Main Street 9

Europe may be reeling from the worst recession in living memory, but in Italy you can barely tell.

As leaders around the continent suffer the backlash from factory closures and job losses, Prime Minister Silvio Berlusconi is more popular than ever, there is not a hint of social unrest and unemployment remains close to record lows.

It’s not that the euro zone’s third largest economy is flourishing, far from it. But Italy has been the area’s most sluggish performer for well over a decade so Italians are inured to crisis and they can finally enjoy seeing others doing even worse.

“You’ll see that we improve our position in this crisis, even if it’s because others nations are going backwards faster,” Economy Minister Giulio Tremonti told reporters last month.

He may well be right. The European Commission expects Italy’s economy to contract by 2% this year, far less than Britain, Ireland and Germany and broadly in line with the average performance of the euro zone for the first time in years.

Long before a global credit crunch sent the world into recession Italian media pundits were wringing their hands about rising poverty and national decline. Now the same pundits focus on the European and American crisis more than the Italian one.

“Italy is used to a stagnant economy and a society feels the difference of going from zero growth to -2% far less than going from 3% growth to -3 or -4% as is happening in other places,” said Unicredit analyst Marco Valli in Milan.

That may explain why dismal figures on industrial output and gross domestic product have produced negligible popular protests and no appreciable change in the national mood.

Retail sales data shows spending has been stagnant for years. It has recently got even worse but restaurants in the centre and the outskirts of Rome and Milan appear as full as ever.

“For us there has been a crisis since 2001 but not much has changed in the last year,” said Alessandra Fiengo, who sells newspapers, books and toys from her kiosk in Rome.

“There is clearly a mismatch between what the experts tell us and public opinion,” said Paolo Pizzoli of ING bank in Milan.

This is borne out by consumer confidence data from the ISAE think-tank and the European Commission which shows Italians’ morale, although depressed, has fallen far less than the euro zone average.

U.S. oil prices rose above $35 a barrel  parring but not reversing  nearly 7% drop on renewed economy concerns, slumping demand and bloated inventories.

U.S. crude for March delivery rose 32 cents to $35.25 a barrel.

“The crude market is still hanging on to the low end of its range,” said Tom Bentz, an analyst at BNP Paribas Commodity Futures Inc. in New York.

“The market is waiting for inventory reports over the next couple of days and positioning ahead of Friday’s March crude expiration,” Bentz said.

With the March contract due to expire on Friday, the April contract’s premium narrowed to around $3.60 on Wednesday versus nearly $8 last week, a sign traders believe swollen inventories in Cushing, Okla., may persist.

Traders said Brent crude futures in 2009 are trading within a $40-$50 a barrel range because OPEC supply cuts have helped support the price in spite of slackening demand.

“Certainly it’s continuing gloom for demand, but OPEC’s reining in its cut is holding Brent in a sideways range,” said Christopher Bellew, broker at Bache Commodities in London.

The Organization of the Petroleum Exporting Countries, a supplier of more than a third of the world’s oil, has struggled to corral its member states into cutting up to 4.2 million bpd since September to prop up prices.

Earlier this month the producer group said its members had delayed 35 new projects due to low prices and the slowdown in demand, and some OPEC countries have raised the prospect of another supply cut at their next meeting in Vienna on March 15.

The U.S. Energy Information Administration will release its weekly inventory data report on Thursday, but a Reuters poll of analysts on Tuesday showed an average forecast for an increase of 2.6 million barrels, nearing an 11-year high. [Read more →]

General Motors and Chrysler LLC said Tuesday they could need an additional $21.6 billion in federal loans between them because of worsening demand for their cars and trucks.

The two firms, in documents submitted to the Treasury Department, also detailed plans to cut 50,000 jobs worldwide by the end of the year. GM said it plans to close five more plants in the next few years and confirmed it will drop some of its weaker  brands.

When all is said and done,GM  said that by 2011 it could need a total of $30 billion, which includes the $13.4 billion in Treasury loans it has already received. In the near term, GM will most certainly need $9.1 billion in additional loans and could require another $7.5 billion in the next two years if auto sales don’t improve.

Chrysler said it now needs a total of $9 billion, up from the $4 billion Treasury loan it received in December. Chrysler said it will need that money by March 31.

GM also accelerated its job cut plans, saying that it would eliminate 47,000 jobs over the course of 2009. The company said it would cut about 20,000 jobs in the United States, or about 22% of its remaining U.S. staff.

Previously, GM called for U.S. job cuts of between 20,000 to 30,000 workers, but it had stretched out those reductions through 2012.

The company said it plans to close five additional U.S. plants by 2012 –in addition to the 12 planned closings announced in December. Executives would not identify the plants that would be closed.

“Our plan is significantly more aggressive because it has to be,” said GM Chairman Rick Wagoner. [Read more →]

Only good economic news lately has been the collapse of oil prices. At the beginning of July, just five months ago, the price of a barrel of was more than $140. By the beginning of December, it was down to about $45. That’s a drop of more than two-thirds. In the U.S., we consume about 15 million bbl. of crude a day. The saving of $95 per bbl. adds up to more than $500 billion a year. That’s big–enough to bail out the auto industry 15 times.

Of course, we’ve been through this before. The price of oil shoots up; we start using less; reduced demand sends the price down; we start using more; pretty soon it’s shooting up again. This time, though, it does feel different. It seems as if Americans have made a real and fundamental commitment to consuming less energy. That is not so much out of idealism as it is the good side, for a change, of our short attention span. When the price of gasoline shot past $4 per gal., it was both shocking and reassuring. Economists had long wondered what price it would take to get our attention. This, at last, was it. Yet $4 gas turned out not to be the end of the world. Although it was devastating for some people–and it surely accelerated our plunge into recession, which is affecting all of us–we adjusted more easily than one would have thought possible. And we kept on adjusting, even as the price of oil plummeted.

Will this change in behavior last? Or will we return to our wastrel ways as we climb out of recession and the reality again sinks in that gas is cheap? The one sure way to prevent this second scenario from happening is not to let gas get cheap again. Yes, this is yet another plea for that hoary notion: a big energy tax. Just five months ago, we were essentially paying a tax of $95 per bbl. That’s the difference between what oil cost then and what it costs now. This was a “tax” whereby the revenue went into the pockets of oil producers–about two-thirds of them foreign countries and one-third fellow Americans. Isn’t there something better to do with the money?
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The White House said a disorderly bankruptcy in the motor industry would be a huge blow which the US economy could not withstand.

Meanwhile General Motors said it was temporarily stopping some production.

And Honda is also to cut back output in North America.

GM, which has been pleading for an emergency government loan to avert collapse, said it would halt 30% of its North American production “in response to rapidly deteriorating market conditions”.

It saw vehicle sales fall 41% in November, when overall US car sales fell 26% industry wide.

The temporary shutdowns will affect 14 US factories as well as three in Canada and three in Mexico, reducing output by 250,000 vehicles in the first three months of 2009.

“The speed and severity of the US auto market’s decline has been unprecedented in recent weeks as consumers reel from the collapse of the financial markets and the resulting lack of credit for vehicle financing,” it added.

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Just how would you raise prices if you were an oil supplier? Controlling the supply — as in the 1973 OPEC embargo — has become less effective with more sources of oil worldwide. And oil suppliers clearly cannot raise prices by controlling demand in the physical oil market; ultimately, they need to sell their oil, not buy it. However, with the market inefficiencies that we expose here, oil suppliers can regain the upper hand by artificially inflating demand using a different market. To understand this mechanism, we must take a glimpse into the future — the futures market, that is.

The price of oil reported in the news is actually the price of oil in the futures market. In this market, traders do not exchange physical barrels of oil, but instead trade contracts which obligate them to exchange oil at a quoted price at a specific date in the future, usually months in advance. Such a contract allows companies to hedge positions by locking in prices early. Airlines might buy futures contracts to reduce their exposure to rising fuel prices. Conversely, oil companies might sell futures contracts to assure a profit against future price drops. It’s all about reducing risk and uncertainty. But what if oil suppliers were instead buying oil futures, compounding their own risk and reaping enormous profits from the explosion in the price of physical oil?

The futures market has become the public driving force in pricing oil. But the vast majority of oil consumed in the world is purchased through private deals, given the massive undertaking of physically delivering millions of barrels. However, a series of private deals cannot establish a market price. Because pricing in the futures market is transparent, in that trade activity is publicly available, it establishes the widely accepted benchmark for the price of oil. In other words, the futures market serves as the price discovery mechanism for the oil the world consumes.

Traders said oil’s gains on Thursday were largely driven by news that U.S. lawmakers appeared close to a final agreement on the massive bailout plan, a deal that could help the world’s largest energy-consuming nation avoid a deep recession that would cut deeply into fuel demand.

But the deal to rescue the faltering U.S. financial system stalled on Thursday amid bickering between Democrats and Republicans.

NYMEX crude for November delivery fell $1.32, or 1.2 percent, to $106.70 a barrel by 0156 GMT, after rising $2.29 to settle at $108.02 on Thursday.

London Brent crude fell $1.13 or 1.1 percent to $103.47.

Oil has gained about 11 percent so far this year on geopolitical tensions between Iranand the West, supply disruptions in Nigeria and a falling U.S. dollar, but it is still 27 percent below the record price of over $147 hit in mid-July.

“Oil is down because traders are taking profits,” said Ryuichi Sato, an analyst at Mizuho Corporate Bank in Tokyo.

“The delay in the bailout plan is bearish for crude markets. There is no confidence in the U.S. economy and traders are worries about the energy demand outlook.”

Concerns about the weakening U.S. economy and increasing evidence of slowing fuel demand have pushed crude prices down from their record high.

A rescue for the U.S. financial system appeared in chaos on Thursday amid accusations Republican presidential candidate John McCain had scuppered the deal.

News that Washington Mutual was closed by U.S. authorities and its assets sold in America’s biggest-ever bank failure also rattled the financial markets.

Separately, Shell Oil said on Thursday its Mars and several other Gulf of Mexico oilfields were expected to return online by the end of next week.

Although, nearly 60 percent of the crude oil production from the Gulf of Mexicoremained shut because of the impact of hurricanes Gustav and Ike, the International Energy Agency said on Thursday it sees no need to release emergency supplies.

“We don’t have to mobilize,” IEA Executive Director Nobuo Tanaka said. “The market is now taking care of the current situation.

Gas prices  fell back, yet again, marking the sixth straight decline, according to a nationwide survey of credit card swipes at gasoline stations.

The average price of unleaded regular dropped 1.3 cents to $3.726 a gallon, from $3.739 a gallon, according to the survey released Tuesday by motorist group AAA. While prices have now dropped some 13 cents and have stayed below the key $4 level for some time now.

But prices still remain much higher from a year ago, when gas was selling for less than $3 a gallon. Current prices are still about 33% higher from a year earlier at this time. Drivers can take some comfort in the fact that prices are 38.8 cents, or 9.4%, down from the record high price of $4.114 a gallon set on July 17.

Gas prices had been moving higher following the devastation left behind by hurricanes Ike and Gustav. With hurricane season is more than halfway done and the high summer driving season is over, the downward trend for gas prices may continue unless a major storm, once again, disrupts the flow of crude.

[Read more →]

President Bush and Treasury Secretary Henry Paulson on Friday outlined a series of far-reaching steps – likely to cost hundreds of billions of dollars – aimed at stemming a widening financial crisis that is roiling the financial markets and undermining confidence in the banking system.

“We must act now to protect our nation’s economic health from serious risk,” Bush said at a White House press conference. “There will be ample opportunity to discuss the origins of this problems. Now is the time to solve it.”

“This is no time for partisanship,” Bush added. “We need to move urgently needed legislation as quickly as possible without adding controversial provisions that could delay action.”

Earlier, Paulson said that federal action would target the mortgage-related “illiquid assets” that are burdening the finance industry.

“The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy,” said Paulson. “This troubled asset relief program must be properly designed and sufficiently large to have maximum impact.”

The new program would cost hundreds of billions of dollars, according to Paulson.
[Read more →]

While the Federal Reserve had been tipped to leave rates on hold, analysts said a cut looked more likely after Lehman Brothers filed for bankruptcy.

The Fed has sought to soothe nerves and earlier injected $70bn  into markets to boost liquidity.

Central banks worldwide have faced the twin threat of quickening inflation and a wider economic slowdown.

“The downside risks to growth and the upside risks to inflation are both of significant concern to the committee,” the bank’s officials said.

Michael Wallace, an analyst at Action Economics said: “The Fed’s statement largely resisted market pressure for a more substantial capitulation.”

He said the assessment was “defiantly set at neutral”, in expressing worries about both slowing economic growth and inflation.

The decision to leave rates at 2%, as it has been since April, was a unanimous move.

US shares were volatile with the leading Dow Jones Industrial Average down 106 points to 10,811 after the news.

However, it later ended more than 140 points higher at 11,059.02 as investors interpreted the Fed’s decision as a sign that the economy was less fragile than some had feared.

Another factor boosting the market were reports that insurance giant AIG might be able to access a loan from the Federal Reserve, which would prevent the firm from collapsing.

Investment firm Lehman Brothers filed for bankruptcy on Monday, triggering market jitters and prompting a sharp fall in shares worldwide. [Read more →]