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How Much Of A Threat Is Oil?

9 March 2012 by Cullen Roche

Here are some good macro thoughts that put the oil threat into perspective (via Credit Suisse):

“The impact on GDP: each 10% rise in the oil price takes 0.2% off US GDP growth and 0.1% off global growth. This time the negative impact of a high oil price on growth is limited as: oil is only 10% above its 6-month MA (changes matter more than levels for growth); other energy prices are muted (coal prices are at 12-month lows, US gas prices down 40% yoy) and CPI food price inflation should fall by 5pp from here (adding 0.7% to disposable income); critically, unlike 2008 and 2011, neither the ECB nor GEM central banks are likely to raise rates in response to higher energy costs; and US macro momentum is currently consistent with GDP 0.8% above 2012 consensus, suggesting some buffer before consensus estimates get downgraded.

Impact on equities: since 2007, equities have tended to fall when oil prices rise by 40% yoy (i.e. an oil price of c$150/bbl). From a macro perspective, we would start worrying if the rise in the oil price pushed up US CPI above 4% (that is when equities de-rate, c$160/bbl), US GDP started being revised down (c$150/bbl) or European inflation rose above 2% year-end (c$140/bbl). Another warning signal is when inflation expectations decouple and start falling as oil continues to rise (as has happened in the past week). Each 10% rise in the oil price takes 2% off European EPS and c1% in the US, on our estimates (yet current valuations can accommodate a c10% fall in earnings).

From a regional perspective, we rank countries’ sensitivity to oil by looking at: net oil imports, energy’s weight in the CPI, output gap and the correlation with oil prices. The winners from a higher oil price are Norway, Russia and Canada, while Thailand, Turkey and Korea are negatively affected. We show cheap domestic plays in the ‘winners’ and expensive domestic plays in ‘loser’ countries.”

Source: Credit Suisse

PRAGMATIC CAPITALISM.

Iran threatens Strait of Hormuz closure

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Source

There is One World Leader Running For President Who’s Loving These High Oil Prices

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Joe Weisenthal | Feb. 28, 2012, 11:37 AM

Putin.

From Citigroup, the connection between the Russian market and the price of oil.

Source

Iran May Disrupt Hormuz Shipping, Supporting Oil, S&P Says

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By Ayesha Daya

Feb. 14 (Bloomberg) — Iran might respond to sanctions with “low-level provocation” such as slowing shipping through the Strait of Hormuz, keeping oil prices at their currently high level, according to three Standard & Poor’s reports.

Iranian authorities could disrupt supplies of oil from the Persian Gulf by imposing tanker inspections or boarding merchant ships in its territorial waters, supporting oil prices because markets would increasingly view armed conflict as “a real, if remote, possibility,” according to the reports’ authors, who include Paris-based Jean-Michel Six, S&P’s chief economist for Europe.

The likelihood of severe disruption of oil supplies through the strait, through which 20 percent of the world’s oil flows, is “very low,” though if one did occur, it might boost oil to $150 a barrel and push economies into a recession, according to the reports.

“For oil-producing sovereigns of the Gulf Cooperation CouncilSaudi Arabia, U.A.E., Qatar, Kuwait, Oman, and to a lesser extent, Bahrain — higher oil prices would actually be beneficial,” said Elliot Hentov, an S&P credit analyst in Dubai. “As oil exporters, they would receive more foreign earnings that they could either use to stimulate demand or improve their government’s balance sheets.”

The U.S. and the European Union are imposing tougher sanctions on Iran and Israel has talked of an attack on the Islamic Republic’s nuclear facilities in an attempt to halt its atomic program. Iran, which says its nuclear program is for civilian purposes, has threatened to block the Strait of Hormuz in retaliation.

The three S&P reports discuss the impact of rising Gulf tensions on Middle Eastern states seeking to borrow money, the risks that a closure of Hormuz would pose for companies looking for credit and the threats to global economic growth from an oil shock.

The Rise Of Dark Inventory In Housing And Oil

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The Automatic Earth | Jan. 14, 2012, 10:14 PM

I’d like to try a little intellectual exercise. There were two pieces in my mailbox this week that concerned posts at Naked Capitalism. Though their topics have at first glance little to do with one another, there is a term that is pivotal to both. Inventory.

When it comes to real estate, it’s popularly called “shadow inventory”. With regards to commodities, the term “dark inventory” has been coined. While there are plenty of differences in the way the terms are applied, I’m for now intrigued more by – potential – similarities between them.

Not that I have the illusion that I can treat this in a way that could even border on comprehensive, don’t get me wrong. I want to lift only part of the veil that hides from view what underlies how and why the financial system that rules our economies is going to the dogs: market manipulation.

In particular, I’m interested in how both shadow and dark inventory phenomena pervert their respective markets, as well as the entire free market system as a whole, where everyone is supposed to have “full access to information”. Something both dark and shadow inventories make impossible. Something the 99% general public are not aware of. At all.

And it’s not like they’re alone. Try your average pension fund manager, banker, politician. Not a clue.

Let’ start with a trip back to June 2011, when Izabella Kaminska for FT Alphaville perhaps first used the term “dark inventory”:

The power of the dark inventory

Dark inventory: Inventory that’s out there, but which no-one else can see.

It comes in many shapes and forms. Equity inventory, which has been internalised by banks and parked off-balance sheet (appropriately via private dark pools). Copper inventory, which has been stashed off-market and encumbered via finance deals. It’s also yet-to-be-produced commodities which have been pre-sold, but which nobody else knows have been encumbered.

But if you have the power to see or command the darkside inventory, you have the power to stay ahead of the game. Especially if you can move quickly. Indeed, almost every befuddling market move of late can, if you think about it, be explained by the concept of dark inventory. For example, consider the impact of dark inventory accumulation (the possible consequence of cheap liquidity).

In oversupplied markets this can mislead fellow investors. They see buying interest coming from somewhere, though they can’t quite understand from where. The fundamentals don’t explain it, but prices are rising regardless, led usually by the cheapest securities, and in tandem. With no ability to see the dark inventory, the market finally falls for the trend. They believe the demand is real.

If you are the accumulator of dark inventory, or privy to the flow, you are able to foresee the market rallies and position yourself accordingly. This is a profitable time.

Of course, in continually oversupplied markets you will begin to suffer the costs of hedging inventory, if you are bothering to hedge, (since forward curves may eventually flatten out) as well as the burden of balance sheet expansion. Eventually it will make sense to park that inventory off-balance sheet.

Thanks to matching, aggregation and netting you can use the inventory (in a sliced up, mixed up manner) to back equitised structured products, exchange traded notes, exchange traded products as well as synthetic funds. Lots of launches follow. This especially makes sense if by then everyone is a believer in the rally, a fact which  has translated into genuine buying interest which can now be captured to back your dark inventory.

The game is afoot.

Ilargi: I certainly recommend reading Izabella’s entire piece (like all other pieces I quote from). But even from the quote above alone, you can, even if you’re not familiar with the topic, still get a genuinely queasy feeling. We’re talking market manipulation here, a way to influence investment decisions without anyone ever knowing they’re being manipulated. And fully legal.

Chris Cook, former compliance and market supervision director of the International Petroleum Exchange, writes this about “dark oil inventory” at Naked Capitalism:

Naked Oil

All is not as it appears in the global oil markets, which in my view have become entirely dysfunctional and no longer fit for its purpose. I believe that the market price is about to collapse as it did in 2008 and that this will mark the end of an era in which the market has been run by and on behalf of trading and financial intermediaries.

In this post I forecast the imminent death of the crude oil market [..]

Global Oil Pricing
The “Brent Complex” is aptly named, being an increasingly baroque collection of contracts relating to North Sea crude oil, originally based upon the Shell “Brent” quality crude oil contract which originated in the 1980s.

It now consists of physical and forward BFOE (the Brent, Forties, Oseberg and Ekofisk fields) contracts in North Sea crude oil; and the key ICE Europe BFOE futures contract which is not a deliverable contract and is purely a financial bet based upon the price in the BFOE forward market.

There is also a whole plethora of other ‘over the counter’ (OTC) contracts involving not only BFOE, but also a huge transatlantic “arbitrage” market between the BFOE contract and the US West Texas Intermediate (WTI) [..]

North Sea crude oil production has been in secular decline for many years, and even though the North Sea crude oil benchmark contract was extended from the Brent quality to become BFOE, there are now only about 60 cargoes of BFOE quality crude oil (and as low as 50 when maintenance is under way), each of 600,000 barrels, delivered out of the North Sea each month, worth at current prices about $4 billion.

It is the ‘Dated’ or spot price of these cargoes – as reported by the oil price reporting service Platts in the ‘Platts Window’– which is the benchmark for global oil prices either directly (about 60%) or indirectly, through BFOE/WTI arbitrage for most of the rest.

[..] traders of the scale of the oil majors and sovereign oil companies do not really have to put much money at risk by their standards in order to acquire enough cargoes to move or support the global market price via the BFOE market.

[..] the evolution of the BFOE market has been a response to declining production and the fact that traders could not resist manipulating the market by buying up contracts and “squeezing” those who had sold forward oil they did not have [..] The fewer cargoes produced; the easier the underlying market is to manipulate.

[..] The Platts window is the most abused market mechanism in the world.[..]

In the early 1990s Goldman Sachs created a new way of investing in commodities. The Goldman Sachs Commodity Index (GSCI) enabled investment in a basket of commodities – of which oil and oil products was the greatest component – and the new GSCI fund invested by buying futures contracts in the relevant commodity markets which were ‘rolled over’ from month to month. The genius dash of marketing fairy dust which was sprinkled on this concept was to call investment in the fund a ‘hedge against inflation’. Investors in the fund were able to offload the perceived risk of holding dollars and instead take on the risk of holding commodities.

The smartest kids on the block were not slow to realise that the GSCI – which was structurally ‘long’ of commodity markets – was taking a long term position which was precisely the opposite of a commodity producer who is structurally ‘short’ of commodities because they routinely sell futures contracts in order to insure themselves against a fall in the dollar price. ie commodity producers are offloading the risk of owning commodities, and taking on the risk of holding dollars.

So in 1995 a marriage was arranged.

BP and Goldman Sachs get Married

From 1995 to 2007 BP and Goldman Sachs were joined at the head, having the same chairman – the Irish former head of the World Trade Organisation, Peter Sutherland. From 1999, until he fell from grace in 2007 through revelations about his private life, BP’s CEO Lord Browne was also on the Goldman Sachs board.

The outcome of the relationship was that BP were in a position, if they were so minded, to obtain interest-free funding via Goldman Sachs, from GSCI investors through the simple expedient of a sale and repurchase agreement: ie BP could sell title to oil with an agreement to buy back the oil later at an agreed price.

The outcome would be a financial ‘lease’ of oil by BP to GSCI investors and the monetisation of part of BP’s oil inventory. Such agreements in relation to bilateral physical oil transactions are typically concluded privately, and are invisible to the organised markets.

Due to the invisibility of the change of ownership of inventory, ‘information asymmetry’ is created where some market participants are in possession of key market information which others do not have. This ownership by investors of inventory in the custody of a producer has been termed ‘Dark Inventory’

I must make quite clear at this point that only BP and Goldman Sachs know whether they actually did create Dark Inventory by leasing oil in this way, and readers must make up their own minds on that.

Planet Hype

The ‘inflation hedging’ meme gradually gained traction and a new breed of Exchange Traded Funds (ETFs) and structured investment products were created to invest in commodities. In 2005 Shell entered quite transparently into a relationship with ETF Securities which enabled them to cut out as middlemen both investment banks and the futures market casinos, and with them the substantial rent both collect.

Other investment banks also started to offer similar products and a bandwagon began to roll. From 2005 to 2008 we therefore saw an increasing flood of dollars into the oil market, and this was accompanied by the most shameless, and often completely misleading hype, and led to a bubble in the price.

There was (and still is) no piece of news which cannot be interpreted as a reason to buy crude oil. The classic case was US environmental restrictions on oil products, which led to restricted supply, and to price increases in oil products. Now, anyone would think that reduced refinery throughput will reduce the demand for crude oil and should logically lead to a fall in crude oil prices.

But on Planet Hype faulty economic logic – the view that higher product prices are necessarily associated with higher crude oil prices – was instead used as justification for the higher crude oil prices which resulted from the financial buying of crude oil attracted by the hype.

You couldn’t make it up: but unfortunately, they could, and they did.

More worrying than mere hype was that a very significant amount of oil inventory had actually changed hands from producers to investors. Only those directly involved were aware that below the visible part of the oil market iceberg lurked massive unseen ‘Dark Inventory’.

Ilargi: In a nutshell: Cook argues that QE measures from the Fed and BOE have caused large investors to flee from dollars into commodities.

This in turn has led to a price bubble through contango (forward prices are higher than spot prices), for which they are all positioned, but this will down the line inevitably lead to the opposite – backwardation -, and the bubble must burst. Severely, says Cook: to as low as $45 a barrel. Given how conservative Cook is in the numbers he uses, even that may be a high estimate.

In yet another article at Naked Capitalism, Irish journalist Philip Pilkington summarizes Cook’s point so well it seems pointless to try and improve on it:

Fear and Loathing in the Financial Markets – What Happens to the Economy When the Oil Bubble Bursts?

Looking at recent market trends Cook raises concerns that we could be seeing the beginnings of the end of a bubble that began to inflate in the oil market after the crash of the previous bubble in 2008. This bubble, Cook argues, was inflated due to inflation fears after the QE programs undertaken by the Federal Reserve and the Bank of England. With the markets awash with dollar and sterling liquidity, banks and investors piled into commodities to escape what they saw to be a looming inflation.

In recent months Cook focuses on the move of the market from a position of ‘contango’ to a position of ‘backwardation’ – which he sees as evidence of a bubble deflating. While some investors read in this that the short-run demand for oil has risen, Cook points out that with the global recession grinding along there is no fundamental reason that this should be occurring. Instead Cook sees in this move a sign that the long-run demand for oil is falling as the current bubble begins to burst.

Cook thinks that the price collapse is going to be very painful – falling possibly as low as $45-$55 a barrel. In response to this OPEC will try to ramp up prices by cutting production and, most importantly for our purposes, a financial crisis of sorts will occur as inflation hedged investors see their net worth cut to pieces.

If this is as Cook says – if this is a bubble of fear and it bursts – the financial sector is going to see a huge wiping out of the profits they have been reaping from it. We have no way of knowing how much profitability is tied up in these dodgy markets – but my thinking is: a lot.

Ilargi: So far, so good. We must realize, however, that while lower oil prices seem very beneficial to many sectors of our economies, a wiping out of everyone who’s betting the wrong side of this wager is not.

And if Cook is right, a large segment of the financial world, that is: those who are not privy to the magnitude of the dark inventory, have been, and are being, manipulated to be on that wrong side. And without a new bubble to flee into to boot. Indeed, there’s a real risk the entire global oil market will cease to – properly – function.

Come to think of it, again, if Cook is right, it probably already has. Since to the extent that it still seems to function, it does so only to service the interests of those that control the dark inventory, and who squeeze those investors not “in the know”. Oil prices are thus set, in essence, by derivative contracts, not by supply and demand, which is a mere illusion. Thing is, who would know?

Needless to say, there’s another party that stands to lose big if oil prices collapse: producers. The Arab Spring may well return more powerful than ever.

Still, while I think it’s important for everyone to see and understand that, and how, manipulation sets market prices for commodities (and stocks, but that’s another story) on a daily basis, and not some free market principle, I started out trying to figure out what connects dark oil inventory and shadow housing inventory.

Michael Olenick, founder and CEO of Legalprise, and creator of FindtheFraud, has – extensively- looked at the latter:

9.8 Million Shadow Inventory Says Housing Market is a Long Way From the Bottom

“Shadow inventory,” the number of homes that are either in foreclosure or are likely to end up in foreclosure, creates substantial but hidden pressure on housing prices and potential losses to banks and investors.

This is a critical figure for policymakers and financial services industry executives, since if the number is manageable, that means waiting for the market to digest the overhang might not be such a terrible option. But if shadow inventory is large, housing prices have a good bit further to go before they hit bottom, which has dire consequences for communities, homeowners, and the broader economy.

Yet estimates of shadow inventory, and even the definition of what constitutes shadow inventory property, vary widely. For example, the Wall Street Journal published a Nov. 11, 2011 article, “How Many Homes Are In Trouble?” where values varied from 1.6 million (CoreLogic), [..] to between 8.2 million and 10.3 million (Laurie Goodman, Amherst Securities). [..]

…. things are actually worse than any of the prevailing estimates indicate, although Goodman is very close to the mark. Current loss experience suggests that this figure is staggering, easily in the $1 trillion range.

Why aren’t those losses more visible yet? Well, evidence suggests that servicers are stalling the foreclosure process, not taking title to and selling these houses. For the lenders, such delay likely allows them avoid the write-offs of both the negative equity as well as the worthless second liens. More generally, it keeps the trillion dollar losses hidden.

Lenders aren’t acknowledging their stall tactics, however. When people notice how slowly foreclosures are progressing from initial steps to resale, lenders point at their foreclosure fraud related dysfunction. Lenders conveniently don’t mention that such dysfunction was self-induced, instead blaming borrowers and courts. [..]

…. there are 9,800,000 houses in shadow inventory.

If these loans were taken out for the median value of a state-by-state home price, using data from the FHFA, for Q2, 2006, there is $2.3 trillion of home values at near the market peak. The mortgage balances are going to be lower than that, but given how widespread equity extraction came to be (and it is probably that the most levered homes are hitting the wall), it is not unreasonable to assume LTV ratios relative to peak values of 80%.

Loss severities on prime mortgages are running at roughly 50% and are 70% on subprime (note that with more borrowers fighting foreclosures, and given that loss severities on a contested foreclosure can come in at 200% or even higher, so using these assumption is certain to understate actual results). $2.3 trillion x 80% x 50% = $900 billion.

These losses will be distributed across the GSEs (meaning taxpayers), banks that have second liens (with the biggest losers being Bank of America, Citibank, JP Morgan, and Wells Fargo), investors in private label (non GSE) mortgage securities, and other US and foreign banks.

Balanced against this liability is some amount figure for the underlying asset, the house. Given that servicer advances, foreclosure costs and servicer fees come close to and even exceed the value of the property, comparatively little of this $2.3 trillion will be recovered in property liquidations. [..]

In support of the conclusion that banks cannot afford to recognize this shadow liability is the sharp decrease of foreclosure filings in 2011 and the seeming unwillingness of banks to move foreclosures through the system.

They file foreclosures, then let them linger, not taking homes even when every possible borrower defense is exhausted. Some of this slowdown may be due to more scrutiny of foreclosure documentation, particularly in judicial foreclosure states, but there is clearly more at work. [..]

There is other anecdotal evidence suggesting banks do not want these houses or, more accurately, do not want the write-offs that actually taking the houses would force:

• Foreclosure defense lawyers have clients who have not paid their mortgage in years, but face neither a foreclosure nor even a negative mark on their credit report. I recently received a call from a man who said he had not paid his $1.6 million mortgage in two years but his servicer has not foreclosed, and he faces no derogatory information on his credit report; he was frustrated because he is retired and just wants to move to a cottage.

This phenomenon, which apparently isn’t rare, might explain why shadow inventory reports that rely on credit reports to extrapolate shadow inventory are often dramatically lower than these calculations. [..]

• It is common for foreclosure mill lawyers to argue for delays in selling a home when nobody is representing a borrower. Judges, who want to clear their dockets, will rail at bank lawyers about the age of the case even while bank lawyers argue for yet another delay, while the other table — where the borrower, the defendant, is supposed to sit — is empty. [..]

Yes, servicers continue to prey upon ordinary Americans. But evidence suggests that they’re also preying on investors. Individual American families do not deserve to suffer these behaviors, that increase the losses while delaying the uncertainty, and neither do pension funds, European villages, municipalities, or other unsuspecting entities who actually funded these loans.

Few people are going to complain when they’re not paying their mortgage that there is no mark on their credit-report nor a foreclosure; a few of the more perplexed ones — or those that want to bring a bad mortgage to resolution — may speak out, but most remain silent.

Similarly, many investors, and surely the banks themselves, know about these figures. But as both sides spin their wheels, the problem continues to spiral out of control.

Ilargi: I think perhaps the best way to make the connection between dark inventory in commodities and shadow inventory in real estate is to look at, no surprise, what pays for it. And that leads me to what I have long since coined “zombie money”.

Zombie money is the money that seems, but only seems, to exist because of unrecognized losses. QE measures, for instance, basically serve to keep those losses unrecognized. That’s what they’re for. To make markets, and ordinary people, believe that banks are still solvent when in reality they’re not.

Funny thing is, even with all the accounting tricks that hide those losses, the entire system is still, and already, on the verge of collapse. And when it goes, the loser will be you, not the gamblers that lost fair and square. If dark inventory shows you anything, it’s that fair and square is a thing of some mythical fairy tale past. The reality for you and me is, and this is not the first time I put it like this: heads you lose, tails you die.

Zombie money pays for dark oil inventory; this is for instance why tar sands can look profitable, even as their EROEI is very low. If there’s sufficient difference between spot prices and forward prices for natural gas and oil, it makes sense to turn the former into the latter (which is all that tar sands are about). Nothing to do with energy efficiency, everything to do with market manipulation. The same goes for shale gas, and for oil shale. It will all soon give a whole new meaning to the term “unsustainable”. Promise.

Zombie money also allows, and causes, lenders, aided and abetted by governments all over, who want no part of a crashing real estate market, to keep millions of homes off the market, which in turn allows them to keep billions, if not trillions of dollars, in losses off their books. This results in hundreds of millions of people, throughout the western world, who think their homes are worth much more than they are. And then they wake up.

Dark inventory and shadow inventory keep us all from having a realistic picture of what is actually out there, what anything at all is worth. Prices are not set in any sort of “free” market; they are set in “shadow markets”, “dark markets”, in which – derivative – financial instruments rule, not the actual assets they are based on. Until they don’t.

Today’s prices are set by bets on expectations of tomorrow’s prices, and these expectations in turn are manipulated by parties that have a vested interest in making investors – and the general public – think a certain expectation is realistic; all it takes is to make that expectation sufficiently opaque, to make sure investors have access to far less information than the parties that deal and/or hold the derivative instruments.

That’s all it takes to create, out of thin air, a whole new generation of suckers and greater fools.

This creates a tremendous cognitive dissonance, a picture of the world that is entirely delusional. And that, of course, can and will not last. Even if a majority of people still wishes to think that it can. What do they know about what’s going on behind the curtain? Hardly anything at all.

And then they wake up.

Source

Naked Oil

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Posted by Gail the Actuary on January 11, 2012 – 12:03pm

This is a guest post by Chris Cook, former compliance and market supervision director of the International Petroleum Exchange.

All is not as it appears in the global oil markets, which in my view have become entirely dysfunctional and no longer fit for its purpose. I believe that the market price is about to collapse as it did in 2008 and that this will mark the end of an era in which the market has been run by and on behalf of trading and financial intermediaries.

In this post I forecast the imminent death of the crude oil market, and I identify the killers; the re-birth of the global market in crude oil in new form will be the subject of another post.

Source

Nigeria: Fuel protests turn violent

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Nigerian union members and demonstrators march in Lagos to protest the removal of petroleum subsidies by the government on January 3, 2012. Nigerian police fired tear gas to disperse a small crowd burning tires in Lagos and arrested demonstrators in the northern city of Kano on Tuesday as protests continued over soaring fuel prices. (Pius Utomi Ekpei /AFP/Getty Images)

Over the weekend, Nigerian President Goodluck Johnathan said the violence that has erupted from Islamist militant group Boko Haram, is the gravest threat since the civil war in 1967 to 1970 that left as many as 3 million people dead, and nearly ripped the country apart, according to Agence France Presse.

“During the civil war we knew and we could even predict where the enemy was coming from. But the challenge we have today is more complicated,” Jonathan said, according to The Guardian. The president said some Boko Haram supporters even work for the government.

As the Nigerian government attempts to counter this threat, however, the country appears to be descending into chaos. On the first of this year, the president announced an end to government-sponsored fuel subsidies, doubling and tripling the price of gas in a matter of days.

The reaction of the people was swift, as people took to the streets in opposition to the move almost immediately. Yesterday, schools, banks and stores were shuttered, as protests and a general strike swept the nation after an emergency court banned the demonstrations on Sunday, according to Bloomberg News.

The BBC reports at least three people were killed and more than 30 injured in the protests, that drew tens of thousands of people, and are scheduled to continue indefinitely.

CNN reports a higher death toll, citing at least five reported deaths. Hadiza Halliru, an Abuja protester told the broadcaster that soaring fuel prices have caused an increase in the costs of everything from food to school fees. In Nigeria, more than 90 percent of the people live on less than $2 a day.

“The fuel hike, which has doubled and even tripled in some states, would affect not only transportation but the price of foodstuff, clothing, any form of direct labor, construction costs,” he told CNN. “But salaries still remain the same, which means everyone who directly pays bills will be affected, especially the middle class and the poor.”

In a photo on the Voice of America website, one man carries a placard that reads: “One day the poor will have nothing to eat but the rich.”

The fuel subsidy cost the government $8 billion in 2011, and some argue it never really helped the average Nigerian person get ahead. Critics of the subsidy say it filtered large amounts of money into the hands of the few, leaving the country with very little in the way of infrastructure development.

As the debate over the subsidy raged last fall, a Nigerian Tribune editorial hailed local leaders for standing up to the people profiting from the subsidy. The author, Joshua Ocheja, writes:

“We can’t sit and watch while an infinitesimal percentage of the population milk us dry in the name of fuel subsidy … It is high time we called a spade a spade in this country. Our elected officials must account for their actions and inactions as it concerns the populace.

Source

Let’s blame speculators

May 5, 2011
Laurel Leader-Call

LAUREL — Here’s a non-rocket science question: If you expect a reduced harvest of wheat, corn, rice or any other commodity some time in the future, what would be the wise thing to do about your consumption today? I bet that the average person would answer: Consume less now so that more will be available in the future.

But how in the world can people be encouraged to consume less now? Enter the futures market, which consists of a worldwide group of millions upon millions of traders, often called speculators. Speculators, betting on a future shortage, buy up wheat, corn and rice today in the hopes of making money selling it for a higher price when the bad harvest hits. As speculators buy more and more wheat, corn and rice, they drive up today’s prices. As today’s price gets higher, people consume less, but more importantly, people do the intelligent thing without bureaucratic edicts. The vital role of the futures trader, or speculator, is to allocate goods over different time periods. And, it’s not just wheat, corn and rice that must be allocated over time but all commodities including oil.

There’s no guarantee that speculators will make money. They might guess wrongly. For example, they might buy wheat now at $8 per bushel, expecting to make a killing in November at $12. Weather predictions might have been wrong and instead of a reduced harvest, there’s a bumper crop driving November wheat prices down to $4 per bushel. That would make the speculator’s $8 investment worth $4.

If we don’t like commodity speculation, we could easily outlaw it. That way, for example, even though there might be every indication of a reduced fall wheat harvest, today’s price of wheat wouldn’t rise. We could consume wheat today and not fret about fall.

President Obama has asked the U.S. Department of Justice to investigate whether Wall Street speculators could be manipulating oil markets. If Obama could convince other nations to put an end to worldwide oil speculation, we might be able enjoy $2 per gallon gas and ignore Middle East conflicts that might impact heavily on future oil supplies.

White House and congressional attacks on oil speculation do not alter the oil market’s fundamental demand-and-supply reality. What would lower the long-term price of oil is for Congress to permit exploration for the estimated billions upon billions of barrels of oil off our Atlantic and Pacific Ocean shores, the Gulf of Mexico and Alaska, not to mention the estimated billions, possibly trillions, of barrels of shale oil in Wyoming, Colorado, Utah and North Dakota.

Some politicians pooh-pooh calls for drilling, saying it would take five or 10 years to recover the oil and won’t solve today’s problems. Nonsense! I guarantee you that if permits were granted to all of our oil sources, we would see a reduction in today’s prices.

Why? Put yourself in the place of an OPEC member knowing there’s going to be a greater supply of U.S. oil in five or 10 years, which might drive oil prices to a permanent $20 or $30 per barrel. What will you want to do now while oil is $120 per barrel? You would want to sell.

OPEC’s collective efforts to sell more would put downward pressures on current oil prices. The White House, U.S. Congress and environmental wackos, by keeping our oil in the ground, are OPEC’s staunchest ally. I wouldn’t be surprised at all if we discovered OPEC reciprocity in the forms of political contributions to congressmen and charitable donations to environmental groups.

In the wake of higher gasoline prices, the only intelligent thing that Obama has called for is an end to $4 billion in annual taxpayer subsidies to oil companies. To get that done, he has an uphill bipartisan fight on his hands. Oil companies buy off both Republicans and Democrats in order to receive government handouts and special treatment.

Walter E. Williams is a professor of economics at George Mason University.

Original Article

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