The Great Debate UK

A global bright spot: Sub-Saharan Africa

By Kathleen Brooks. The opinions expressed are her own.

For the last three years talk about the global economy has been decidedly negative. Firstly there was the sub-prime housing crisis in the U.S., then the sovereign debt crisis, now we wonder whether the euro will survive and whether China will suffer a “hard” economic landing.

But amidst all of this doom and gloom, there seems to be a bright spot: Sub-Saharan Africa. For the bulk of the last thirty years the focus has been on famine, civil war or piracy, which has left a decidedly negative impression of the continent. However, in recent weeks there has been a growing number of optimistic reports about Africa, with some even thinking it could continue to grow while the rest of the world stagnates.

So why all the positivity? The media might be behind the curve on this one since Sub-Saharan growth has outperformed the global average for most of the past decade, according to data from the International Monetary Fund (IMF). What is even more astonishing is that it has managed to sustain its growth rates even during periods of crisis. Last year growth averaged more than 5 percent even  though the sovereign debt crisis ravaged Europe and exports stayed high. Now that global food and energy inflation is starting to level, the continent is in a solid position.

The IMF predicts that Sub-Saharan Africa will grow at a faster pace than Brazil – one of the BRIC economies – between 2010 and 2015. So how has the continent managed to divert the narrative from famine and war to growth and prosperity?

There are a few reasons for this: firstly, demographics, secondly, natural resources and thirdly, its lack of exposure to developed world banking sectors. Looking at demographics first, a growing middle class is starting to emerge and now makes up approximately one third of the population of Sub-Saharan Africa. This class of people want to spend money and have helped to lift domestic demand as a share of GDP across the region. Added to this, 70 percent of the middle class is under the age of 40 so have many “spending” years ahead of them.

The Middle Class has been helped by some expedient political decisions in the region, debt relief and peace returning to parts of the continent. This helped to nurture a private sector that has also benefitted from intra-regional trade. A growing middle class brings with it societal benefits: rising education standards and aspirations, which may eventually filter down to poorer parts of society. There is no denying that poverty is a reality in Africa and by 2060 one third of the population is expected to be still living on $1.25 per day, but at the same time more and more people are expected to lift themselves out of poverty.

from Breakingviews:

End game in Libya could herald oil slump

By Una Galani The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

The end game in Libya could herald an oil price slump. Like the rebel advance into Tripoli, Libyan supplies to the global market could come sooner than expected. Brent has slipped by almost $3 to almost $106 per barrel in a matter of hours. A resolution in Libya, coupled with concerns over global growth, means tight markets could soon look oversupplied.

A return of Libyan oil production to pre-unrest levels of 1.7 million barrels per day, or 2 percent of global supply, would take until 2015, according to a June estimate of the International Energy Agency. The forecast may now look too pessimistic, with the rebel-controlled Arabian Gulf Oil Co., Spain’s Repsol, and Italy’s all suggesting normal supply could resume much faster once the crisis is resolved. Analysts reckon production could reach up to 1 mbpd within a year.

Oil prices have already eased almost $20 per barrel in four months. A supply increase, just as the U.S. and European economies look vulnerable to a new recession, will further weigh on prices. And Saudi Arabia’s recent effort to offset the disruption from Libya, taking production to a record high of almost 10 mbpd, will inadvertently act to compound any supply glut, as will the IEA release of emergency reserves.

Yet any price slump is likely to be much less severe than in 2008, when oil prices crashed by more than $100 per barrel in six months. This time around, credit lines remain open to businesses. And oil demand remains strong from non-OECD countries like China, which now account for almost 50 percent of the total compared to 44 percent in 2008, according to Barclays Capital.

Politics will further support prices. Investors remain alert for any signs that the protest movement could yet spread to larger oil producers, namely Iran. And even if prices do continue to fall, high-spending Gulf oil countries have a big incentive to cut production quicker than before. Saudi Arabia needs roughly $84 per barrel to break even compared to around $50 per barrel three years ago. But with Brent prices some way off the pain threshold for producers, there’s still room for a significant adjustment.

from Breakingviews:

Will the real price of oil please stand up?

By Christopher Swann The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Oil is a quintessential global commodity. But the price of the black stuff has got harder to grasp thanks to the gap between the two main benchmarks -- Brent and WTI. Contrary to market expectations, this gap could widen over the coming year as ever more U.S. crude is stranded at home. This will delight U.S refiners. Questioning about the true price of oil, however, could get louder.

Market benchmarks for oil were never perfect measures of world crude prices. Crude oil comes in different qualities, and costs of transport impacts buying decisions. Dominant producers like Saudi Arabia –- seeking absolute control of pricing – pretend their oil is not even traded, but bought at the price it decides is right. The Brent benchmark, based on shipments of North Sea oil, emerged in the 1980s partly as a way of skirting this problem.

But in recent years both Brent and WTI -- West Texas Intermediate, a U.S. oil similar in nature to the North Sea crude –- have faced challenges. Does either reflect the global price of oil? Flagging oil production from the North Sea led to upward pressure on the price of Brent. Some wonder if trades are deep enough to constitute effective price discovery. True, Platts, custodian of the Brent benchmark, has worked hard to keep the price relevant by bringing new fields into the calculation and looking at prices over a longer time frame. The decline in North Sea output –- down 40 percent since 1999 according to Citi -– still makes its life difficult.

As for WTI, inadequate pipeline infrastructure makes it difficult to get the stuff out of North America -- and that depresses its price, especially when demand is also weak. Its problems could also get worse before they get better. Output from North America is growing faster than expected. Canadian producers, for example, recently said output will grow from 2.7 million barrels a day to 3.4 million by 2014 and North Dakota production is surging. Meanwhile efforts to build new pipelines are mired in political controversy.

Financial markets believe the trading discount of WTI -– which is near its $22 record -– will narrow over the coming year to $12 as these problems are resolved. This is starting to look over optimistic. Citi estimates the WTI-Brent spread could widen to as high as $40 this year. That would be a bonanza for U.S. refiners like HollyFrontier and Marathon Petroleum that use captive U.S. oil and sell products that are linked to the Brent price. But it is becoming ever trickier to see either benchmark as a truly representative price for oil.

from Breakingviews:

Oil crash shows investors still trust flawed model

By Peter Thal Larsen The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

LONDON -- Are oil investors clinging to flawed financial models? That's the strong impression given by last week's sharp oil price drop. If market movements followed a normal distribution, such a plunge would be extremely surprising. But what's really astonishing is that investors still appear to be relying on risk management techniques that were comprehensively rubbished by the credit crisis.

The central flaw lies in believing that price movements in financial products follow a normal distribution around a central mean. Small fluctuations are common. Larger jumps or falls -- the narrow "tails" of a distribution charted on a graph -- are more rare. So anyone using this analysis to look at the oil market would have been very surprised by last week's selloff. Clive Capital, the commodities hedge fund, has written to investors to point out that the drop in the Brent crude oil contract was a five standard deviation event, according to the Financial Times. In a normal distribution, such an event should happen on just one trading day in every 1.7 million -- or about once every 7,000 years.

But this type of analysis has been comprehensively undermined by the credit crisis. To begin with, extreme movements happen much more regularly than they should if normal distribution data held true. Moreover, these fluctuations do not happen randomly, but tend to be clustered together. In other words, the "tails" are longer and fatter than the theory suggests.

Indeed, a glance at historical price movements shows the flaws of assuming oil price movements are normally distributed. As my Reuters colleague John Kemp has pointed out, the Brent crude price has moved, as it did last week, by 9.5 percent or more on 33 days in the past two decades.

Ever since the credit crisis struck, mathematicians and risk managers have been busily debating how risk models can be improved to better reflect the real world. It's questionable whether any model can accurately capture complex, fast-moving and ever-evolving financial markets. But that does not excuse fund managers from clinging to an approach that was shown to be so disastrously inadequate four years ago.

from Breakingviews:

Saudi handouts ratchet up “fair price” of oil

By Una Galani The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

DUBAI -- Saudi Arabia's rulers have long thought they could tell what a "fair" oil price should be. Prior to the heightening unrest on its own borders, the Kingdom reiterated its long-held view that this was somewhere between $70 and $80 per barrel. But the recent pledge for a massive boost to spending on everything from housing to religious police is pushing Saudi into its largest budget spending. No wonder the Kingdom now thinks the market is "oversupplied". "Fair" looks set to become more expensive.

The Kingdom will need an average oil price of between $80 to just over $90 per barrel to balance its budget during 2011, according to various estimates. This is one of the highest breakeven prices within the bloc of six Gulf nations, up from previous forecasts of around $60 to $70 per barrel.

Of course, supply disruptions in Libya -- which produces a type of sweet crude that the Kingdom cannot easily replace -- and the threat of similar problems erupting elsewhere have pushed prices well above Saudi's needs to around $123 per barrel for Brent crude and $109 for WTI.

It is not in Saudi's interests to keep prices so high that they threaten the global economy, irk Western allies, and provide incentives for developing alternative fuels. But if higher spending becomes a new norm and Saudi wants to avoid taking on new debt or eating into its foreign reserves, then the Kingdom clearly needs to adjust its view of what is sees as fair.

The previous margin between Saudi's breakeven requirements and its stated price target, suggests that the Kingdom might now consider a fair price to be closer to $90 to $100 per barrel. But even if spending comes down in the future, higher price expectations will be supported by another domestic factor: the Kingdom's explosive growth in domestic oil consumption which Banque Saudi Fransi estimates has grown 27 percent since 2007.

Speculation has long-swirled about the longevity of Saudi's oil reserves. Record spending and the Kingdom's own oil consumption -- which according to some estimates amounts to about 15 percent of its production -- suggests that Saudi's domestic issues will probably force it to shift its consideration of what it deems "fair" nearer to $100 per barrel. Consumer countries better take note.

Tide turns against nuclear energy

By Kathleen Brooks. The opinions expressed are her own.

As the nuclear threat in Japan steps up a gear, global politicians have pre-empted a wave of anti-atomic feeling from their public and spoken out against nuclear reactors, which threatens its future as a viable alternative to oil.

As Japan has found out with devastating consequences when things go wrong with atomic energy the effect is both devastating and immediate. Unlike carbon fuels, which have a lagged detrimental effect on the atmosphere, a nuclear accident doesn’t get worse in increments – once radioactive material is released into the atmosphere the damage to the surrounding areas is done.

In contrast carbon-based fuels are more of an incipient threat. Increased rates of asthma, holes in the ozone layer and deterioration in air quality take many years take of oil-burning to come about, which makes it hard to pinpoint who the real culprit actually is. But if a radioactive cloud suddenly appears you know exactly where it has come from.

The outlook for nuclear energy is not good at this juncture. The relative infrequency with which nuclear disasters happen (there have only been three notable accidents in the past decade including the events in Northern Japan) seems to only increase their negative impact on public opinion. In contrast, individual oil companies can have multiple spillages over the same time frame and demand for crude will continue to rise.

For a world addicted to electricity, finding clean energy sources is vital. Nuclear is extremely clean and when it functions without a problem it causes very little damage to the environment. While oil usage may be tapering off in the developed world, it’s the emerging market powerhouses that are gulping down ever increasing amounts of “black gold”.

Don’t blame politicians for pragmatic foreign ties

By Laurence Copeland

There are times when even a cynic like me has to feel some sympathy for politicians. Take the case of Libya, for example. Over the forty years of Muammar Gaddafi’s regime, relations between Britain (and our Western allies) and Libya have varied from lukewarm to cold and back to lukewarm again.

Now that this particular dictator appears to have reached the end of the road, some people are asking why the previous Government ever allowed our relations to rise above freezing point, which sounds rather as though they are trying to resurrect our long-dead (and possibly mythical) Ethical Foreign Policy. Is that feasible?

Starting with the commercial issues, how much of the world’s oil is buried under the soil (or sand) of countries that could reasonably be regarded as democracies? A glance at the statistics suggests no more than 20%, which leaves precious little scope for picking and choosing among suppliers. In exchange for oil, we sell the supplying countries a range of goods and services, notably armaments, which unsurprisingly gets the boycott lobby even more incensed.

However, their rage is likely to have little impact, given that the arms industry employs many thousands in poorer parts of the UK. Of course, if we had a properly functioning labour market undistorted by generous welfare benefits and restrictions on employers’ freedom to hire and fire – something the boycott lobby is probably in no hurry to see – we could have some confidence that cutting out arms exports would divert resources of capital and labour into other, perhaps even into new industries. But since reform is ruled out in a country as wedded to welfare as Britain, the process of reallocating resources away from the arms industry could take decades, with even more unemployment in the interim in places like Preston, where current levels are already quite high.

Moreover, as Libya explodes in rebellion, we should remember that when Colonel Gaddafi replaced King Idris, his revolution appeared to be extremely popular, and indeed lubricated by oil wealth, he seemed to enjoy considerable support until relatively recently. At which point ought we – Britain, the West -  to have decided that the popular demagogue had turned into a tyrant?

Did the Fed catastrophically mis-time QE2?

The sternest criticism of QE2 is the way it pumped up asset prices like commodities in recent months without making much of an impact on U.S. economic growth. Rising fuel and food costs have weighed on inflation everywhere from emerging markets to the UK. But this criticism might step up a gear if Middle East tensions lead to a spike in oil prices and the Fed tries to protect growth using a similarly blunt tool as QE2.

The political crisis in the Middle East has been the game-changer for the global economic outlook in the past couple of weeks.  In just five days WTI oil (U.S. crude) jumped $10, and Brent (European oil) surged to within touching distance of $120 per barrel. This showed us what fear is like: since the 1970’s each recession has been preceded by an oil price shock. You don’t need much more evidence than this to see the extremely close relationship between oil and growth especially in the U.S., the largest consumer of crude in the world.

The West is extremely sensitive to the Middle East. The region is undergoing a period of transition and what the new post-crisis Middle East will look like or how it will function has yet to be figured out, so investors are left to contemplate the worst case scenario in a vacuum of uncertainty. Right now the worst case would be if protests and public uprisings in North Africa spill over to the Middle East, specifically to Saudi Arabia – the most powerful nation in the region, an ally of the West and home to the world’s largest oil reserves.

In this case we could see oil well over $200 per barrel sending economists scrambling to reduce their forecasts for U.S. growth. Far from considering an exit plan the Federal Reserve would probably start planning QE3. After all, if it pumped the economy full of dollars during a blip in global growth last year then surely it should do so when the U.S. faces a real threat of recession?

The answer seems like a no-brainer – but not quite. QE2’s critics have pointed out two flaws to the current stimulus plan. Firstly, although the Fed pledged to bring down unemployment with its second stimulus plan the jobless rate still remains uncomfortably high at 9 percent, and arguably only started to moderate after the announcement that President Barack Obama would extend the Bush-era tax cuts in December. Secondly, even before Middle East tensions arose the Fed’s $600bn stimulus programme was blamed for artificially pumping up global commodity prices, with most of the liquidity flowing into the financial markets rather than the U.S. economy.

This is evident in the price action of commodities. WTI crude has been on an upward trajectory since August when Ben Bernanke first touted the prospect of QE2. Back then it was trading at $75 per barrel and finished 2010 nearly $20 higher. While the spike to $100 isn’t bad for the U.S. economy by itself, it’s the rate of change that causes the biggest impact on headline inflation rates. The $25 increase in 7 months could just be the start, especially if we see an escalation in tensions in the Middle East.

Unlike Europe where oil consumption has been falling, in America it has been growing since the 1970’s, so a supply shock, or price spike, would weigh on headline inflation and has the potential to have a devastating impact on growth. As more of peoples’ pay checks get used up on gas and other commodity prices, the more it depresses core inflation as consumer confidence gets hit slowing spending and thus economic growth.

from Reuters Investigates:

WikiLeaks, OpenLeaks, GreenLeaks and more leaks

A Reuters exclusive details the emergence of two anti-corporate, WikiLeaks-style websites in Europe, both called GreenLeaks. The sites promise to leak confidential documents regarding environmental abuses by a host of industries.

The report by Mark Hosenball also reveals the rise of other possible WikiLeaks copycats that would focus on specialized topics or regions -- from Russia and the European Union bureaucracy to international trade, the pharmaceutical industry and the Balkans.

The two rival GreenLeaks sites were set up by Mads Bjerg (left) in Copenhagen (greenleaks.org) and Scott Millwood (below) in Berlin (greenleaks.com) -- and neither is happy about the competition.

Over lunch in a Berlin sushi bar, Millwood told Reuters his group acquired the domain name GreenLeaks in 36 countries where it also has registered GreenLeaks internet addresses under the ".com" and ".biz" designators. Millwood said he also has applied to the European Union to register "GreenLeaks" as a trademark, but recently learned that Bjerg's Denmark-based group had made a similar move within days of Millwood making his own application.

Millwood acknowledged that there was "one inactive domain name that we don't own" --  Bjerg's URL, "GreenLeaks.org." By the same token he said, one of the URLs Millwood says he registered himself is "GreenLeaks.dk" -- a domain name specifically related to Denmark. Millwood acknowledged the rivalry between the two groups could escalate into a "legal dispute." 

The most closely watched rollout in the leak-hosting world was the launch on Thursday of OpenLeaks.org, a site whose principal creator, German transparency activist Daniel Domscheit-Berg, was once Julian Assange's closest collaborator on WikiLeaks.

Has QE2 worked?

– Kathleen Brooks is research director at forex.com. The opinions expressed are her own. –

Ever since the U.S. Central Bank formally announced its second round of quantitative easing back in November, bond yields have trended higher. Ten-year Treasury yields have jumped by 100 basis points and are back at levels last reached in May 2010. Higher yields underpinned the dollar, which has risen by more than 5 percent over the same time period. So what does this tell us about the market, and has the Fed’s grand plan actually backfired?

Those in the ‘yes’ camp argue that quantitative easing was designed to help the most interest rate-sensitive sectors in the U.S. economy such as the housing market. However, the housing market in the U.S. remains depressed and rising Treasury yields are pushing up long-term mortgage rates, which on average rose to 4.86 percent in the week ending 10 December up from 4.66 percent the week before.

Rising borrowing costs are unlikely to attract buyers to purchase homes especially when house prices continue to fall. Without a convincing recovery in the housing market they argue, it is difficult to see how consumption and  growth can pick up to levels that will ward off deflation and help push the unemployment rate lower.

So what about those who believe the Fed did the right thing and QE2 is working? They say that QE2 will work with a lag and so-far-so good. Since Fed Chairman Bernanke first touted the idea of more QE back in August he has helped to re-flate the global economy after the financial crisis threatened to cause the worst depression since the 1930s.

While inflation isn’t showing up in consumer prices (core inflation in the U.S. remains a fairly meagre 0.8 percent) it is very much alive in the stock markets and in commodities fuelled by Fed-generated liquidity. Global stock markets have reached pre-Lehman Brothers highs and commodity prices are also reaching record levels; for example, oil is back above $90 per barrel.

This signals that investors are willing to take on more risk, and a risk-on environment is always inflationary. In contrast, a risk-off environment is deflationary as it signals weak growth. The key to sustaining the U.S. recovery is inflation. Thus QE2 was necessary to promote inflationary forces that, after a lag, will finally start to show up in the U.S. economy. Once prices are rising in line with the Fed’s 2 percent annual target then the unemployment rate should start to recede and, hey presto, the Fed has achieved its duel mandate and saved the economic day.