new options will allow primary dealers — many of the largest investment banks — to purchase options to borrow at the TSLF at a set rate. It can work as a hedge if rates jump due to stress on the system. The Fed plans only to offer the options “in advance of periods that are typically characterized by elevated stress in financial markets, such as quarter ends,” a statement said.

Fear of Y2K bug sends Hong Kong residents to the ATM on Dec. 20, 1999 (Getty Images)

This gives the Fed an opportunity to get ahead of potential disruptions around known volatile dates. It works primarily to restore confidence among dealers, and, in a best-case scenario, the options may never have to be exercised.

That was the case around the turn of the millennium, when the Fed introduced a similar program, called the Standby Financing Facility. Amid fears of a Y2K bug (that, as we now know, never materialized), market participants suggested that they would curtail their normal trading activities in the federal funds market in the weeks before and after the date change. If such a disruption occurred, it could cause a chain reaction in the federal funds market driving rates well above the Fed’s target rate. To offset this risk, the Fed introduced options that would let primary dealers to borrow under repurchase agreements at a set rate. The thinking was that the mere existence of these options would be enough to keep rates below the strike price as long as the markets’ fears of Y2K technical difficulties didn’t materialize.

The options worked perfectly. Although the Fed took in over $6 billion in premiums from banks that purchased options, they never had to be exercised.

However, there may be more risk involved with this new proposal. Details will be worked out with primary dealers, and won’t be announced until some time next month. Among the issues up for debate are the actual auction dates, expiration dates, and other program terms. There’s no set date — such as Jan. 1, 2001 — this time around. And at the time it was pretty well established when the Fed introduced the options program in 1999 that the Y2K bug was unlikely to cause major problems. In the current environment the Fed’s bet isn’t quite as safe, but the fact that it’s willing to put it’s money on the table indicates that policymakers believe the system is fundamentally sound.

Another issue is the timing of the options strike dates. The Fed only hinted at a timeframe around the end of a quarter. But with such an open calendar, the question remains of when the best time to guarantee rates might be. –Phil Izzo

Wall Street Journal reporter Bob Davis introduces the trade debate, which he will moderate over the next few days in Shaping the New Agenda. So far the campaigns have addressed whether global trade talks are fatally flawed.

Trade runs like a fault line through the presidential election. On one side is Republican John McCain who has said he is a deep-in-his-bones free trader who made his first overseas trips of the campaign to Canada and Mexico, the U.S partners in the North American Free Trade Agreement. He backs the three bilateral trade pacts that the Bush administration has already negotiated but which haven’t passed Congress: Colombia, Panama and South Korea.

Barack Obama also calls himself a free trader, but he mixes in a lot more skepticism about the downsides of trade liberalization. He has said he would renegotiate Nafta and is opposed to the pending trade deals with Colombia, Panama and South Korea that Sen. McCain embraces. Sen. Obama says he wants to make sure that ordinary workers benefit from new trade deals.

The two campaigns have nominated very distinguished and experienced trade hands to represent the candidates. On the Democratic side is Daniel Tarullo, a Georgetown law professor and former top Clinton White House international economics official. On the Republican side, Philip Levy, a scholar at the American Enterprise Institute, and a former a member of the Bush administration’s Council of Economic Advisers, who focused on trade.

CLICK HERE to see the candidates’ debates so far and comment on the issues.

A roundup of economic news from around the Web.

Compiled by Phil Izzo

Private sector jobs unexpectedly rose by 9,000 in the U.S. in July, according to the ADP national employment report.

The report, released Wednesday by payroll giant Automatic Data Processing and consultancy Macroeconomic Advisers, was better than the expected decline of 65,000 seen in a Dow Jones Newswires survey. June’s report was revised to a decline of 77,000 from a decline of 79,000.

“Though July’s figures showed a slight employment gain, the ADP Report’s recent three-month average of negative 14,000 suggests that the weakened employment situation continues,” ADP said in a press release.

The ADP employment report provides a snapshot of the private sector job market just ahead of the official payrolls report on Friday. ADP’s report doesn’t include government jobs, which in June rose by 29,000.

According to the report, gains were driven by growth in the services sector, where jobs rose by 74,000 in July. Jobs in the goods-producing sector declined 65,000 and by 49,000 in the manufacturing sector.

ADP’s reading indicates that the labor market outlook remains weak even as overall economic growth has held up despite severe headwinds from the bursting of the housing market bubble and sharp rises in food and energy prices.

But while the economy was seen expanding by 2.3% in the second quarter from the first quarter’s 1.0% — raising the prospect of a possible recession without growth contraction — nonfarm payrolls have declined six straight months in a row this year.

They are expected to show another drop in July, with economists in a Dow Jones survey forecasting a decline of 65,000. That’s after a decline of 62,000 in June. Since peaking in December 2007, payrolls have declined by 438,000 jobs. The unemployment rate is expected to tick up to 5.6% in July from June’s 5.5%.

Other data also point to continued weakness in the labor market. In the Conference Board’s July consumer confidence report, the gap between respondents who saw jobs as “plentiful” and those who saw jobs as “hard to get” stood at its widest in the current cycle, according to Goldman Sachs.

Weekly jobless claims readings have been equally soft, the firm said, noting a smoothed four-week moving average of 383,000. “At this elevated a level, the labor market still looks to be anemic,” they wrote in a note last week. Still, job losses so far have been mild compared with previous recessions when monthly job losses were far higher.

ADP, based in Roseland, N.J., claims to process the payment of one in six U.S. workers, while Macroeconomic Advisers, based in St. Louis, is an economic consulting firm. –Madeleine Lim

In a recent column, Paul Krugman tries to explain the “Bush bust.” Instead of clear, cogent economic theory, we are fed a mass of contradictory ideas, a bit of political partisanship, and explanations that simply make no sense. Austrian economists hold that there are certain principles which can be understood and which are based upon immutable laws of human action. Unfortunately, in Krugman’s world, events happen with no real explanation. FULL ARTICLE