Friday, May 30, 2008

Planting your own garden

Close to half of oil prices are subsidized by governments around the world. That's about to change:

One by one, countries across Asia and the Middle East are being forced to abandon price controls on fuel and energy, bringing hundreds of millions of consumers face to face with the true market cost of oil. The effect has already begun to chip away at world demand and may ultimately trigger a slide in crude prices.

Egypt - the most populous Arab state - has raised petrol prices by 40pc, despite protests in Cairo. Sri Lanka lifted diesel and petrol prices by 25pc over the weekend. India may have to follow soon to prevent its trade and budget deficits climbing to dangerous levels. "The situation is alarming. We need to stem the rot," said India's energy secretary, MS Srinivasan.

Indonesia has raised petrol prices by 33pc in order to restore fiscal discipline (subsidies are 3pc of GDP). Taiwan has mooted a 20pc rise, and Malaysia is to peel back controls. While China has so far resisted calls for price freedom, the policy is becoming unsustainable. Analysts predict a change in tack after the finish of the Beijing Olympics at the end of August.

The drip-drip effect of grim data from the United States, Britain and parts of Europe has sapped confidence, causing many investors to question the whole assumption of a rapid "V" recovery powered by low interest rates in the US. The number of miles driven by Americans fell in March at the steepest rate ever recorded. Oil use in the OECD club of rich states has been falling for more than two years.

Stephen Jen, currency chief at Morgan Stanley, says half the world's population now enjoys fuel subsidies of one sort or another. Petrol costs 5 cents a litre in Venezuela, 12c in Saudi Arabia, 64c in China, $1 in the US, and $2.16 (£1.10) in Britain. It is heavily subsidised in Mexico, Iran, central Asia and the Gulf states...

The result has been to encourage promiscuous use of fuel. It has masked the underlying rate of inflation in emerging markets, and flattered the economic growth rate.

Mr Jen says the game is largely over. "The subsidies will need to be rolled back, especially for governments with fragile fiscal positions. They face a stagflationary shock," he said.

Lehman Brothers estimates that supply will average 86.2m bpd in the second quarter, while demand slips to 85.6m. The surplus will widen to 1m bpd later in the year as new oil comes on stream from Brazil, Azerbaijan, Kazakhstan and the Sudan. The US Energy Information Agency expects US output to rise by 400,000 bpd by the winter..

For now, traders are keeping a careful eye on politicians in Europe and the US as they call for curbs on the derivatives market for oil futures. The Hunt brothers in Texas were ruined attempting to corner the silver market in 1980 when the COMEX exchange suddenly changed margin requirements, and then suspended trading altogether. The pair failed to heed the warning signs.

Speculators are missing the signs of the top in oil. It's everywhere. If the CFTC curbs the derivative market, it's lights out for the huge profits on the commodity swaps, that allows institutions to bypass the commodity position limits.

If these institutions can't bypass the position limits, they can't buy enough of the commodity to make a difference in their huge funds.

And then they can't pass off their commodity hoarding on to the rest of the world as higher commodity prices caused by India, China and the rest of the world.

Speculators bought homes with 1% down, attempting to game housing to profit from the "housing shortage." We all know how that ended.

Has anyone every planted a lettuce garden, or grown some fresh herbs for cooking? It takes all of three weeks, and the produce is just handled by you.

Sarkozy of France wants to end the 35 hour work week, while the local governments here in the States want to have four day work weeks to curb oil consumption.

People could spend their Fridays growing their garden. And then you would just handle the manure in your backyard, and not listen when it is spread by Wall Street!


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