reality is only those delusions that we have in common...

Saturday, December 27, 2014

week ending Dec 27

If Wishes Were Loaves and Fishes - Kunstler --Janet Yellen and her Federal Reserve board of augurers might as well have spilled a bucket of goat entrails down the steps of the mysterious Eccles Building as they parsed, sliced, and diced the ramifications in altering their prior declaration of “a considerable period” (that is, before raising interest rates), vis-à-vis the simpler new imperative, “patience,” with its moral overburden of public censure aimed at those too eager for clarity — that is to say, the assurance that the Fed will not pull the plug on their life-support drip of funny money for the racketeering operation that banking has become. The vapid pronouncement of “patience” provoked delirium in the markets, with record advances to new oxygen-thin heights. Behind all this ceremonial hugger-mugger lurks the dark suspicion that the Federal Reserve has no idea what’s actually going on, and no idea what it’s doing. And in the absence of any such ideas, Ms. Yellen and her collegial eminences have engineered a very elaborate rationale for doing nothing.  The truth is, they have already done enough. They have succeeded via their dial-tweaking interventions in destroying the agency of markets so that nobody can tell the difference anymore between prices and wishes. Not even very far in the background, there is wreckage everywhere as events spin out of the pretense of control. Surely something is up in the Mordor of derivatives, that unregulated shadowland of counterparty subterfuge where promises are made with no possibility or intention of ever being kept. You can’t have currencies crashing in more than a handful of significant countries, and interest rates ululating, without a lot of slippage among the swaps. My guess is that a lot of things have busted wide open there, and we just don’t know about it yet, like fissures working deep below the surface around a caldera.  This Federal Reserve is running on the final fumes of its credibility. Counsel “patience” as it might, other institutions and the people running them may run out of patience with it and start running for cover. When currencies catch fire, even a run on the bank becomes an exercise in futility. The rot is spreading from the margins to the center. In a world of oxidizing paper obligations, the paper dollar is hardly a fortress but more like a stack of empty foil-wrapped boxes displayed in the concourse of a shopping mall scheduled for closure as soon as the holiday is concluded. Maybe some wise-ass kid will just torch it. The security guard is still awaiting his previous paycheck and is out drinking by the dumpster.

The Federal Reserve's Dirty Little Secret - The Fed has a dirty little secret, one it has closely guarded over the past six years of unconventional monetary policy. This secret has eluded many journalists, commentators, and economists and led to much confusion over monetary policy. If it were widely known it would create far more criticism of Fed policy. For Fed officials, then, it is a secret better left unsaid. So what is this dirty little secret? To answer this question, we need to review two underappreciated facts about the Fed's quantitative easing (QE) programs.   The first underappreciated fact is that the large expansion of the monetary base under QE is temporary. The Fed has always planned to eventually return its balance sheet and, by implication, the monetary base back to the trend path it was on prior to the QE programs. This point has been communicated in several ways. First, the Fed issued exit strategy plans in its June, 2011 and September, 2014 FOMC meetings that point to a reduction in the monetary base. Here is an excerpt from the latter meeting: The Committee intends to reduce the Federal Reserve’s securities holdings in a gradual and predictable manner...The Committee intends that the Federal Reserve will, in the longer run, hold no more securities than necessary to implement monetary policy efficiently and effectively.   Second, Fed officials, including Ben Bernanke and Janet Yellen, have reiterated these plans in speeches, talks, and Op-Eds. In short, the Fed's exit strategy was widely publicized. Third, several official Fed studies have examined what these exit strategies mean for the Fed's balance sheet and find that it puts the future path of the monetary base close to its pre-crisis trend. This 2013 Board of Governors study, for example, shows this projected path:

Follow-Up to the Fed's Dirty Little Secret - My last post made the argument that monetary base injections at the zero lower bound (ZLB) can be effective if they are permanent. I also noted that this understanding is a standard view in macroeconomics and that it implies the Fed's QE programs were muted from the beginning given their temporary nature. The post generated further discussion from Paul Krugman, David Glasner, Scott Sumner, and Bill Woolsey. In addition, others responded in the comments sections of their blogs as well in twitter. I want to respond several of the issues raised in these discussions.  First, some commentators were confused by the notion of a permanent monetary base injection. What is important is the commitment to permanently expand the monetary base. The actual expansion may not be needed or be very small if this commitment is credible. Based on this understanding, the Fed has taken the wrong approach. It could have had a much smaller balance sheet expansion with far more effect on the economy than what actually took place over the past six years. Instead, the Fed failed to take advantage of it and instead relied upon the segmented markets-portfolio channel to work its magic.  This leads me to my second comment. My critique of the QE programs should not be construed to mean these large scale asset programs did nothing. There is plenty of empirical evidence they had positive but modest effects on the economy. My view is that they they put a floor under the economy and prevented it from getting worse. A casual reading of the evidence suggests the QE programs were turned on when core inflation started to drift toward 1% and turned off as it drifted toward 2%. So while they provided a floor on the economy, they were never allowed to reach their full potential as argued in my previous post.

Stephen Roach Takes the Fed to the Woodshed  -- naked capitalism by Yves Smith - While the Fed appears to be getting nervous about increasing (and long overdue) criticism for its undue coziness with banks, it has for the most part ignored opponents of its aggressive monetary policies. And for good reason. Most of them have been fixated on the risk of inflation, which is not in the cards as long as labor bargaining power remains weak. There are other, more substantial grounds for taking issue with the central bank's policies. For instance, gooding asset prices widens income and wealth inequality, which in the long term is a damper on growth. Moreover, one can argue that the sustained super-accommodative policy gave the impression that Something Was Being Done, which took the heat off the Administration to push for more spending. Indeed, the IMF recently found that infrastructure spending pays for itself, with each dollar of spending in an economy with high unemployment generating nearly $3 in GDP growth. And a lot of people are uncomfortable for aesthetic or pragmatic reasons. Aesthetically, a lot of investors, even ones that have done well, are deeply uncomfortable with a central bank meddling so much. And many investors and savers are frustrated by their inability to invest at a positive real yield without being forced to take on a lot of risk. Stephen Roach, former chief economist of Morgan Stanley and later its chairman for Asia, offers a straightforward, sharply-worded critique: just as in the runup to the crisis of 2007-2008, the Fed's failure to raise rates is leading to an underpricing of financial market risk, or in layspeak, to the blowing of bubbles. He argues that has to end badly.

Is the Fed in a Trap?: I Really Cannot See It...- DeLong: The very sharp and smart Stephen Roach is seriously alarmed–and I think he is wrong. Stephen Roach: The Fed Sets Another Trap: “America’s Federal Reserve is headed down a familiar……and highly dangerous path… the same incremental approach that helped set the stage for… 2008-2009. The consequences could be similarly catastrophic… incremental approach… condoning mounting excesses in financial markets and the real economy…. [The] macro-prudential tools… approach… fails to address the egregious mispricing of risk brought about by an overly accommodative monetary policy….The Fed’s $4.5 trillion balance sheet… no inclination to scale back… passed the quantitative-easing baton to the BoJ and the ECB…. The longer central banks promote financial-market froth, the more dependent their economies become on these precarious markets…. What do independent central banks stand for if they are not prepared to face up to the markets and make the tough and disciplined choices that responsible economic stewardship demands?… Now it is time for the Fed and its counterparts elsewhere to abandon financial engineering and begin marshaling the tools they will need to cope with the inevitable next crisis… A financial crisis happens when something leads to a sharp fall in the risk tolerance of the market; that fall in risk tolerance reduces the price of risky assets in such a way that highly-leveraged financial intermediaries become illiquid and possible insolvent; that possible insolvency produces a sharp shift in the riskiness of assets as many previously classified as safe are no longer so; thus the fall in the demand for risky assets (and the rise in the demand for safe assets) triggers a huge rise in the supply of risky assets (and a huge fall in the supply of safe assets), and the downward spiral commences.

Fed Watch: Asked and Answered. Mostly. - Last week I had six questions for Federal Reserve Chair Janet Yellen. Here is my attempt to piece together the answers from her post-FOMC press conference: Question 1: If you want to know what the Fed is thinking at this point, a journalist needs to push Yellen on the secular stagnation issue at next week's press conference. Does she or the committee agree with Fischer? And does she see any inconsistency with the SEP implied equilibrium Federal Funds rates and the current level of long bonds?  The Federal Reserve believes that the current level of long rates is an artifact of safe-haven flows, not an indication of secular stagnation. They must anticipate that the yield curve will not flatten further or invert when they begin raising rates. Question 2: I would like a journalist to press Yellen on her interpretation of the 5-year, 5-year forward breakeven measure of inflation expectations. Does she see this measure as important or too noisy to be used as a policy metric? What is her preferred metric? The Federal Reserve does not believe market-based measures of inflation expectations as indicative of actual inflation expectations. Watch surveys, Cleveland Fed-type measures, and actual inflation instead. Question 3: Considering that recent updates of your optimal control framework now suggest that the normalization process should already be underway, how useful do you believe such a framework is for the conduct of monetary policy? What specific framework are you now using to dismiss the results of your previously preferred framework? This is the general story of optimal control - hold unemployment below the natural rate to accelerate return to target inflation. Ignore any overshooting of inflation in such an analysis; Yellen was never really serious about that. Only thing preventing Fed from raising rates now is tweeking the optimal control results to account for still-high unemployment.

Overseas Risks Could Delay Rate Hike to 2016, Ex-Fed’s Kohn Says - The U.S. economy’s gradual improvement is being threatened by weaker economic growth prospects overseas, something that might force Federal Reserve officials to wait beyond next year before raising interest rates, according to former Fed Vice Chairman Donald Kohn. “There are some clouds on the horizon … that raise doubt about whether conditions will be right for the Fed to be able to lift its policy rate off of zero this year,” Mr. Kohn, in an opinion piece for Brookings Institution, where he is now a senior fellow. In particular, Mr. Kohn cites weaker growth in Europe and Japan, as well as softer economic activity in large emerging countries like China, Brazil and Russia, which is in the midst of a currency crisis. The Fed last week said it will remain ‘patient’ about raising interest rates and watch incoming data. While most analysts are expecting a first increase in official interest rates, which have stood effectively at zero since Dec. 2008, in mid-2015, Mr. Kohn believes the drag on inflation from weaker growth abroad could also weigh on Fed policy makers’ minds. The Fed has been missing its 2% inflation target for over two years already, and is forecast to continue doing so through 2015. “Although lower energy prices should be only a temporary depressant on US inflation, if low incoming inflation data causes a drop in longer-term inflation expectations, that could threaten the timely return to a 2% inflation path,” Mr. Kohn said.

"These Are Astonishing Figures, Evidence Of A 1930s-Style Depression" - Just a few numbers, courtesy of the Telegraph's Ambrose-Evans Pritchard: Mr Martin flagged warnings by William Dudley, the head of the New York Fed, that the US authorities had tightened too gently in 2004 and might do better to adopt the strategy of 1994 when they raised rates fast and hard, sending tremors through global bond markets. Bank of America said quantitative easing in Europe and Japan will cover just 35pc of the global stimulus lost as the Fed pulls back, creating a treacherous hiatus for markets. It warned that the full effect of Fed tapering had yet to be felt. From now on the markets cannot expected to be rescued every time there is a squall. “The threshold for the Fed to return to QE will be high. This is why we believe we are entering a phase in which bad news will be bad news and volatility will likely rise,” it said. What is clear is that the world has become addicted to central bank stimulus. Bank of America said 56pc of global GDP is currently supported by zero interest rates, and so are 83pc of the free-floating equities on global bourses. Half of all government bonds in the world yield less that 1pc. Roughly 1.4bn people are experiencing negative rates in one form or another. These are astonishing figures, evidence of a 1930s-style depression, albeit one that is still contained. Nobody knows what will happen as the Fed tries break out of the stimulus trap, including Fed officials themselves.

The first half of 2015 will be a tipping point -- This is an interesting period of time, coming out of QE3.  Inflation expectations and real interest rates rose during the QEs, and then declined coming out of the QEs, and in hindsight, QE3 seems to have created the same basic pattern.  Short term treasury rates are distorted by the curvature at the short end of the yield curve.  This first chart is the 5 year, 5 year forward real interest rate (approx.) and expected inflation.  This shows the tendency for both real rates and inflation expectations to have risen during QEs and fallen afterward.  Long term real rates are lower now than after QE1 or QE2, even though it still appears as though a rate increase might happen. All of the QEs stabilized the forward yield curve, bringing us closer to the point where short term rates might rise above the zero lower bound.  The length of QE3 was helpful in this regard, since we are now back to within six months of the expected date of interest rate increases for the first time since the beginning of the crisis.  (I think this is the case, but my data prior to QE3 isn't as precise, so I'm not certain.)  With the pullback in October, it looked like the expected date of the first rate increase might start moving forward in time again.  But, this has recovered, and as of Friday, the expected first rate increase was less than 6 months away for the first time in a long time. QE3 seems to have improved near term expectations enough to firm expectations for the eventual rate increase, but at the same time, long term forward rates have declined.  Here we can see the yield curve for Eurodollar futures over time during QE3.  The time frame for rate hikes has remained fairly stable.  By the end of 2013, the timing of the first hike had moved back somewhat, but most of the effect was to increase the slope of the yield curve after hikes began, and to increase the expected final level of rates after rate hikes would have ceased. The expected rate hike remains in mid-2015 now, but the slope of the yield curve is fairly flat again, and most strikingly, the long end of the curve has moved even lower than it had been at the start of QE3.  This suggests that Fed Funds rates are expected to top out at around 2.5%.

Inflation Reading Misses Fed’s Target for 31st Straight Month -- Robust economic growth and strong hiring supports the expectation that the Federal Reserve will move to raise short-term interest rates next year, despite inflation trending below the central bank’s target.  Most Fed officials expect to start raising short-term rates from near-zero in 2015, with many of them pointing toward the middle of the year. Fed Chairwoman Janet Yellen said last week that Fed officials anticipate raising rates as long as unemployment continues to fall, and they are confident inflation will over time move back toward their 2% goal.  The latest inflation readings, however, show prices trending away from that goal.  The price index for personal consumption expenditures, the Fed’ s preferred inflation gauge, fell 0.2% in November and was up 1.2% from a year earlier, the Commerce Department said Tuesday. That shows an easing from last month’s annual reading of up 1.4%.  The PCE price index has undershot the Fed’s target for 31 straight months.  Even when excluding food and energy, inflation is decelerating. So-called “core” prices were up 1.4% in November from a year earlier. That’s a slowdown from October’s annual reading of 1.5%, which itself was revised down from a previously reported 1.6% gain.  The new inflation numbers alone likely won’t change views inside the Fed, but if core inflation continues to decelerate, that could be a worry.  Ms. Yellen acknowledged last week that falling energy prices will hold down headline inflation, “and may even spill over, to some extent, to core inflation.” But, she said, officials “see these developments as transitory.”

PCE Price Index: Headline and Core Remain Well Below Target -- The Personal Income and Outlays report for November was published this morning by the Bureau of Economic Analysis. The latest Headline PCE price index year-over-year (YoY) rate is 1.17%, down from 1.42% the previous month. The Core PCE index of 1.41% down from the previous month's 1.53% YoY. As I've routinely observed, the general disinflationary trend in core PCE (the blue line in the charts below) must be perplexing to the Fed. After years of ZIRP and waves of QE, this closely watched indicator consistently moved in the wrong direction. Since April of last year the Core PCE had hovered in a narrow YoY range of 1.23% to 1.35%. The subsequent six months saw a higher plateau around 1.5%, but the most recent month moved back toward the lower range. The adjacent thumbnail gives us a close-up of the trend in YoY Core PCE since January 2012. I've highlighted the 12 months when Core PCE hovered in a narrow range around its interim low. The first chart below shows the monthly year-over-year change in the personal consumption expenditures (PCE) price index since 2000. I've also included an overlay of the Core PCE (less Food and Energy) price index, which is Fed's preferred indicator for gauging inflation. I've highlighted 2 to 2.5 percent range. Two percent had generally been understood to be the Fed's target for core inflation. However, the December 2012 FOMC meeting raised the inflation ceiling to 2.5% for the next year or two while their accommodative measures (low FFR and quantitative easing) are in place.  I've calculated the index data to two decimal points to highlight the change more accurately.

Do falling oil prices raise the threat of deflation? -- In economists’ theoretical models, inflation usually is often thought of as a condition in which all wages and prices move up together by the same amount. For a given nominal interest rate, the lower inflation, the higher is the real cost of borrowing. With the short-term nominal interest rate still stuck at zero, a decrease in inflation could discourage spending, something the Fed would rather not see happen in the current situation. Or so the theory goes. But typical consumers often have something very different in mind when they talk about inflation. Many people think of inflation as a condition where the cost of the goods and services they buy goes up but their wages do not. Not so surprising then that while the Fed says it wants more inflation, most consumers say they do not. What’s happened to oil prices this fall looks more like the average Joe’s version of reality than the Fed’s. The average U.S. retail price of gasoline right now is about $2.40 a gallon. Last year American consumers and businesses bought 135 billion gallons of gasoline at an average price of $3.60 a gallon. If gasoline prices stay where they are and if we buy the same number of gallons of gasoline this year as last, that leaves us with an additional $160 billion to spend over the course of the year on other items. If we restate the total savings for U.S. consumers and businesses in terms of the 116 million U.S. households, that works out to almost $1400 per household. It’s a particularly big deal for the lower-income households, who spend a much higher fraction of their income on energy.

Deflation in the Air - A New York Times article over the weekend delves into the history and rationale of the 2 percent inflation target, beloved of central bankers everywhere and a fairly recent innovation. Of course, the US Federal Reserve has a dual mandate, which includes both inflation and employment goals. The Fed said last week that it was most likely to start raising interest rates around the summer of 2015, but many countries’ central banks are moving in the opposite direction, solely because inflation is falling short of their targets. Private borrowers—who usually have higher propensities to spend than lenders—benefit from an easing of the burden of debt when wages and prices move broadly upward. Also, for governments with debts that they cannot service with their own currency, inflation eases the burden of making payments, as tax revenues tend to rise in step with nominal wages and prices. Of course, falling prices have the opposite effect. The resulting changes in spending reverberate through the rest of the economy. Recent data show that there exists a strong threat of deflation around the world in economies such as Japan and the Eurozone, where core inflation has recently turned negative. Michal Kalecki also argued to this effect in a critique of the so-called Pigou effect (falling prices would supposedly restore full employment by raising the inflation-adjusted wealth of households). The New York Times emphasizes instead the point that lower inflation makes it easier for some inflation-adjusted wages to fall, given that wages do not move downward as easily as upward. It also mentions that modest inflation permits central banks to lower real short-term interest rates below zero. Thoughts that deflation might be coming in much of the world are very sobering.

Don’t fear oil prices and deflation - Most Americans are happy that the price of oil has tumbled, helping consumers while hurting nasty regimes abroad. There are always worriers among us, though, and what has them alarmed today is that this decline will tip the U.S. into a damaging round of deflation. There’s no need to join them in their gloom. Deflation isn’t something we should fear. What matters is what’s causing prices to decline: an increase in productivity or a decline in economic activity. Only in the second case is there a serious danger that the Federal Reserve should try to respond to. Similarly, rising prices can be a sign that monetary policy is too loose, but can also reflect declines in productivity. And so changes in the price level, or prospective changes in it, can easily lead central banks astray. A run-up in oil prices, much of it caused by supply disruptions, made the Fed excessively concerned about inflation in 2008, which is one reason it was slow to react to the financial crisis. (When Lehman Brothers Holdings Inc. collapsed that year, the Fed was so concerned about inflation that it initially declined to cut interest rates.) The current fall in the price of oil is creating a bias in the opposite direction. It’s stirring up fears of deflation and leading to calls for looser monetary policy. This reaction is less likely to prove catastrophic than the error of 2008. But it is still an error.

Deflation Is Winning  -  Since early 2009, central banks globally have printed more than $13 trillion. In addition, governments across the planet have increased their borrowings at historic proportions (the US just crossed $18T – another new high!), all in an effort to stimulate economies and avoid deflationary pressures. Total US Federal debt has more than doubled in five years, an increase of $9.5 trillion and counting. The objective? Generate inflation. In addition, central bankers have not been bashful about explicitly targeting inflation rates they would like to achieve in their respective countries.  So where do we find ourselves today?  Have the global central banks vanquished the deflationary demon? Have they “created” enough inflation via money printing to allow debt burdens to melt away? Has the Bernanke deflationary antidote been a success for the Fed and their global central banking brethren? We can start with a very simple look at the year-over-year change in the US consumer price index. What we see is that the current level of rate of change in consumer prices is pushing the lows of the current cycle from 2009 to present.  We are not seeing any meaningful inflationary pressures in consumer prices.  Yes, selective consumer goods such as food and health care costs have risen, but we have seen deflationary pressures in electronics prices and in non-essential areas of consumer spending.  We’re now seeing it in energy prices.  On balance, inflationary pressures are modest at best at the headline level.

Chicago Fed: Index shows "Economic Growth Accelerated" in November -- The Chicago Fed released the national activity index (a composite index of other indicators): Index shows economic growth accelerated in November  Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) rose to +0.73 in November from +0.31 in October. Two of the four broad categories of indicators that make up the index increased from October, and only one of the four categories made a negative contribution to the index in November.  The index’s three-month moving average, CFNAI-MA3, rose to +0.48 in November from +0.09 in October, reaching its highest level since May 2010. November’s CFNAI-MA3 suggests that growth in national economic activity was above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests modest inflationary pressure from economic activity over the coming year. This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967.

Chicago Fed: Economic Growth Accelerated in November -- "Index shows economic growth accelerated in November": This is the headline for today's release of the Chicago Fed's National Activity Index, and here are the opening paragraphs from the report: Led by improvements in production-related indicators, the Chicago Fed National Activity Index (CFNAI) rose to +0.73 in November from +0.31 in October. Two of the four broad categories of indicators that make up the index increased from October, and only one of the four categories made a negative contribution to the index in November.  The index’s three-month moving average, CFNAI-MA3, rose to +0.48 in November from +0.09 in October, reaching its highest level since May 2010. November’s CFNAI-MA3 suggests that growth in national economic activity was above its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests modest inflationary pressure from eco- nomic activity over the coming year.  The CFNAI Diffusion Index, which is also a three-month moving average, increased to +0.37 in November from +0.18 in October. Fifty-four of the 85 individual indicators made positive contributions to the CFNAI in November, while 31 made negative contributions. Fifty indica- tors improved from October to November, while 35 indicators deteriorated. Of the indicators that improved, six made negative contributions. [Download PDF News Release]  The previous month's CFNAI was revised upward from 0.14 to 0.31.  The Chicago Fed's National Activity Index (CFNAI) is a monthly indicator designed to gauge overall economic activity and related inflationary pressure. It is a composite of 85 monthly indicators as explained in this background PDF file on the Chicago Fed's website. The index is constructed so a zero value for the index indicates that the national economy is expanding at its historical trend rate of growth. The first chart below shows the recent behavior of the index since 2007. The red dots show the indicator itself, which is quite noisy, together with the 3-month moving average (CFNAI-MA3), which is more useful as an indicator of the actual trend for coincident economic activity.

Q3 GDP Revised Up to 5.0%  - From the BEA: Gross Domestic Product: Third Quarter 2014 (Third Estimate) Real gross domestic product -- the value of the production of goods and services in the United States, adjusted for price changes -- increased at an annual rate of 5.0 percent in the third quarter of 2014, according to the "third" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 4.6 percent. The GDP estimate released today is based on more complete source data than were available for the "second" estimate issued last month. In the second estimate, the increase in real GDP was 3.9 percent. With the third estimate for the third quarter, both personal consumption expenditures (PCE) and nonresidential fixed investment increased more than previously estimated  Here is a Comparison of Third and Second Estimates.  PCE was revised up from 2.2% to 3.2%, and private investment was revised up.   A very strong report.

US GDP Grows at 5 Percent in Q3 2014, Best of the Recovery -- The US economy grew at a 5 percent annual rate in Q3 2014, the fastest rate of the recovery, according to the third estimate released yesterday by the Bureau of Economic Analysis. That is an upward revision from the 3.9 percent of the second estimate. It comes on the heels of a 4.6 percent growth rate in Q2, making it the fastest six-month growth spurt since the 1990s. Consumer spending led the way, contributing 2.21 percentage points to the quarterly growth. Investment spending contributed 1.18 percentage points to GDP growth. Business fixed investment accounted for most of that. Residential investment was below average in the quarter, and inventories were essentially unchanged. Exports continued to expand and imports fell slightly. A spurt of defense spending raised the contribution of the government sector. Inflation, as measured by the national accounts, remained moderate. The broadest measure of inflation, the GDP deflator, rose at an annual rate of 1.4 percent in the quarter. The deflator for personal consumption expenditure rose at a 1.2 percent rate. The PCE deflator is especially important because it is the preferred inflation indicator for the Federal Reserve. PCE inflation remains well below the Fed's 2 percent target. The BEA will release its advance estimate for Q4 GDP at the end of January. Employment indicators for the final quarter have been strong, so it is likely that growth will continue through the end of the year, although most forecasters expect a slightly slower pace than in Q3.

US notches up fastest growth in decade - The US economy reaffirmed its traditional role as the engine of global growth after notching up its fastest expansion in more than a decade. The S&P 500 equity index rose 0.2 per cent to a record closing high of 2,082 — its fifth successive daily gain.   The upwards revision from a previous estimate of 3.9 per cent was unusually high.  The new figures show the world’s most important economy was accelerating even before the recent fall in oil prices. The pace of growth will ramp up pressure on the US Federal Reserve to consider more aggressive interest rate rises after it made only cautious communication changes at its meeting last week. “Today’s US GDP growth was superlative,” said Mike Jakeman, global analyst for the Economist Intelligence Unit. “Job creation is running at the strongest rate for 15 years. More people in work means more income, which means more private spending, which means more business investment, which means more hiring.” “This strong GDP print will put additional pressure on the Fed to move away from its zero interest rate policy and enter its hiking cycle, further supporting the US dollar,” said Camilla Sutton, a foreign exchange strategist at Scotiabank. Two-year Treasury yields, which are highly sensitive to the pace of Fed interest rate rises, hit a three-year high of 0.74 per cent. The strong third quarter — on top of 4.6 per cent growth in the second quarter — shows how the US has shifted into a higher gear this year, as the rest of the world economy struggles.

U.S. Growth Rate at 5%, Strongest in a Decade - — The U.S. economy grew at its quickest pace in 11 years in the third quarter, the strongest sign yet that growth has decisively shifted into higher gear.The economy appears to have sustained some of the momentum in the fourth quarter. Other data on Tuesday showed consumer spending rose solidly in November, which could offset an unexpected weakness in durable goods orders."After four years of rocky recovery the U.S. economy is now hitting its stride ... and growth should remain good next year, with lower gasoline prices a big plus for consumers," said .The Commerce Department revised up its gross domestic product growth estimate to a 5.0 percent annual pace, citing stronger consumer and business spending than it had previously assumed.It was the fastest growth pace since the third quarter of 2003. The economy was previously reported to have expanded at a 3.9 percent rate. GDP growth has now been revised up by a total of 1.5 percentage points since the first estimate was published in October. Big revisions are not unusual as the government does not have full information when it makes its initial estimates.U.S. stocks rallied on the data, with the Dow Jones Industrials breaking through 18,000 points for the first time. Prices for U.S. Treasury debt fell, while the dollar rose to a fresh eight-year high against a basket of currencies.The economy expanded at a 4.6 percent rate in the second quarter, meaning it has now experienced the two strongest back-to-back quarters of growth since 2003.

Q3 2014 GDP Revised Up to a Whopping 5.0% -  Third quarter 2014 real GDP was revised up even further to a whopping 5.0%.  Merry Christmas Wall Street as the Dow closed above 18,000, a record high.  This is the highest quarterly GDP since Q3 2003, a full eleven years ago.  The reason for the revision blow out was consumer spending and investment.  Real consumer spending was revised up almost 3/4th of a percentage point more than the first revision previously reported.  Overall, Q3 GDP has been revised a full 1.5 percentage points upward from the original, advance report.  Overall Q3 GDP was a surprisingly holiday surprise. As a reminder, GDP is made up of: Y=C+I+G+(X-M) where Y=GDP, C=Consumption, I=Investment, G=Government Spending, (X-M)=Net Exports, X=Exports, M=Imports*.  GDP in this overview, unless explicitly stated otherwise, refers to real GDP.  Real GDP is in chained 2009 dollars.This below table breaks down the revisions from the advance report and now in Q3 GDP.  We expected imports to be revised dramatically up but the changes to private inventories was a bonus boost to Q3 growth which negated increased imports. We now have two very strong quarters of great GDP growth.  This below table shows the percentage point spread breakdown of Q2 from Q3 2014 GDP major components and their spread.  Consumer spending, C was now 44.6% of GDP, revised upward from 39%.  Durable goods were now a 0.67 percentage point GDP contribution, slightly revised upward.  Motor vehicles & parts consumer spending added 0.28 percentage points to GDP.   In consumer spending services, food & accommodation services was 0.21 percentage points while financial & insurance was 0.35 percentage points, which makes one wonder how jacked consumers are getting on finance charges.  Housing and utilities was a -0.22 GDP percentage point contribution which reflects the decreasing energy demand.  Below is a percentage change graph in real consumer spending going back to 2000.

Economy Grows at 5% For Only Second Quarter Since 2001 - The U.S. economy grew at its fastest pace in more than a decade in the third quarter of 2014 according to the latest revision of Gross Domestic Product, which showed growth at 5.0%, a number it has only achieved twice since 200:The U.S. economy posted its strongest growth in 11 years during the third quarter, supported by robust consumer spending and business investment.Gross domestic product, the broadest measure of goods and services produced across the economy, grew at a seasonally adjusted annual rate of 5% in the third quarter, the Commerce Department said Tuesday. That was up from the second quarter’s growth rate of 4.6% and the strongest pace since the third quarter of 2003, when GDP grew at a 6.9% pace.The agency last month had estimated third-quarter GDP growth at 3.9%. Economists surveyed by The Wall Street Journal had expected a smaller upward revision, to 4.3% growth.Tuesday’s report showed stronger-than-expected spending by U.S. consumers, particularly on services like health care. Fixed nonresidential investment also was revised up, signaling more spending by businesses on new buildings and research and development.“There is a positive feedback loop going on at the moment,” . “Job creation is running at the strongest rate for 15 years. More people in work means more income, which means more private spending, which means more business investment, which means more hiring.”  The jump in growth was less dramatic on an annual basis. Economic output in the third quarter climbed 2.7% from a year earlier, up from 2.6% growth in the second quarter.

Q3 GDP Final Estimate: Christmas Came in The Third Quarter -- (8 graphs) The BEA announced in the 3rd estimate that real GDP increased at a s.a.a.r. of 5.0% for 2014 Q3. This was the strongest quarterly growth rate in over a decade.  It seems clear that the U.S. recovery is continuing apace and, if the economy is not held back by weak growth in Europe and the BRICS, we should continue to improve. A favorable sign is that personal consumption expenditures (PCE) contributed about half of the total, split pretty evenly between goods and services. Durable goods expenditures continued to be strong, increasing 9.2% after a 14.1% increase in the 2nd quarter.  Five percent growth is a healthy number and a good excuse for an extra glass of holiday cheer. It still makes sense, however, to view this recovery in the context of other business cycles. When we do, it is apparent that this economy is still climbing out of what was a very deep hole and very tepid recovery to date. The pictures below show the path of GDP, Consumption and Investment, in this recovery contrasted with the paths of other post-war business cycles. This makes it clear that, while things are looking better, we might want to keep the good champagne corked for a while longer. The fact that this recovery is set against the background of a world economy that is very feeble is a cause for tempering the optimism. Another positive sign for the holiday is the report from the BLS today that, once again, initial claims for unemployment has declined. The 4-week moving average has been trending down and now is as low as at any time over the last several decades.  The picture below reprises a theme from our previous post.  The U.S. recovery looks great when contrasted with Japan and Europe. The question is can we continue to sustain this progress when they are struggling? Economic linkages wax and wane as the terms of trade change between nations. Falling commodity prices have strengthened the U.S. dollar. Some trading partners have pushed down the value of their currencies. These contribute to keeping inflation low and this in turn helps domestic consumption. Most signs point to the recovery continuing to be robust but there are many moving parts to this picture and we will have to continue to watch them all.

Fed Tightening On Deck After Q3 GDP Soars To 5% On Revisions, Highest Since 2003 - And just like that Q3 GDP, the one for the quarter ended Sept.30, was revised from 3.9% (which in turn was revised higher from 3.5%) to a mindblowing 5% - the highest print since Q3 2003 when GDP rose by 6.9%. This was above the highest Wall Street forecast of 4.7%, higher even than Joe Lavorgna's. The drivers: unprecedented revisions to Personal Consumption which supposedly rose by 3.2% in Q3 as opposed to the 2.2% prior reported, and 2.5% expected. Consumption accounted for 2.21% of the final 5.0% GDP print: this was the highest since Q4 2010 when it rose 2.8%. In fact, everything was revised higher: fixed investment rose 1.21% compared to the 0.97% reported previously; private inventories were virtually unchanged after allegedly subtracting 0.6% from growth in the original Q3 GDP estimate; net trade was unchanged adding 0.77% to GDP and finally the government boosted GDP a little as well, contributing 0.8%.

That big GDP number! - Real GDP was up 5% last quarter on an annualized basis, the strongest quarter in over a decade according to the final revision from the BEA. And that’s on the heels of 4.6% growth in the prior quarter. As the BEA put it, pretty much all cylinders were firing in the Q3: The increase in real GDP in the third quarter primarily reflected positive contributions from [consumer spending], [business] investment, federal government spending, exports, state and local government spending, and residential…investment. Imports, which are a subtraction in the calculation of GDP, decreased. But you know my methods, Watson. I’m all about the bass longer-run changes to smooth out the quarterly noise. The figure below shows both quarterly changes (annualized) and yr/yr changes; note how the latter is a smoother version of the former. There’s a small tick up at the end of the smoothed series, with real GDP up 2.7% in 2014Q3 compared to the same quarter last year. We’ll see if it holds. Of course, one factor powering the growth acceleration is the decline in energy prices. In fact, as the figure below reveals, on a nominal basis (before inflation) GDP actually grew more slowly in Q3 than in Q2, 6.4% versus 6.8%. But because prices fell faster last quarter, real growth accelerated. BTW, it’s not just oil either. The core consumer price index (sans energy and food) in today’s report–the Fed’s key inflation benchmark–was up a measly 1.4% in Q3 compared to 2% in Q2.

Health-Care Spending Gives Boost to U.S. Growth -- U.S. gross domestic product grew at a robust 5.0% pace in the third quarter, its strongest growth in more than a decade and up from an earlier estimate of 3.9%, the Commerce Department said on Tuesday. That tops the second quarter’s 4.6% growth rate, and represents the best quarterly growth since the third quarter of 2003, when GDP grew at a 6.9% rate.  The report upgraded estimates for fixed nonresidential investment, a proxy for business spending, and personal spending, especially on services like health care.  The agency’s early estimates for spending on services are subject to sometimes-major revisions based on new data. The latest example is today’s GDP report. Last month, the agency said spending on services rose at a 1.2% pace in the third quarter. Now, it says services spending climbed 2.5%. Health-care spending alone contributed 0.52 percentage point to growth, up from an earlier estimate of 0.22 percentage point. Economic output in the third quarter climbed 2.7% from a year earlier, up only slightly from 2.6% annual growth in the second quarter. The U.S. economy has experienced robust growth since the spring, recovering from the first quarter’s unexpected—but fleeting—GDP contraction. The nation has seen its best year of hiring since 1999. Those signs of strength stand in contrast to worries about a slowdown in other parts of the world, including China, Japan and members of the eurozone. Still, the weak first quarter will weigh on full-year growth in the U.S., and many economists expect somewhat slower growth in the fourth quarter. Federal Reserve policy makers expect GDP growth of 2.3% to 2.4% in 2014, and a pickup next year to growth of 2.6% to 3%, according to projections released last week. The Commerce Department will release its first estimate of GDP in the fourth quarter, which ends next week, on Jan. 30.

Here Is The Reason For The "Surge" In Q3 GDP - Back in June, when we were looking at the final Q1 GDP print, we discovered something very surprising: after the BEA had first reported that absent for Obamacare, Q1 GDP would have been negative in its first Q1 GDP report, subsequent GDP prints imploded as a result of what is now believed to be the polar vortex. But the real surprise was that the Obamacare boost was, in the final print, revised massively lower to actually reduce GDP! This is how the unprecedented trimming of Obamacare's contribution to GDP looked like back then. Of course, even back then we knew what this means: payback is coming, and all the BEA is looking for is the right quarter in which to insert the "GDP boost". This is what we said verbatim:Don't worry thought: this is actually great news! Because the brilliant propaganda minds at the Dept of Commerce figured out something banks also realized with the stub "kitchen sink" quarter in November 2008. Namely, since Q1 is a total loss in GDP terms, let's just remove Obamacare spending as a contributor to Q1 GDP and just shove it in Q2. Stated otherwise, some $40 billion in PCE that was supposed to boost Q1 GDP will now be added to Q2-Q4. And now, we all await as the US department of truth says, with a straight face, that in Q2 the US GDP "grew" by over 5% (no really: you'll see). Well, we were wrong: it wasn't Q2. It was Q3, albeit precisely in the Q2-Q4 interval we expected.

You Thought The Saudis Were Kidding? - Ilargi -   There are many things I don’t understand these days, and some are undoubtedly due to the limits of my brain power. But at the same time some are not. I’m the kind of person who can no longer believe that anyone would get excited over a 5% American GDP growth number. Not even with any other details thrown in, just simply a print like that. It’s so completely out of left field and out of proportion that you would think by now at least a few more people understand what’s really going on.  All the MSM headlines about consumer confidence and comfort and all that, it doesn’t square with the 43 million US citizens condemned to living on food stamps. I remember Halloween spending (I know, that’s Q4) was down an atrocious -11%, but the Q3 GDP print was +5%? Why would anyone volunteer to believe that? Do they all feel so bad any sliver of ‘good news’ helps? Are we really that desperate? We already saw the other day that Texas is ramming its way right into a recession, and North Dakota is not far behind (training to be a driller is not great career choice going forward), and T. Boone Pickens of all people confirmed today at CNBC what we already knew: the number of oil rigs in the US is about to do a Wile E. cliff act. And oil prices fall because global demand is down, as much as because supply is up. A crucial point that few seem to grasp; the Saudis do though. And I also don’t understand why nobody seems to understand what Saudi Arabia and OPEC have consistently been saying for ever now. They’re not going to cut their oil production. Not going to happen. The Saudis, probably more than anyone, are the guys who know what demand is really like out there (they see it and track it on a daily basis), and that’s why they’ll let oil drop as far as it will go. There’s no other way out anymore, no use calling a bottom anywhere.  In the two largest markets, US demand is down through far less miles driven for a number of years now, while domestic supply is way up; at the same time, real Chinese demand is way below what anybody projects, and oil is just one of many industries that have set their – corporate – strategies to fit expected China growth numbers that never materialized. Just you watch what other – industrial – commodities fields are going to do and show in 2015. Or simply look at prices for iron ore, copper etc. today.

What 5 Percent Means -  Krugman - OK, that was a seriously impressive GDP report — 5 percent growth rate, and it’s all final demand rather than an inventory bounce. But what does it mean? It does not necessarily mean that now is the time to tighten; that depends mainly on how far we still are from target employment and inflation, not on how fast we’re growing. Remember, the US economy grew 10 percent in 1934, which didn’t mean that the Depression was anywhere near over. With inflation still low and not accelerating, this report at most suggests that the Fed might get there a bit sooner than previously expected. It’s interesting to note that the bond market seems quite unimpressed, with only a slight uptick in long-term rates. What the report should do, however, is further discredit the “Ma, he’s looking at me funny!” theory of the Obama economy. Remember, we were supposed to be having the worst recovery ever because Obama was a Kenyan socialist who scared businessmen. Actually, it’s a better recovery than the alleged Bush boom – and what’s really striking, as you can see from the chart, is how strong nonresidential investment — essentially, business investment — has been; all the weakness has been in housing.Of course, you can count on hearing, any minute now, from people claiming that the numbers are cooked — we really have plunging output and double-digit inflation, plus they’re stealing our precious bodily fluids.

How Asset Manager BlackRock Gave Me the Willies About 2015 - BlackRock, the largest asset manager in the world and one of the big beneficiaries of the Fed’s policies, and of similar policies by other central banks, is in a bullish mood. In its 2015 Investment Outlook, BlackRock is gung-ho about the US economy. Dominant among the forces behind that miracle is the Fed’s “ultra-loose monetary policy” that has “inflated US equity and home values.” Monetary policy will likely “remain highly stimulatory.” And “even if the Fed were to hike by a full percentage point, real short-term interest rates would still be negative.” So savers would continue to get annihilated, at least until they entrust their money to BlackRock. BlackRock is a fan of Abenomics and the Bank of Japan which has taken over where the Fed left off. BlackRock is licking its chops. And it’s looking with fond expectations to the ECB, which has essentially promised, despite German opposition, a big load of QE starting in 2015, on top of the negative deposit rates it is already inflicting on banks and increasingly their depositors. Under these glorious circumstances, for an asset manager that depends on assets being constantly inflated, nothing could possibly go wrong in 2015. Or so it would seem. But in its 2015 Investment Outlook, BlackRock sees quirks of reality that could royally muck up the rosy central-bank-decreed scenario. Turns out, financial markets and economies in most countries are “diverging.” The financial cycle, pushed to the max by central banks, has moved much faster then the economic cycle. So the US may be “closer to the end of the financial cycle than the economic cycle.” That is, even if the economy hums along, turmoil could break out in the financial markets. But the economy may not hum along either: That hoped-for growth in the US is at risk if “weak global demand and the strong dollar” hurt exports; ballooning student loan burdens are a “drag on consumption and home buying”; and a “liquidity crunch” leads to “financial instability.” Even the Fed is using that term.

Republicans weigh big changes at U.S. budget referee agency (Reuters) - When Republicans take full control of Congress on Jan. 6, they will face decisions on major changes at the Congressional Budget Office, including possibly naming a new head and changing the rules used to assess the cost of legislation. Conservative groups have been calling for the replacement of CBO Director Doug Elmendorf, who was appointed by Democrats in 2009 and whose term expires next month. They argue that a Republican-leaning economist would more readily adopt a cost analysis known as "dynamic scoring" that incorporates expectations of higher economic growth associated with legislation. Analyses by the CBO, a non-partisan office, show how much a bill would increase or decrease the federal budget deficit over a 10-year period. The budget math used under dynamic scoring has long been a goal for Republican lawmakers, including the incoming chairman of the House Budget Committee, Representative Tom Price, and the current chairman, Paul Ryan, who next month will take over the tax-writing House Ways and Means Committee. Under current congressional analysis rules, if a bill cuts tax rates, government revenues fall. Dynamic scoring assumes that lower tax rates would boost growth and income, helping to offset at least some of the lost revenues. Some economists say this approach could make it easier to sell tax reforms or balance the budget while avoiding painful cuts in military spending.

House GOP Leadership Would Require Dynamic Scoring of Some Tax Bills. Will It Matter? -- Last night, the House Republican leadership proposed new rules that would require the Joint Committee on Taxation and the Congressional Budget Office to incorporate macroeconomic effects of “major” legislation into their official budget estimates. But there may be less to these new rules for so-called “dynamic scoring” than meets the eye. The GOP did not make the language easy to find. But here is a link to the legislative language. Here is one to the section-by-section analysis, and here is an interpretation of the new rules by House Budget Committee Chair Paul Ryan, who was very likely the prime mover behind the changes. On a first reading, there are three interesting things going on:

  • The new rules would not require dynamic scoring for all bills. They would only apply to “major legislation,” which is defined as having annual budgetary effects of at least 0.25 percent of Gross Domestic Product. At current GDP levels, that’s about $45 billion (though the rules would allow exceptions). Appropriation bills are excluded.
  • JCT and CBO are asked to produce a “qualitative” assessment of macroeconomic effects “to the extent practicable.” CBO and JCT don’t normally use only “qualitative” analysis to score legislation, and it is tough to imagine how such an assessment could lead to an accurate budget score. And it is impossible to know how the phrase “to the extent practicable” will be interpreted.
  • The rules will require macroeconomic analysis over 20 years, double the traditional 10-year budget window. On one hand, this may limit some of the gaming that lawmakers use to make tax law changes look like they raise more money than they really do. On the other, any estimate of how any tax change will affect the economy over 20 years would be highly uncertain at best.

Prominent MMT Advocate Stephanie Kelton to Become Chief Economist for Senate Budget Committee --  Yves Smith - Congratulations Stephanie! Amazingly, being a heterodox economist, no less a leading advocate of MMT, is not a bar to landing an influential post.

The Government Problem - Robert Reich - Some believe the central political issue of our era is the size of the government. They’re wrong. The central issue is whom the government is for. Consider the new spending bill Congress and the President agreed to a few weeks ago. It’s not especially large by historic standards. Under the $1.1 trillion measure, government spending doesn’t rise as a percent of the total economy. In fact, if the economy grows as expected, government spending will actually shrink over the next year.  The problem with the legislation is who gets the goodies and who’s stuck with the tab.For example, it repeals part of the Dodd-Frank Act designed to stop Wall Street from using other peoples’ money to support its gambling addiction, as the Street did before the near-meltdown of 2008. Dodd-Frank had barred banks from using commercial deposits that belong to you and me and other people, and which are insured by the government, to make the kind of risky bets that got the Street into trouble and forced taxpayers to bail it out.  But Dodd-Frank put a crimp on Wall Street’s profits. So the Street’s lobbyists have been pushing to roll it back. The new legislation, incorporating language drafted by lobbyists for Wall Street’s biggest bank, Citigroup, does just this. It reopens the casino. This increases the likelihood you and I and other taxpayers will once again be left holding the bag. Wall Street isn’t the only big winner from the new legislation. Health insurance companies get to keep their special tax breaks. Tourist destinations like Las Vegas get their travel promotion subsidies.In a victory for food companies, the legislation even makes federally subsidized school lunches less healthy by allowing companies that provide them to include fewer whole grains. This boosts their profits because junkier food is less expensive to make. Major defense contractors also win big. They get tens of billions of dollars for the new warplanes, missiles, and submarines they’ve been lobbying for.

Congress Again Buys Abrams Tanks the Army Doesn't Want - The new defense spending bill includes $120 million for tanks that the Army has repeatedly said it doesn't want. For three years, the Army in numerous Congressional hearings has pushed a plan that essentially would have suspended tank building and upgrades in the U.S. for the first time since World War II. The Army suggested that production lines could be kept open through foreign sales. Each time, Congress has pushed back. Last week, Congress won again in the National Defense Authorization Act (NDAA) for Fiscal Year 2015. In a statement, Rep. Mike Turner, R-Ohio, said that Congress "recognizes the necessity of the Abrams tank to our national security and authorizes an additional $120 million for Abrams tank upgrades. This provision keeps the production lines open in Lima, Ohio, and ensures that our skilled, technical workers are protected." Turner chairs the Tactical Air and Land Forces Subcommittee of the House Armed Services Committee and will retain that position in the next Congress. The General Dynamics Land Systems plant in Lima, the only U.S. manufacturer of tanks, is in the district of Rep. Jim Jordan, R-Ohio. Turner's office did not respond to several requests for comment on why Congress went against the recommendation of Gen. Ray Odierno, the Army chief of staff, to suspend tank production.

Opting Out of the U.S. Corporate Income Tax - The U.S. corporate income tax always seems controversial. Are U.S. corporations taxed too little? Are they taking jobs and business outside the U.S. because they are taxed too much? Should the goal be to eliminate the corporate tax and instead focus on how we tax those who benefit from higher corporate profits through dividends and capital gains on stock ownership? But while we are having these arguments, an increasing number of U.S. firms are organizing themselves as "flow-through" businesses, in which the corporate tax does not apply to profits, because the profits flow immediately through to owners. Tax data is usually a couple of years old, before it is released by the IRS. Here's some of the more recent evidence from Joseph Rosenberg in the September 28, 2014, issue of Tax Notes. He writes:  More than 90 percent of businesses, representing more than one-third of all business activity, in the United States are structured as flow-through entities — businesses that do not pay the corporate income tax, but rather pass profits through to owners who pay tax under the individual income tax. Over the past two decades, the importance of flow-through businesses — partnerships and S corporations in particular — has grown dramatically. In 2012 net income from sole proprietorships, partnerships, and S corporations totaled nearly $840 billion and accounted for more than 9 percent of  total adjusted gross income reported on individual income tax returns. ... [I]income from partnerships and S corporations has more than tripled as a share of AGI since the late 1980s.

Why is No One Fighting the New Robber Barons?-  (video & transcript) Yves Smith - Last week, Bill Moyers interviewed historian Steve Fraser on what he calls our Second Gilded Age. Despite the anodyne title of the segment, The New Robber Barons, it was really about why the American public has been so quiescent in the face of rapidly rising income inequality, while during the first Gilded Age, a wide range of groups rebelled against the wealth extraction operation. I encourage you to watch the segment in full or read the transcript.

Citigroup PR: Stop, You’re Making It Worse — Alexis Goldstein - Last week, an epic fight was waged in Congress over the repeal of a key part of Wall Street reform meant to prevent future bailouts. A firestorm ensued in the halls of Congress, pitting Democrats against Democrats, and the Obama administration against progressives. In the end, as usual, Wall Street got what it wanted. But the industry was left hemorrhaging credibility. And the defense mounted by Citigroup has done nothing to stanch the bleeding. First, a quick recap. The year-end spending bill included a near-total repeal of Section 716 of Dodd-Frank (2010's Wall Street reform bill). Section 716 is also known as “swaps pushout,” and it required that big banks push certain derivatives out of the part of the bank that enjoys FDIC insurance. The spending bill, with the swaps pushout repeal intact, was ultimately passed by both chambers of Congress (219–206 in the House, and 56–40 in the Senate). Those who opposed the repeal went down fighting, and fighting hard. The battle pitted progressive Democrats against President Obama, who was personally making calls trying to whip votes for the spending bill (some lawmakers noted it was the first time in six years they’d heard from him). JPMorgan CEO Jamie Dimon also made personal phone calls to Congress in favor of the pushout repeal. Progressives in the House balked, repudiating both the Obama-Dimon tag team, and the repeal itself. Many members of Congress pointed out that the language of the repeal was written by Citigroup lobbyists, a point hammered in the press. But no one hammered Citigroup more than Senator Elizabeth Warren, who on the evening of Dec 12 gave a nearly ten-minute speech focused entirely on the bank.  In the speech’s most stinging part, she addressed Citigroup directly: “Let me say this to anyone who is listening at Citi. I agree with you: Dodd-Frank isn’t perfect. It should have broken you into pieces.”

Wall Street Bank Regulator Issues Outrageous Press Release -- The press release was issued on Friday, December 19, 2014 by the Office of the Comptroller of the Currency (OCC), the regulator of all national banks which is mandated to make sure that insured banks “operate in a safe and sound manner.” The press release begins with a bizarre sounding headline for a bank regulator: “OCC Reports Third Quarter Trading Revenue of $5.7 Billion.” It wasn’t actually the OCC that had this trading revenue, of course, it was that “Insured U.S. commercial banks and savings institutions reported trading revenue of $5.7 billion in the third quarter of 2014” and year-to-date trading revenue of $18.3 billion, as the press release explains. In a sane financial world, of course, insured banks are not supposed to be trading; they are supposed to be receiving insured deposits backstopped by the U.S. taxpayer in return for making loans to worthy businesses and consumers in order to create jobs and grow our economy. But Alice in Wonderland regulators have now completely bought in to the lunacy of today’s Wall Street bank structure, as this press release leaves no doubt. This next paragraph sounds more like a gushing letter to clients from a hedge fund than a press release from a Federal bank regulator: “ ‘There were fairly low expectations for trading revenue at the beginning of the quarter, but client demand picked up fairly sharply toward the end, helping to make trading performance fairly positive,’ said Kurt Wilhelm, Director of the Financial Markets Group. ‘Trading revenue tends to weaken as the year goes on, so it wasn’t much of a surprise that it fell from the second quarter. But, stronger client demand, especially in foreign exchange (FX) products, helped to make it a much stronger quarter than last year’s third quarter.’ ”

Volcker Rule Delayed: How Wall Street Is Dismantling Financial Reform -On Friday, the Federal Reserve delayed by two years compliance with the Volcker rule, the prohibition on banks’ proprietary trading—deals made to profit the bank instead of their clients. The postponement removes a key argument of those people who dismissed Congress’ Christmas gift last week to Wall Street, the elimination of Dodd-Frank Section 716. Section 716 required commercial banks to push their riskiest swaps into separately capitalized subsidiaries—but Congress nixed it with a rider in its year-end budget bill known as the CRomnibus. Wall Street lobbied intensively for Section 716’s erasure, but even some of the finance industry’s toughest critics, like Paul Krugman, argued that substantively, it wasn’t that big a deal. And one key reason they gave for this was that the Volcker rule overlapped with the Section 716 rule. The theory went that the Volcker rule already prohibited risky trades, so there was no need to also spin them off into subsidiaries. The Bipartisan Policy Center (BPC), applauding the CRomnibus maneuver, wrote, “a well-structured and monitored Volcker rule will accomplish the same policy objectives as the Lincoln amendment, making the swaps push out both costly and unnecessary.” Let’s first point out that this isn’t true. Mike Konczal, Alexis Goldstein, and Caitlin Kline explained this, noting the difference between risky activities and risky products. The Volcker rule does stop certain risky activities. But if banks sell products like uncleared credit default swaps, under the guise of “making markets” or hedging other bets, then they are exempted from the Volcker rule. Volcker and 716 were complementary regulations. What the Volcker rule doesn’t prohibit Section 716 forces out into a separate subsidiary. If key elements of the Volcker rule won’t be enforced until 2017—as the Federal Reserve just announced—then the logic of killing other rules that allegedly “overlap” with it completely falls apart. Banks already have had four years since the passage of Dodd-Frank to comply with the Volcker rule; with the multiple Federal Reserve extensions, they now have nearly seven years to unwind investments in entities like private equity firms and hedge funds.

Oil Crash Wipes $11.7 Billion From Buyout Firms’ Holdings -  Oil’s plunge makes energy a great investment for the coming years, according to Blackstone Group LP (BX)’s Stephen Schwarzman and Carlyle (CG) Group LP’s David Rubenstein. For private equity firms, it’s also been painful. More than a dozen firms -- including Apollo Global Management LLC (APO), Carlyle, Warburg Pincus and Blackstone -- have lost a combined $11.7 billion in 27 publicly traded oil producers since June, when crude prices reached this year’s peak before beginning their six-month slide, according to data compiled by Bloomberg. Stocks of buyout firms with exposure to energy have slumped, and bond prices suggest some closely held oil producers may struggle to pay for their debt. “It’s been a really volatile period, and frankly that’s how Saudi Arabia wants it,” said Francisco Blanch, head of global commodity research at Bank of America Corp. “This is a battle of endurance.”

Wolf Richter: First Oil, Now US Natural Gas Plunges, “Negative Igniter” for New Debt Crisis -  Yves here. Wolf has been keeping a sharp eye out on how shale gas players were junk bond junkies, and how that is going to lead to a painful withdrawal. Here, he focuses on one of the big drivers of the heavy borrowings: the deep involvement of private equity firms, who make money whether or not the companies they invest in do well, by virtue of all the fees they extract. The precipitous drop in natural gas prices is exposing how bad the downside of a dubious can be, at least for the chump fund investors. It's hard to imagine an industry that is a worse candidate for private equity than oil and gas exploration and production. The prototypical private equity purchase is a mature company with steady cash flow. Oil and gas development is capital intensive and the cash flows are unpredictable and volatile, because the commodity prices are unpredictable and volatile. A less obvious issue is that it actually takes a lot of expertise to run these businesses. This is not like buying a retailer or a metal-bender. Now private equity kingpins flatter themselves into believing that experts are just people they hire, but here, the level of expertise required, and the fact that the majors are way bigger than private equity firms means that the private equity buyers don't know enough to vet whether the guy they hire is really as good as he says he is. Like all outsiders, they are way too likely to be swayed by the sales pitch and personality rather than competence.* And even with all the money that private equity has thrown at energy plays, it's not clear that New York commands much respect in Houston. As one private equity insider wrote in June, ironically just before oil priced peaked:

Global Aging: More Headwinds for U.S. Stocks? | Federal Reserve Bank San Francisco - The retirement of the baby boomers is expected to severely cut U.S. stock values in the near future. Since population aging is widespread across the world’s largest countries, this raises the question of whether global aging could adversely affect the U.S. equity market even further. However, the strong relationship between demographics and equity values in this country do not hold true in other industrial countries. This suggests that global aging is unlikely to create additional headwinds for U.S. equities.

Taxpayers Could Be on the Hook for Trillions in Oil Derivatives - Ellen Brown --Senator Elizabeth Warren charged Citigroup last week with “holding government funding hostage to ram through its government bailout provision.” At issue was a section in the omnibus budget bill repealing the Lincoln Amendment to the Dodd-Frank Act, which protected depositor funds by requiring the largest banks to push out a portion of their derivatives business into non-FDIC-insured subsidiaries. Warren and Representative Maxine Waters came close to killing the spending bill because of this provision. But the tide turned, according to Waters, when not only Jamie Dimon, CEO of JPMorgan Chase, but President Obama himself lobbied lawmakers to vote for the bill.   A fraction, but a critical fraction, as it included the banks’ bets on commodities. Five percent of $280 trillion is $14 trillion in derivatives exposure – close to the size of the existing federal debt. And as financial blogger Michael Snyder points out, $3.9 trillion of this speculation is on the price of commodities. Among the banks’ most important commodities bets are oil derivatives. An oil derivative typically involves an oil producer who wants to lock in the price at a future date, and a counterparty – typically a bank – willing to pay that price in exchange for the opportunity to earn additional profits if the price goes above the contract rate. The downside is that the bank has to make up the loss if the price drops. As Snyder observes, the recent drop in the price of oil by over $50 a barrel – a drop of nearly 50% since June – was completely unanticipated and outside the predictions covered by the banks’ computer models. The drop could cost the big banks trillions of dollars in losses. And with the repeal of the Lincoln Amendment, taxpayers could be picking up the bill.

Bankers Brought Rating Agencies ‘To Their Knees’ On Tobacco Bonds - ProPublica: When the economy nosedived in 2008, it didn’t take long to find the crucial trigger. Wall Street banks had peddled billions of dollars in toxic securities after packing them with subprime mortgages that were sure to default. Behind the bankers’ actions, however, stood a less-visible part of the finance industry that also came under fire. The big credit-rating firms – S&P, Moody’s and Fitch – routinely blessed the securities as safe investments. Two U.S. investigations found that raters compromised their independence under pressure from banks and the lure of profits, becoming, as the government’s official inquiry panel put it, “essential cogs in the wheel of financial destruction.” Now there is evidence the raters also may have succumbed to pressure from the bankers in another area: The sale of billions of dollars in bonds by states and municipalities looking to quickly cash in on the massive 1998 legal settlement with Big Tobacco. A review by ProPublica of documents from 22 tobacco bond offerings sold by 15 state and local governments shows that bankers routinely bragged about having their way with the agencies that rated their products. The claims were brazen, the documents show, with bankers saying they routinely played one firm against its competitors to win changes to rating methods, jack up a rating or agree to rate longer-term, riskier bonds.

The Greater Abomination: Washington’s Lies About TARP’s “Success” Are Worse Than The Original Bailouts - David Stockman - The mainstream economics narrative is so far down the monetary rabbit hole that the blinding clarity of the chart below has no chance whatsoever of seeing the light of day. That’s because it dramatizes the real truth regarding all the Fed gibberish about “accommodation” and “stimulus”. Namely, that what lies beneath its “extraordinary measures”, such as ZIRP, QE, wealth effects and the rest of the litany, is a central banking regime that systematically destroy savers.  Period.  Now despite the monetary politburo’s noisy gumming about  the mythical “deflation” threat, the gaping difference between earning $5,000 and $400 per year on the same principal amount is a matter purely of central bank policy. It has nothing whatsoever to do with market economics or any change in the underlying inflation trend. In fact, the average CPI gain during the four years after 1996 was 2.1% – or only a hairline different than the 1.9% per year that has prevailed since 2009.  And that gets us to the galling part. The policy apparatus of the state has subjected savers to brutal punishment for one reason alone. Namely, to enable the insolvent big banks of America to dig their way out of the deep hole they were in at the time of the financial crisis. By scalping false profits from the Fed’s regime of financial repression, they have, in fact, been able to return accounting profits to pre-crisis levels and beyond.

Bank Revenues Plummet 17% In October And November According To Citi -- It appears that the Q4 earnings season "bloodbath" predicted by harbinger Jefferies is right on track. According to Citigroup, Q4 is shaping up to be nothing short of a disaster for bank earnings. To wit: "Primary revenues decreased 17% yoy over Oct-Nov, notably impacted by weaker lending trends, per Dealogic industry data. Issuance revenues also declined while advisory revenues increased slightly. Loans revenues fell 61% yoy over Oct-Nov with leveraged finance particularly lower, given weaker market conditions [ZH: uhm, market hit all time highs in both October and Novemer?!]. By contrast, DCM revenues increased 11% over the same period, primarily driven by higher IG issuance (+27% yoy), partially offset by lower HY, down 12%." Which is odd: remember how everyone said banks are being punished for low volatility? Apparently the only thing worse for banks than zero/low vol was... high vol.

Unofficial Problem Bank list declines to 401 Institutions -- This is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Dec 19, 2014. The OCC released an update on its latest enforcement action activity that contributed to many changes to the Unofficial Problem Bank List this week. Also, the FDIC closed a bank this Friday in what will likely will be the last closure of the year. In all, there were nine removals and four additions that leave the list with 401 institutions with assets of $125.1 billion. A year ago, the list held 633 institutions with assets of $216.7 billion. Assets on the list increased by $1.2 billion this week and one would have to go all the way back about two years to the week ending November 16, 2012 for a similar increase in assets. The FDIC shuttered Northern Star Bank, Mankato, MN ($19 million) today making it the 18th failure this year. A total of 23 institutions headquartered in Minnesota have failed since the on-set of the Great Recession, which ranks fifth after Georgia (88), Florida (71), Illinois (61), and California (40).  Next week we anticipate the FDIC will release an update on its enforcement action activity. Note: The first unofficial problem bank list was published in August 2009 with 389 institutions. The list peaked at 1,002 institutions on June 10, 2011, and is now down to 401.

Why Everyone Is About To Rush Into Subprime Mortgage Debt (Again) - If there is one thing the investing public has 'learned' in the last few years, it is 'no matter how bad the fundamentals, if it's been working, buy moar of it'. And so, it is with almost certain confidence that we should expect a resurgent flood of yield-chasing muppetry into no more egregious idiocy than the subprime-mortgage-debt market. As Bloomberg reports, the subprime-slime-backed securities that were created in the years before the financial crisis in 2008, which marked the last time they were issued, have gained almost 12% this year, or six times more than junk-rated corporate debt, according to Barclays. As one money 'manager' proclaims, "a lot of the uncertainty around the asset class has been taken away." Indeed, home prices will never go down ever again, right? (Just ignore this and this)

New York’s Benjamin Lawsky Forces Resignation of CEO of Mortgage Servicer Ocwen Over Wrongful Foreclosures, Shoddy Records and Systems --  Yves Smith -- New York State Superintendent of Financial Services Benjamin Lawsky has forced the resignation of the chairman and CEO of a mortgage servicer, Ocwen over a range of borrower abuses in violation of a previous settlement agreement, including wrongful foreclosures, excessive fees, robosigning, sending out back-dated letters, and maintaining inaccurate records. Lawsky slapped the servicer with other penalties, including $150 million of payments to homeowners and homeowner-assistance program, being subject to extensive oversight by a monitor, changes to the board, and being required to give past and present borrowers access to loan files for free. The latter will prove to be fertile ground for private lawsuits. In addition, the ex-chairman William Erbey, was ordered to quit his chairman post at four related companies over conflicts of interest. The Ocwen consent order shows Lawksy yet again making good use of his office while other financial services industry regulators are too captured or craven to enforce the law. Unlike other bank settlements, investors saw the Ocwen consent order as serious punishment. Ocwen's stock price had already fallen by over 60% this year as a result of this probe and unfavorable findings by the national mortgage settlement monitor, Joseph Smith. Ocwen's shares closed down another 27% on Monday. And that hurts Erbey. From the Wall Street Journal:

Colorado AG charges two more foreclosure law firms with fraud - Colorado’s Attorney General has accused two of the state’s law firms of fraud, claiming that the firms inflated the costs charged to homeowners. According to a report from Reuters, Attorney General John Suthers sued two foreclosure law firms, Robert J. Hopp & Associates and The Hopp Law Firm, and The Vaden Law Firm, stating that the firms overcharged consumers, for amongst other things, non-existent title insurance policies. From the Reuters report: (Suthers) said the Vaden firm is alleged to have inflated foreclosure costs for postings, court filings and titles, while Hopp is accused of routinely collecting between $1,200 and $1,400 in premiums for non-existent title insurance policies. "For abusing the foreclosure process for their own profit, eight Colorado foreclosure law firms have now been targets of investigation by my office," Suthers said in a statement. "It is my hope that these actions will result in greater transparency and fairness in the legal processing of foreclosures." In July, one of Colorado’s largest foreclosure law firms, Aronowitz & Mecklenburg, confirmed it will pay $10 million to settle a price-gouging complaint  brought against it by the state's attorney general. In that case, Colorado alleged that the law firm sought to unfairly raise the cost of their foreclosure services, relying on the fact homeowners could not dispute the costs and the state of Colorado lacked proper administrative and judicial tools to prevent the actions.

Mortgage Servicer Privity with Borrowers - A lot of the mortgage servicing litigation over the past seven years has faltered on standing issues. Does the borrower have standing to sue the servicer? This has been a problem for RESPA and HAMP suits, where there are questions about whether there is a private right of action, as well as for plain old breach of contract actions. The point I make in this post is that borrowers almost always have standing to sue the servicer for a breach of contract action arising out of the mortgage loan contract itself because the servicer is an assignee of part of the mortgage note. This was an issue that lurked in the background of a case I recently testified in, and I think it's worth highlighting for the Slips readers.    A lot of courts have misunderstood the nature of the servicing relationship vis-a-vis the borrower and assumed that because the servicer is not expressly a party to the note and security agreement that there is no privity between the borrower and servicer and hence the borrower cannot maintain a breach of contract suit.  That's wrong. The servicer is not on the note or the security agreement, but the servicer is an assignee of the note, just like the securitization trust, and that provides all the privity needed for a breach of contract suit.   Legal scholarship has long understood that property can be conceptualized as a bundle of separate rights.  Thus, if I sell you Blackacre in fee simple, absolute, I am conveying to you the right to use Blackacre currently, the right to use it in the future, the right to the products and profits from the land, the right to recovery it, etc. These rights could be split up:  I could sell you the right to use Blackacre for a year, with the property reverting to me thereafter.  That's just a lease.  Likewise, the mineral rights and the air rights to Blackacre could be sold separately from the surface rights. The same can be done with a mortgage note.

Housing policy - please do the opposite -- I recently saw this column by Robert Shiller, where he argues against the mortgage tax credit.  This is an interesting issue.  I agree with Shiller about this.  And, I think this would be the perfect time to phase it out.  Affordability is not the binding constraint in housing right now.  Access to capital is.  Households with capital or credit can purchase homes.  The homes are underpriced, so for the few that can buy a home with a large mortgage, they are earning excess rents.  The mortgage deduction is just adding to those rents.  Normally, there would be a fear that ending the mortgage deduction would lead to a drop in home prices that was steep enough to cause an economic dislocation.  But, real estate credit has been too hobbled for the mortgage interest deduction to lead to higher prices.  Home prices are low enough to be profitable for investors, and at least until very recently, cash buyers have been dominant, so if the mortgage deduction was ended now, cash and institutional investors would keep prices from declining significantly.  Since home ownership provides excess profits, and these profits tend to go to households with the most access to capital, we tend to think, wouldn't it be fair if everyone could get access to those profits?  This is wrong-headed.  Profits (accounting for liquidity and idiosyncratic risk) only exist because there is limited access to the market.  If everyone gets access, the profit goes away.  The solution is to get rid of the profit.  But the irony is that, if we get rid of the profit, then moving households into home ownership is not necessarily a benefit.  The only equitable outcome for housing policy isn't to subsidize more home owners, it's to make all households indifferent to home ownership.

Freddie Mac: Mortgage Serious Delinquency rate unchanged in November - Freddie Mac reported yesterday that the Single-Family serious delinquency rate was unchanged in November at 1.91%. Freddie's rate is down from 2.43% in November 2013, and the rate in October and November was the lowest level since December 2008. Freddie's serious delinquency rate peaked in February 2010 at 4.20%.  The serious delinquency had declined every month since December 2012 (when it was also unchanged). These are mortgage loans that are "three monthly payments or more past due or in foreclosure".  Although the rate is generally declining, the "normal" serious delinquency rate is under 1%.   The serious delinquency rate has fallen 0.52 percentage points over the last year - and at that rate of improvement, the serious delinquency rate will not be below 1% until late 2016.  Note: Very few seriously delinquent loans cure with the owner making up back payments - most of the reduction in the serious delinquency rate is from foreclosures, short sales, and modifications. 

Mortgage tax deductions and gentrification - Cathy O’Neil - Yesterday we had a tax expert come talk to us at the Alternative Banking group. We mostly focused on the mortgage tax deduction, whereby people don’t have to pay taxes on their mortgage. It’s the single biggest tax deduction in America for individuals. At first blush, this doesn’t seem all that interesting, even if it’s strange. Whether people are benefitting directly from this, or through their rent being lower because their landlord benefits, it’s a fact of life for Americans. Whoopdedoo.  Generally speaking other countries don’t have a mortgage tax deduction, so we can judge whether it leads to overall more homeownership, which was presumably what it was intended for, and the data seems to suggest the answer there is no. We can also imagine removing the mortgage tax deduction, and we quickly realize that such a move would seriously impair lots of people’s financial planning, so we’d have to do it very slowly if at all. But before we imagine removing it, is it even a problem? Well, yes, actually. Let’s think about it a little bit more, and for the sake of this discussion we will model the tax system very simply as progressive: the more income you collect yearly, the more taxes you pay. Also, there is a $1.1 million (or so) cap on the mortgage tax deduction, so it doesn’t apply to uber wealthy borrowers with huge houses. But for the rest of us it does apply. OK now let’s think a little harder about what happens in the housing market when the government offers a tax deduction. Namely, the prices go up to compensate.

MBA: Mortgage Applications Increase in Latest MBA Weekly Survey - From the MBA: Mortgage Applications Increase in Latest MBA Weekly Survey Mortgage applications increased 0.9 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending December 19, 2014. ... The Refinance Index increased 1 percent from the previous week. The seasonally adjusted Purchase Index increased 1 percent from one week earlier....The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.02 percent, the lowest level since May 2013, from 4.06 percent, with points increasing to 0.26 from 0.21 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

"Mortgage Rates Match December Highs" -- 30 year mortgage rates moved up a little today, but are way down from 4.60% a year ago. From Matthew Graham at Mortgage News Daily: Mortgage Rates Match December Highs Mortgage rates continued higher today as lenders opted for typically conservative holiday pricing strategies. The bond markets that most directly influence mortgage rates improved slightly from yesterday's precipitous weakness. Normally, those underlying market movements do more to move rates than anything else, but in cases where lenders are getting caught up to abrupt market changes or when they're protecting against uncertainty associated with long holiday weekends, their individual strategies can result in higher rates in spite of market movements suggesting lower rates. That's the case today, and it puts the average conforming 30yr fixed rate quote at 4.0%, matching the previous high from December 5th. There's no way to know if rates will move higher or lower next week (don't expect much change this Friday). What we do know is that rates would improve if trading levels merely held flat between now and then. In other words, there's a bit of extra negativity baked into current rate sheets, and if markets manage to hold their ground or improve heading into the new year, we would get some of the recent losses back. To be clear, that's something that makes sense to HOPE for, but isn't justification to forgo locking your rate unless you're prepared to lock at even higher rates if the market happens to move against you. Here is a table from Mortgage News Daily:

Existing Home Sales in November: 4.93 million SAAR, Inventory up 2.0% Year-over-year -  The NAR reports: Existing-Home Sales Lose Momentum in November as Inventory Slightly Tightens Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, fell 6.1 percent to a seasonally adjusted annual rate of 4.93 million in November from a downwardly-revised 5.25 million in October. Sales dropped to their lowest annual pace since May (4.91 million) but are above year-over-year levels (up 2.1 percent from last November) for the second straight month. ... Total housing inventory at the end of November fell 6.7 percent to 2.09 million existing homes available for sale, which represents a 5.1-month supply at the current sales pace – unchanged from last month. Despite the tightening in supply, unsold inventory remains 2.0 percent higher than a year ago, when there were 2.05 million existing homes available for sale.This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. Sales in November (4.93 million SAAR) were 6.1% lower than last month, and were 2.1% above the November 2013 rate. The second graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 2.09 million in November from 2.24 million in October. Headline inventory is not seasonally adjusted, and inventory usually increases from the seasonal lows in December and January, and peaks in mid-to-late summer. The third graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Since inventory is not seasonally adjusted, it really helps to look at the YoY change. Note: Months-of-supply is based on the seasonally adjusted sales and not seasonally adjusted inventory.

Existing Home Sales Collapse Most Since July 2010, Downtick In Stock Market Blamed -- Having exuberantly reached its highest level since September 2013 last month (despite the total collapse in mortgage applications), it appears the ugly reality of the housing market has peeked its head out once again. As prices rose, existing home sales plunged 6.1% - the most since July 2010 (against an expected 1.1% drop) to 4.93mm SAAR (the lowest in 6 months). As usual there is an excuse for this carnage... NAR's Larry Yun blames the stock market (and rising home values). Quite a conundrum for the Fed...

Are Low Mortgage Rates Keeping People in Their Homes? -- Sales of previously owned homes tumbled in November to their lowest level in six months, the National Association of Realtors said Monday. And NAR chief economist Lawrence Yun is puzzled as to why.  He admits weak inventory growth could be holding some potential buyers back. So too could October’s stock-market volatility and the “lock-in effect” of low interest rates. Many current homeowners fear that if they buy a new house, they risk facing higher rates–though current mortgage rates are near 18-month lows. Still, the potential of a home purchase resulting in higher mortgage rates  “will be a potentially long-term trend,” says Yun, who called November’s sales-pace decline a “1-month aberration.” He sees the annualized pace returning to 5 million next year.

A Few Comments on November Existing Home Sales - Once again housing economist Tom Lawler's forecast of 4.90 million SAAR was closer than the consensus (5.20 million) to the NAR reported sales (4.93 million). The most important number in the NAR report each month is inventory.   This morning the NAR reported that inventory was up 2.0% year-over-year in November.   It is important to note that the NAR inventory data is "noisy" and difficult to forecast based on other data.  Also it isn't always clear what is included in "inventory" (some areas report "active" listings, others all listings including pending short sales).   Also, some sources are reporting more inventory, as an example, Zillow's data shows inventory was up 12% year-over-year in November.  The headline NAR inventory number is not seasonally adjusted, even though there is a clear seasonal pattern. Trulia chief economist Jed Kolko has sent me the seasonally adjusted inventory. NOTE: The NAR does provide a seasonally adjusted months-of-supply, although that is in the supplemental data. This shows that inventory bottomed in January 2013 (on a seasonally adjusted basis), and inventory is now up about 9.1% from the bottom. On a seasonally adjusted basis, inventory was up 2.5% in November compared to October. Important: The NAR reports active listings, and although there is some variability across the country in what is considered active, many "contingent short sales" are not included. "Contingent short sales" are strange listings since the listings were frequently NEVER on the market (they were listed as contingent), and they hang around for a long time - they are probably more closely related to shadow inventory than active inventory. However when we compare inventory to 2005, we need to remember there were no "short sale contingent" listings in 2005. In the areas I track, the number of "short sale contingent" listings is also down sharply year-over-year. And another key point: The NAR reported total sales were up 2.1% from November 2013, however normal equity sales were up even more, and distressed sales down sharply.

New Home Sales at 438,000 Annual Rate in November -- The Census Bureau reports New Home Sales in November were at a seasonally adjusted annual rate (SAAR) of 438 thousand.  October sales were revised down from 458 thousand to 445 thousand, and September sales were unchanged at 455 thousand. "Sales of new single-family houses in November 2014 were at a seasonally adjusted annual rate of 438,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 1.6 percent below the revised October rate of 445,000 and is 1.6 percent below the November 2013 estimate of 445,000." The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. Even with the increase in sales over the previous two years, new home sales are still close to the bottom for previous recessions. The second graph shows New Home Months of Supply. The months of supply increased in November to 5.8 months from 5.7 months in October. The all time record was 12.1 months of supply in January 2009. This is now in the normal range (less than 6 months supply is normal). The third graph shows the three categories of inventory starting in 1973. The inventory of completed homes for sale is still low, and the combined total of completed and under construction is also low.

Comments on New Home Sales - The new home sales report for November was below expectations at 438 thousand on a seasonally adjusted annual rate basis (SAAR). Also, sales for the two of the previous months were revised down.  Sales in 2014 are significantly below expectations, however, based on the low level of sales, more lots coming available, and demographics, I expect sales to increase over the next several years. It is important to remember that demographics is a slow moving - but unstoppable - force! It was over four years ago that we started discussing the turnaround for apartments. Then, in January 2011, I attended the NMHC Apartment Strategies Conference in Palm Springs, and the atmosphere was very positive.  One major reason for that optimism was demographics - a large cohort was moving into the renting age group. Now demographics are slowly becoming more favorable for home buying.

The Housing Recovery Remains Cancelled Due To 6 Months Of Downward Revisions -- Following last month's surge to record high home prices, it is perhaps no surprise that for the 6th month in a row, home prices have been revised lower. New Home Sales printed 438k, down from prior revised lower 445k and missing expectations of a surge to 460k... missing for 8 of the last 10 months. However, the key focus should be on the epic revisions of the (by now useless) home sales. For the period May - November, the initial new home sales prints amount to 2.779MM houses. Post revision, the number plunges by 22% to 2.168K. There goes the housing pillar of recovery (let's hope economists are wrong and rates don't rise next year eh?)

November housing sales: a detailed look: With all of the important housing sales reports in for November, let's take a detailed look at that market.As a general rule, housing construction is affected first and foremost by interest rates. Even a small change may have major effects. For example, an increase in interest rates from 3% to 4% increases monthly interest payments on mortgages by 1/3, e.g., from $600/mo. to $800/mo. That's a significant enough increase to disqualify a lot of potential purchasers, especially first time purchasers. A similar decrease in rates will have a similar positive effect. Here's how interest rates (blue,inverted) have fed through into housing permits (red) over the last 4 years: In general, housing permits have followed interest rates with a 3 - 6 month lag, although permits never really went negative this year. The big reason for this is demographics. A move in interest rates might be attenuated, if not negated, by a big increase or decrease in the age group most likely to purchase houses - again, especially those in their late 20's through mid-30's most likely to be purchasing their first home. Here's Bill McBride, a/k/a Calculated Risk with a graph of this crucial demographic: Note that both interest rates and demographics have turned positive for the housing market since late spring, albeit only slightly While in October, all data series were positive, in November housing data was mixed. Permits (blue) and existing home sales (brown) were positive YoY, starts (red) and new single family home sales (green) were down YoY. as shown by the graph below: November single vs. multi-unit housing permits showed that condominiums and apartment construction continued to outperform single family home construction, which is essentially flat: Part of the reason November looked poor is because November 2013 saw a post-recession high in housing starts. A better look is seen by norming the data to 100 in January 2013. All three series involving new homes are up, but only about 5% to 15%. Existing home sales have fared more poorly, retreating from their level of two years ago:

Construction Costs Rising as Economy Improves -  Building costs are rising at the fastest pace in six years, according to a new report by Rider Levett Bucknall, a property and construction consulting firm. The firm–which tracks the costs of new commercial, residential and other buildings– said its index of construction costs in the U.S. increased 1.66% between July 1 and Oct. 1, the largest three month increase since early 2008. The firm’s report attributed the increase to the improving construction financing climate and stronger commercial and residential development markets. Experts say that as markets improve, demand increases for labor and construction material, driving up their costs. The report points out that–according to the Commerce Department–the value of construction put-in-place in the first nine months of 2014 was $710.1 billion, up 6.1% from the same period in 2013. The report predicts that construction starts in 2015 will rise about 10%, almost double the estimated growth rate of 2014. “General optimism with the construction sector has continued to rise,” the report says. Since 2001, Rider Levett Bucknall has been tracking construction costs by studying the price tag on labor, materials, overhead and other expenses. The firm, whose North American headquarters is based in Phoenix, has used that data to prepare a quarterly index. The index, which started at 100 in April 2001, hit a record 161.11 in October, up from 158.48 in July. It was at 153.09 in October 2013. The index, which isn’t adjusted for inflation, shows that construction costs are rising faster than the inflation rate. The Labor Department earlier this month said its index of consumer prices was just 1.3% above its year-earlier level in November. The construction index was up 5.2% during that same time period.

Why You Probably Don’t Understand the National Accounts. In Pictures. - A recent post of mine, How Do Households Build Wealth?, got a fair amount of attention (even a radio interview) because its takeaway graph seemed to surprise people (as it did me, when I put it together). Here it is again, presented more sensibly as a bar rather than an area chart. Click for larger.Note: the revaluations shown here are not “realized” capital gains (which really only matter for tax purposes). They’re changes in asset values. If your portfolio’s value goes up by $20,000 this year, that bumps your net worth by $20,000 even if you don’t sell any assets. Ditto your house, but without the second-by-second reporting of prices. What surprised people: capital gains and losses completely overwhelm Saving (net or gross) when it comes to changes in Net Worth. Here’s an even starker depiction, showing both magnitude and volatility: I think these graphs are surprising to people because they don’t understand what Saving means in the national accounts, or how it relates to Net Worth. Thinking of households, for instance, many might be surprised to find that:

  • Starting Net Worth + Saving ≠ Ending Net Worth
  • Household Saving ≠ Change in Household Net Worth

As you can see in the charts above, it’s not even close. Why? In the national accounts, capital gains/revaluations aren’t counted as part of “Income.” It’s no wonder the Saving/Net Worth equality doesn’t balance; a whole bunch of household “Income” is missing from “Saving.” (Should capital gains be counted as Income and included in Saving? More on that below.)

Personal Income increased 0.4% in November, Spending increased 0.6% --The BEA released the Personal Income and Outlays report for November:  Personal income increased $54.4 billion, or 0.4 percent ... in November, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $67.9 billion, or 0.6 percent....Real PCE -- PCE adjusted to remove price changes -- increased 0.7 percent in November, compared with an increase of 0.2 percent in October. ... The price index for PCE decreased 0.2 percent in November, in contrast to an increase of less than 0.1 percent in October. The PCE price index, excluding food and energy, increased less than 0.1 percent, compared within an increase of 0.2 percent. ... The November price index for PCE increased 1.2 percent from November a year ago. The November PCE price index, excluding food and energy, increased 1.4 percent from November a year ago. The following graph shows real Personal Consumption Expenditures (PCE) through November 2014 (2009 dollars). Note that the y-axis doesn't start at zero to better show the change. The dashed red lines are the quarterly levels for real PCE.Using the two-month method to estimate Q4 PCE growth, PCE was increasing at a 4.3% annual rate in Q4 2014 (using the mid-month method, PCE was increasing 4.5%). It looks like Q4 will be a strong quarter for PCE growth - revise up those Q4 GDP forecasts!

The Latest on Real Disposable Income Per Capita - With the release of the pre-Thanksgiving report on October Personal Incomes and Outlays we can now take a closer look at "Real" Disposable Personal Income Per Capita. The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000. This indicator was significantly disrupted by the bizarre but predictable oscillation caused by 2012 year-end tax strategies in expectation of tax hikes in 2013. The October nominal 0.11% month-over-month increase disposable income drops to 0.06% when we adjust for inflation. The year-over-year metrics are 3.23% nominal and 1.75% real. The BEA uses the average dollar value in 2009 for inflation adjustment. But the 2009 peg is arbitrary and unintuitive. For a more natural comparison, let's compare the nominal and real growth in per capita disposable income since 2000.   Nominal disposable income is up 60.5% since then. But the real purchasing power of those dollars is up only 20.8%.  Let's take one more look at real DPI per capita, this time focusing on the year-over-year percent change since the beginning of this monthly series in 1959. I've highlighted the value for the months when recessions start to help us evaluate the recession risk for the current level.

US retailers may only just meet holiday sales forecasts: U.S. consumers have not turned out in force for the final shopping days before Christmas, suggesting that traditional retailers will just meet industry sales forecasts in a season marked by deep discounts and growing encroachment from online rivals led by Inc. Super Saturday - the last pre-Christmas Saturday, which fell on Dec. 20 this year - failed to make up for spotty performance this season. That included a disappointing Black Friday, the day after the U.S. Thanksgiving holiday that is typically one of the busiest shopping days of the year. "The past weekend will not save this holiday season," . "But combined with online sales, it would certainly save the year from being a dismal one." Johnson said if sales hold up in the next few days and the week after Christmas, retailers may finish close to his company's November and December forecast of 3.4 percent growth in store and online sales. He estimates that Super Saturday weekend sales, which include store and online, rose 2.5 percent to $42 billion this year.  The National Retail Federation (NRF), the leading industry trade body, forecast a 4.1 percent rise in holiday sales this year, including online and store sales. The NRF is hoping to meet its expectations amid falling gasoline prices, lower U.S. unemployment and consumer spending which showed signs of increasing during the first two weeks of December.

Rise in Loans Linked to Cars Is Hurting Poor - The rusting 1994 Oldsmobile sitting in a driveway just outside St. Louis was an unlikely cash machine.That was until the car’s owner, a 30-year-old hospital lab technician, saw a television commercial describing how to get cash from just such a car, in the form of a short-term loan..”Her loan carried an annual interest rate of 171 percent. More than two years and $992.78 in debt later, her car was repossessed.  “These companies put people in a hole that they can’t get out of,” Ms. O’Connor said.The automobile is at the center of the biggest boom in subprime lending since the mortgage crisis. The market for loans to buy used cars is growing rapidly.And similar to how a red-hot mortgage market once coaxed millions of borrowers into recklessly tapping the equity in their homes, the new boom is also leading people to take out risky lines of credit known as title loans. They are, roughly speaking, the home equity loans of subprime auto. In these loans, which can last as long as two years or as little as a month, borrowers turn over the title of their cars in exchange for cash — typically a percentage of the cars’ estimated resale values. “Turn your car title into holiday cash,” TitleMax, a large title lender, declared in a recent television commercial, showing a Christmas stocking overflowing with money. More than 1.1 million households in the United States used auto title loans in 2013, according to a survey by the Federal Deposit Insurance Corporation — the first time the agency has included the loans in its annual survey.Title loans are an increasingly prevalent form of high-cost, short-term credit in subprime finance, as regulators in a number of states crack down on payday loans.

Vehicle Sales Forecasts: "Strongest December in 10 Years", 17 Million in 2015 -- The automakers will report December vehicle sales on Monday, Jan 5th. Sales in November were at 17.1 million on a seasonally adjusted annual rate basis (SAAR), and it appears sales in December might be close to 17 million SAAR again.Note:  There were 26 selling days in December this year compared to 25 last year. Here are a few forecasts: From WardsAuto: Forecast: December Sales Set to Reach 10-Year High A WardsAuto forecast calls for U.S. automakers to sell 1.51 million light vehicles in December, which would be the second-highest December sales tally since at least 1980, just behind December 2004’s 1.53 million. ... From J.D. Power: Vehicle Sales Forecast Increases for 2014 and 2015; December Retail SAAR Highest Since 2006Total light-vehicle sales in December 2014 are expected to reach 1.5 million units, a 6 percent increase, compared with December 2013. [Total forecast 16.7 million SAAR] ..From Kelley Blue Book: New-Vehicle Sales To Jump Nearly 10 Percent In Best December Since 2004; Kelley Blue Book Forecasts 16.9 Million SAAR In 2015 In December, new light-vehicle sales, including fleet, are expected to hit 1,490,000 units, up 9.8 percent from December 2013 and up 14.7 percent from November 2014. The seasonally adjusted annual rate (SAAR) for December 2014 is estimated to be 16.7 million, up from 15.4 million in December 2013 and down from 17.1 million in November 2014.And on 2015 from TrueCar: TrueCar projects 2015 U.S. new auto sales to reach decade-high 17 million, set all-time record revenue of $553 billion TrueCar, Inc. ... expects a healthy U.S. auto industry in 2015 with sales of new cars and trucks rising at least 2.6 percent to 17 million units, the highest level since 2005.

UMich Consumer Confidence Near 8-Year High, Inflation Expectations Hit 4-Year Lows - Despite the collapse of inflation expectations in last month's UMich confidence, the push to 7-year highs was unstoppable (though missing expectations)...after soaring confidence amid Ebola scares and crashing stocks in October, even the surveyers were questioning the respondents' replies "it would be surprising if recent declines in household wealth did not reverse some of the recent gains in optimism in the months ahead." But sure enough, to maintain the magic, UMich consumer confidence rose from November's missed expectations to the highest since Jan 2007 at 93.6. Inflastion expectations for the next year fell from the preliminary to the lowest in over 4 years.

Plunging Gas Prices Pull Down November CPI -- The monthly Consumer Price Index dropped -0.3% for November. That's some serious deflation but not to worry, it's all about falling oil prices. Gasoline prices declined the steepest since December 2008. Inflation with gas and food removed increased a very tame 0.1%. CPI measures inflation, or price increases. CPI has only increased 1.3% from a year ago due to the collapse in gasoline and is shown in the below graph. Great news for those who drive a lot. Core inflation, or CPI with all food and energy items removed from the index, increased 0.1% and has increased 1.7% for the last year. Core CPI is one of the Federal Reserve inflation watch numbers and 2.0% per year is their target rate. Graphed below is the core inflation change from a year ago. Core CPI's monthly percentage change is graphed below. Deflation is a grave concern for the Federal Reserve and they appear to be keeping interest rates low regardless. Onto the big story in this month's report. Energy overall declined -3.8% for the month and energy costs are now down -4.8% from a year ago. This decline should be even more dramatic next month since oil & gas prices are still dropping like a stone. The BLS separates out all energy costs and puts them together into one index. This index includes gasoline which dropped -6.6% for the month and has declined -10.5% for the year. Fuel oil dropped -3.5% for the month, down -10.1% for the year. Natural gas is now up 3.2% from a year ago with a monthly decline of -1.7%. Electricity increased 0.1% for the month and is now up 2.8% for the year. Graphed below is the overall CPI energy index. Graphed below is the CPI gasoline index only, which shows gas prices wild ride. Gasoline is best news. Core inflation's components include shelter, transportation, medical care and anything not food or energy.  The shelter index is comprised of rent, the equivalent cost of owning a home, hotels and motels.   Shelter increased 0.3% and is up 3.0% for the year.  The cost of housing is clearly jumping up and considering most wages cannot afford a one bedroom apartment in many areas of the country, this is disconcerting.  Rent increased 0.3% for the month, 3.5% for the year. 

Weekly Gasoline Price Update: Down Another 15 Cents - It's time again for my weekly gasoline update based on data from the Energy Information Administration (EIA). Rounded to the penny Regular dropped 15 cents and Premium 14 cents. Regular is now at its lowest price since May 2009. Will the price decline in gasoline boost discretionary spending during the holiday season? Stay tuned!  According to, Hawaii has the highest cost at $3.57. The highest continental average price is in New York at $2.87. Oklahoma has the cheapest Regular at $2.04.

Gas Stations in 24 States Drop Prices to $2 a Gallon  An oil boom has pushed gas prices at some stations, as of Saturday, down to as little as $2 a gallon.Price tracking service found that pockets of low prices below $2 have also cropped up across the country, while average prices across the U.S. are tracking at $2.43 a gallon.“As of this morning, there are 24 states with prices under $2 a gallon,” GasBuddy’s senior petroleum analyst told USAToday.  Commuters in Missouri have reaped the biggest windfalls, with gas dropping to $1.96 a gallon in Springfield–and even lower in some outlying towns.  With Saudi Arabia’s announcement in September that it would keep the oil flowing, despite falling prices, analysts predict that gas prices have not bottomed out just yet. American Automobile Association analysts expect prices to fall by another seven cents, just in time for Christmas.

More evidence of a consumer blast-off courtesy of cheap gas -- No graphs this time, but I wanted to point out that there were a slew of reports this morning confirming that low gas prices (and maybe an asssist from consistent stronger job growth, and maybe a little bit of wage growth), have caused a real surge in consumer sentiment and behavior in the US. Here's the list:

  • Personal spending for November rose a strong +0.6%.
  • ICSC same store sales for last week were reported up +3.3% for the week, and +3.1% YoY.
  • Redbook same store sales last week were up +5.3% YoY, the third-strongest showing all year.
  • Consumer sentiment from the University of Michigan at 93.6, down just 0.2 from two weeks ago, and  together the strongest monthly showing bar one since 2005.
  • Gallup's 3 day average of consumer spending hit $130 on December 14th for only the second time since the onset of the last recession
  • Gallup's daily Economic Confidence index just had the best daily (-1) and weekly (-4) readings since before the last recession.

It is crystal clear that in the last 2 to 3 months, there has been a real change in attitude among average Americans about the economy, and their wallets are showing it.

Bloomberg's Commodity Index Drops To Lowest Since 2009: What Does It Mean? - Moments ago we learned that for all talk of a commodity "bottom", the "energetic" dead cat has resumed its inverse bounce. To wit: Commodities Extend Drop to Lowest Since ’09 as Oil Loss Deepens.   So what does that mean? The answer: it all depends on whose narrative one chooses to believe and/or which narrative the US Ministry of truth is promoting on any given day in order to boost confidence. The main plotline now is simple: plunging commodity prices (just don't call them deflation, "negative inflation" is much better) are a huge tax cut on the US consumer the pundits will have you know. And why not: so simple a Jonahtan Gruber could have come up with it.  The only problem is that you learn all this from the same pundits who told you just a few months ago, that soaring commodity prices are great for the economy, for jobs, and, drumroll, for the consumer. Behold CNBC from March 2014: Booming US energy sector feeds manufacturing, may overtake it  Could the booming U.S. energy sector assume the mantle that Detroit's big automakers once held in the economy? Although it's still too early to tell, recent trends suggest soaring energy production may replace automobile manufacturing as an economic powerhouse. Even as the U.S. recovery falters, manufacturing and energy are in the midst of a broad expansion that is helping to generate growth.

U.S. Durable Orders Fall 0.7% in November - WSJ: Orders for big-ticket manufactured goods fell in November, a sign of weaker business spending in the final stretch of the year. Purchases of durable goods—products like airplanes, cars and heavy machinery that are designed to last at least three years—fell 0.7% in November from the prior month to a seasonally adjusted $242.28 billion, the Commerce Department said Tuesday. Economists surveyed by The Wall Street Journal had forecast a 3% rise in new orders. Durable-goods orders have fallen two of the past three months, suggesting that a surge in business spending over the spring and summer may be over. Durable-goods orders rose 0.3% in October and fell by 0.7% in September. “November durable-goods orders data signaled a weaker handoff into the final quarter of the year,” . A decline in defense-aircraft orders led the decline in November durable-goods orders after helping to buoy them in October. Defense-aircraft orders fell 7.8% last month after surging 43.5% in the prior month. Outside this volatile category, the November data pointed to weak underlying demand for manufactured goods. Excluding transportation, orders fell 0.4%. Excluding defense, orders fell 0.1%.

Durables Goods Data Ugly Across The Board, Worst Since Polar Vortex -- Against expectations of a jubilant 3% surge in November, Durable Goods Orders slipped 0.7% - the biggest miss since December 2013. Perhaps even more worrisome, YoY Durable Goods Orders rose at a mere 0.3% - the slowest since the Polar Vortex. Across the board the data was a disaster, ex-Transports -0.4% (against expectations of a 1% rise), Cap Goods Order non-defense were unchanged (against expectations of a 1% rise) and shipments rose just 0.2% (missing expectations of a 1.3% rise)...

Weekly Initial Unemployment Claims decreased to 280,000 - From the DOL reported: In the week ending December 20, the advance figure for seasonally adjusted initial claims was 280,000, a decrease of 9,000 from the previous week's unrevised level of 289,000. The 4-week moving average was 290,250, a decrease of 8,500 from the previous week's unrevised average of 298,750. There were no special factors impacting this week's initial claims. The previous week was unrevised. The following graph shows the 4-week moving average of weekly claims since January 2000.

Chances of Finding Full-time Employment Have Improved - Atlanta Fed's macroblog - Today's sharp upward revision to the third-quarter GDP reading reinforces the view that the underlying strength of the U.S. economy has been sufficient to support more rapid improvement in the labor market. Last week we noted the solid and broad-based recent improvement in the involuntary part-time work (part-time for economic reasons or PTER) situation over the last year, noting significant declines in the stock of PTER workers across industrial sectors and occupational categories.   In this post we look at labor market improvement over the last year in terms of worker flows. Because the Current Population Survey is set up as a rotating panel, many of the people in the survey in any given month were in the survey a year earlier as well. This allows us to ask the question: if you were an unemployed prime-age individual (25–54 years old) or working PTER one year ago, what are you doing today? Have your chances of becoming employed full-time improved? Chart 1 shows the distribution of labor market outcomes of prime-age workers who were PTER one year earlier. Chart 2 shows the distribution of outcomes for those who were unemployed one year earlier. The data are 12-month moving averages to smooth out seasonal variation.

Oil Jobs Squeezed as Prices Plummet -- U.S. oil and gas companies have been an engine of growth through much of an otherwise lackluster economic expansion, providing steady employment, solid wages and fierce competition for workers across wide swaths of the country.  Now, after a roughly 50% plunge in oil prices, exploration and production companies are cutting capital budgets, service companies are weighing layoffs and nonenergy firms that popped up to support the industry are bracing for a protracted slowdown.  One company caught in the industry downturn is Hercules Offshore Inc. The Houston-based firm is laying off 324 employees, roughly 15% of its workforce, because oil companies aren’t renewing contracts for its offshore drilling rigs in the Gulf of Mexico while crude prices are depressed.  Lower oil prices are still expected to provide an overall boost to the U.S. economy. Consumers are spending less on gasoline and more at retailers and restaurants, while many companies are benefiting from cheaper costs for energy and raw materials—giving a boost to hiring outside the energy sector. Money that would have gone to imported oil—the U.S. remains a net importer—will remain at home. The U.S. Energy Information Administration said the average U.S. household is expected to spend about $550 less on gasoline next year than in 2014. And HSBC expects lower gasoline prices will boost consumer spending enough to add 0.4 percentage point to the U.S. growth rate for gross domestic product next year, a sizable bump for an economy that has struggled to sustain momentum.

Philly Fed: State Coincident Indexes increased in 44 states in November - From the Philly FedThe Federal Reserve Bank of Philadelphia has released the coincident indexes for the 50 states for November 2014. In the past month, the indexes increased in 44 states, decreased in two, and remained stable in four, for a one-month diffusion index of 84. Over the past three months, the indexes increased in 48 states and decreased in two, for a three-month diffusion index of 92. Note: These are coincident indexes constructed from state employment data. An explanation from the Philly Fed:  The coincident indexes combine four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables in each coincident index are nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). The trend for each state’s index is set to the trend of its gross domestic product (GDP), so long-term growth in the state’s index matches long-term growth in its GDP.This is a graph is of the number of states with one month increasing activity according to the Philly Fed. This graph includes states with minor increases (the Philly Fed lists as unchanged). In November, 47 states had increasing activity (including minor increases). This measure declined sharply during the winter, but is close to normal for a recovery. Here is a map of the three month change in the Philly Fed state coincident indicators. This map was all red during the worst of the recession, and is mostly green again.  In will be interesting to see if several oil producing states - such as Texas, North Dakota, Alaska and Oklahoma - turn read in 2015.

Exclusive: U.S. minimum wage hikes to affect 1,400-plus Walmart stores - (Reuters) - Minimum wage increases across the United States will prompt Wal-Mart Stores Inc (WMT.N) to adjust base salaries at 1,434 stores, impacting about a third of its U.S. locations, according to an internal memo reviewed by Reuters. The memo, which was sent to store managers earlier this month, offers insight into the impact of minimum wage hikes in 21 states due to come into effect on or around Jan. 1, 2015. These are adjustments that Wal-Mart and other employers have to make each year, but growing attention to the issue has expanded the scope of the change. Thirteen U.S. states lifted the minimum wage in 2014, up from 10 in 2013 and 8 in 2012. Wal-Mart spokeswoman Brooke Buchanan said the company was making the changes to "ensure our stores in the 21 states comply with the law." For Wal-Mart, the biggest private employer in the United States with 1.3 million workers, minimum wage legislation is not a small thing. Its operating model is built on keeping costs under close control as it attracts consumers with low prices and operates on tight margins.

Obama labor board comes down hard on McDonald’s - In a significant victory for fast-food demonstrators, the Obama administration filed 13 legal complaints on Friday against McDonald’s USA, LLC, alleging 78 instances in which it violated federal labor law by punishing workers for taking part in fast-food protests.This is the first time the fast-food giant has been held even partly responsible for labor violations allegedly committed by any of its 2,500 independent owners or franchisees. The franchisees operate their restaurants under contracts with McDonald’s that explicitly free the company of any responsibility for hiring, firing and supervising restaurant employees.Story Continued Below The complaints allege that the company and its franchisees retaliated against protesters by reducing their hours or firing them. It’s illegal to retaliate against any worker for “concerted activities” to protest workplace conditions, even when no union organizing takes place — which was almost always the case in the fast-food protests.The action, undertaken by the National Labor Relations Board’s general counsel, will be met immediately by a high-spending business campaign to counter it through litigation, lobbying and public relations. The International Franchise Association, the most active Big Business lobby opposing the complaints, has already retained lobbyists at the law firm Akin Gump Strauss Hauer & Feld, including Ed Pagano, a former Senate liaison and deputy assistant to President Barack Obama.

There Should Be Overtime Protection—and Pay—For Anyone Paid Less Than $51,000 a Year - In March 2014, President Obama directed Secretary of Labor Tom Perez to prepare an update of the regulations that govern exemptions from the Fair Labor Standards Act (FLSA) requirement that employers pay time-and-a-half for work beyond 40 hours in a week. The so-called “white collar” exemptions for professionals, executives, and administrators include a threshold salary below which every employee is guaranteed overtime pay regardless of his or her work duties. Above that salary level, the employer doesn’t have to pay anything for overtime hours—not even minimum wage—if the work performed meets certain criteria. The salary threshold has rarely been increased, and since 1975, its real value has been eroded by inflation. It currently stands at $455 a week, or $23,660 a year—below the poverty level for a family of four and nothing like a true executive or professional salary. Whereas 65% of salaried workers were guaranteed overtime coverage by the salary threshold in 1975, just 11% are covered today. In the past year, four significant proposals have been made to update the salary threshold, and each would guarantee coverage to a different number of workers. The figure and table below show that as the threshold increases, millions more employees are guaranteed overtime coverage.

Wealth inequality and the marginal propensity to consume -  If someone handed you $10 right now, what would you do with it? Would you decide to spend it right away? Or would you stash it away? Or some combination of the two? The answer to that question would in part reveal your marginal propensity to consume, or MPC for short. This statistic goes a long way toward understanding the consumption behaviors of families. More or less, it tells us how much more spending happens when a household or individual gets more income or wealth. Economists have long debated what determines the marginal propensity to consume and its level to understand changes in demand in the economy. A new working paper looks at how the amount of wealth inequality can affect the marginal propensity to consume and the resulting implications for policy. The authors built a model that tries to replicate the dynamics that determine the amount of wealth inequality in an economy. In figuring out the dynamics that lead to the current levels of wealth inequality in the United States, the model also reveals the marginal propensity to consume among households across the wealth spectrum of the nation. Carroll and his co-authors find an aggregate MPC, or average MPC for all households, ranging between 0.2 and 0.4. Their estimate is on the high end of other estimates. Their results mean, to return to the question posed above, if I gave you $10, you’d spend between $2 and $4. Not everyone would spend these extra bucks the same way, of course, because not everyone has the same marginal propensity to consume. The authors find a wide dispersion in the MPC across the wealth distribution. For the most part, less wealthy households have much higher MPCs than wealthier households. But the economists find that the ratio between wealth and income is the key determinant of the MPC.

The Doom Boom: US Families Increasingly Prepared For "Modern Day Apocalypse" -- From the outside America may seem to be a land of endless optimism and confidence. But, as Sky News reports, an increasing number of Americans seem to think it is danger of falling apart, and they're preparing for the end. "We're not talking about folks walking around wearing tin foil on their heads,; we're not talking about conspiracy theorists. I'm talking about professionals: doctors and lawyers and law enforcement and military. Normal, everyday people. They can't necessarily put their finger on it. But there's something about the uncertainty of our times. They know something isn't quite right."

Some States See Budgets at Risk as Oil Price Falls - States dependent on oil and gas revenue are bracing for layoffs, slashing agency budgets and growing increasingly anxious about the ripple effect that falling oil prices may have on their local economies.The concerns are cutting across traditional oil states like Texas, Louisiana, Oklahoma and Alaska as well as those like North Dakota that are benefiting from the nation’s latest energy boom.“The crunch is coming,” said  Experts and elected officials say an extended downturn in oil prices seems unlikely to create the economic disasters that accompanied the 1980s oil bust, because energy-producing states that were left reeling for years have diversified their economies. The effects on the states are nothing like the crises facing big oil-exporting nations like Russia, Iran and Venezuela. But here in Houston, which proudly bills itself as the energy capital of the world, Hercules Offshore announced it would lay off about 300 employees who work on the company’s rigs in the Gulf of Mexico at the end of the month. Texas already lost 2,300 oil and gas jobs in October and November, according to preliminary data released last week by the federal Bureau of Labor Statistics.On the same day, Fitch Ratings warned that home prices in Texas “may be unsustainable” as the price of oil continues to plummet. In Louisiana, the drop in oil prices had a hand in increasing the state’s projected 2015-16 budget shortfall to $1.4 billion and prompting cuts that eliminated 162 vacant positions in state government, reduced contracts across the state and froze expenses for items like travel and supplies at all state agencies. And in Alaska — where about 90 percent of state government is funded by oil, allowing residents to pay no state sales or income taxes — the drop in oil prices has worsened the budget deficit and could force a 50 percent cut in capital spending for bridges and roads.

A Bipartisan Push to Limit Lobbyists’ Sway Over Attorneys General -- In state legislatures and major professional associations, a bipartisan effort is emerging to change the way state attorneys general interact with lobbyists, campaign donors and other corporate representatives. This month, during a closed-door meeting of the National Association of Attorneys General, officials voted to stop accepting corporate sponsorships. In Missouri, a bill has been introduced that would require the attorney general, as well as certain other state officials, to disclose within 48 hours any political contribution worth more than $500. And in Washington State, legislation is being drafted to bar attorneys general who leave office from lobbying their former colleagues for a year. Perhaps most significant, a White House ethics lawyer in the administration of George W. Bush has asked the American Bar Association to change its national code of conduct to prohibit attorneys general from discussing continuing investigations or other official matters while participating in fund-raising events at resort destinations, as they often now do. Those measures could be adopted in individual states. The actions follow a series of articles in The New York Times that examined how lawyers and lobbyists — from major corporations, energy companies and even plaintiffs’ law firms — have increasingly tried to influence state attorneys general. These outside players have tried to shut down investigations, enlist the attorneys general as partners in litigation, or use their clout to try to block or strengthen regulations emerging from Washington, the investigation by The Times found.

Americans are 40% poorer than before the recession - The Great Recession is officially over, but Americans are still 40% poorer today than they were in 2007, the year before the global financial crisis. The net worth of American families — the difference between the values of their assets, including homes and investments, and liabilities — fell to $81,400 in 2013, down slightly from $82,300 in 2010, but a long way off the $135,700 in 2007, according to a new report released on Friday by the nonprofit think-tank Pew Research Center in Washington, D.C. “The Great Recession, fueled by the crises in the housing and financial markets, was universally hard on the net worth of American families,” the report found. There is also a dramatic disparity in net worth between races. The median net worth of white households was $141,900 in 2013, down 26% since 2007. It declined by 42% to $13,700 over the same period for Hispanic households and fell by 43% to $11,000 for African-American households. One theory for the wealth gap: White households are more likely than other ethnicities to own stocks directly or indirectly through retirement accounts, the Pew report said.

A day with modern Detroit pioneers in a squatter community: The destination is Fireweed Universe City, a collective community just off Woodward Avenue a few blocks outside Highland Park. The residents of the three-block community — which has garnered little media attention — have been dubbed hippies, pioneers, and other romantic monikers. Fireweed really is a squatters community, or at least that’s how it started. In 2011, as Occupy Detroit petered out, a group of the protesters found themselves without residence and made their way on to Goldengate Street, a semi-occupied residential street. Hilldale, a standard residential street on one side of Goldengate is flanked by Robinwood, with 60 out of 66 homes vacant at the time. One more street over is Hollywood; it’s the polar opposite of what one would expect of a street named after glamourous city. Instead it is the most unnerving place I’ve ever set foot. I’m told this is where crack and heroin dealers live. My contact, Charlie Beaver, is a 52-year-old former construction worker who has lived in Fireweed for near three years. “It was a little rough in the beginning because one of the guys ended up being a thug robber and had one prostitute working here and was selling crack,” said Beaver. “He robbed one of the couch surfers at gunpoint. There’s been a lot of troublemakers and I almost left because it was just too chaotic. … The bad people kinda just started disappearing and good people were showing up.”

NCCP | Child Poverty -- More than 16 million children in the United States – 22% of all children – live in families with incomes below the federal poverty level – $23,550 a year for a family of four. Research shows that, on average, families need an income of about twice that level to cover basic expenses. Using this standard, 45% of children live in low-income families.Most of these children have parents who work, but low wages and unstable employment leave their families struggling to make ends meet. Poverty can impede children’s ability to learn and contribute to social, emotional, and behavioral problems. Poverty also can contribute to poor health and mental health. Risks are greatest for children who experience poverty when they are young and/or experience deep and persistent poverty. Research is clear that poverty is the single greatest threat to children’s well-being. But effective public policies – to make work pay for low-income parents and to provide high-quality early care and learning experiences for their children – can make a difference. Investments in the most vulnerable children are also critical.

“High quality” preschools: Read the fine print -- AEI early-childhood education expert Katharine Stevens writes in the Wall Street Journal that the December 10, 2014 award of $750 million to states, district, agencies and non-profits is nothing but a Trojan horse.  Personally highlighted by President Obama, Education Secretary Arne Duncan, and HHS Secretary Sylvia Burwell, the Early Head Start-Child Care Partnerships and the Preschool Development Grants include a mountain of costly, hard to follow federal regulations (including 2,400 Head Start performance standards stipulating how to clean potties or place a cot in a room) and a “qualified workforce” requirement which mandates that all preschool teachers must have a college degree even though it would cost the 300,000 current teachers who don’t have a degree $23 billion to comply.  Stevens explains that preschool teacher quality and pay should be defined by effectiveness in the classroom – not by credentials. She notes that the new rule will keep many talented teachers from entering the profession, and that there are other ways to ensure academic ability.

Anti-intellectualism is taking over the US -  Recently, I found out that my work is mentioned in a book that has been banned, in effect, from the schools in Tucson, Arizona.  I invite you to read the book in question, titled Critical Race Theory: An Introduction, so that you can decide for yourselves whether it qualifies. In fact, I invite you to take on as your summer reading the astonishingly lengthy list of books that have been removed from the Tucson public school system as part of this wholesale elimination of the Mexican-American studies curriculum. The authors and editors include Isabel Allende, Junot Díaz, Jonathan Kozol, Rudolfo Anaya, bell hooks, Sandra Cisneros, James Baldwin, Howard Zinn, Rodolfo Acuña, Ronald Takaki, Jerome Skolnick and Gloria Anzaldúa. Even Thoreau's Civil Disobedience and Shakespeare's The Tempest received the hatchet. Trying to explain what was offensive enough to warrant killing the entire curriculum and firing its director, Tucson school board member Michael Hicks stated rather proudly that he was not actually familiar with the curriculum. "I chose not to go to any of their classes," he told Al Madrigal on The Daily Show. "Why even go?" In the same interview, he referred to Rosa Parks as "Rosa Clark." The situation in Arizona is not an isolated phenomenon. There has been an unfortunate uptick in academic book bannings and firings, made worse by a nationwide disparagement of teachers, teachers' unions and scholarship itself. Brooke Harris, a teacher at Michigan's Pontiac Academy for Excellence, was summarily fired after asking permission to let her students conduct a fundraiser for Trayvon Martin's family. Working at a charter school, Harris was an at-will employee, and so the superintendent needed little justification for sacking her. According to Harris, "I was told… that I'm being paid to teach, not to be an activist."

Little College Guidance: 500 High School Students Per Counselor - A steady stream of teenagers fidgeting with forms and their backpacks flowed through the Midwood High School college office one day this month, all with lists of questions on their minds. But one of the school’s two college counselors was nowhere to be found. She had taken refuge in another office, a quieter spot where she tried to pump out as many college recommendation letters as she could. “We take turns,” said Lorrie Director, the other college counselor at Midwood, “There’s really no other way,” she continued. “I tell the kids, there are 766 of you, and there’s two of us.” While small private schools can often afford to provide their students with tremendous hand-holding, large public high schools across the country struggle with staggering ratios of students to guidance counselors. Nationally, that ratio is nearly 500 to 1, a proportion experts say has remained virtually unchanged for more than 10 years. And when it comes time to apply to college, all of the students need help at once.And in some schools, there is nothing. The federal Education Department’s Office for Civil Rights said this year that one in five high schools in the country had no school counselor at all.

White House and Census Set to Collide Over College Education Data - Two government initiatives seeking to understand the value of a college education are about to butt heads. The White House spelled out a plan Friday to rank the nation’s 5,000 colleges and universities, reasoning that students need more information before committing to the hefty expense of higher education. At the same time, and with much less fanfare, the U.S. Census Bureau has proposed ending its efforts to collect data on college majors. “It feels like the left hand doesn’t know what the right hand is doing,” said Anthony Carnevale, the director of Georgetown University’s Center on Education and the Workforce, who uses the Census Bureau’s American Community Survey data for research on the value of different college degrees. “We’re going through lots of hand-wringing and political struggle trying to figure out how to inform the public on the value of the colleges they go to,” said Mr. Carnevale. “What we know, largely because of the ACS data, is it’s not about the value of colleges, it’s about the value of the major you take when you go to college." The Census proposed removing seven sets of data from the ACS. In addition to ceasing data collection on college majors, the Census would drop five questions about people’s marital status, and one housing question from their survey. While seven questions are currently being considered for elimination, 17 more have been identified by Census as “low-benefit” and in need of further scrutiny. The White House, meanwhile, has released a draft framework to rate schools on graduation and retention rates, the ability of graduates to pay back student loans, and whether schools include low-income and first-generation students. This initiative, run out of the Department of Education, would not rely on ACS data. But both the Census data and the Department of Education data speak directly to the same question: how valuable is a college education?

College Students Across America Protest Santa Claus -- After weeks of preparation by an umbrella group that calls itself the Santa Claus Repudiation Organization Offering Greater Education, students at campuses across America spent Christmas Eve protesting what they consider a dangerous symbol of everything that is wrong with the world today.

Science Journal Fraud: Paying for Placement -- Yves here. Corruption has become the biggest growth business in the US. The latest example is the subversion of peer-reviewed research in top scientific journals. This isn’t as crass as pay to play in public pension funds, but the results are just as bad. Here, it appears that Chinese services are offering a whole menu of scholarly paper placement services. That does not mean helping you get your paper placed, but letting you buy a completed and not necessarily valid paper and charging you for getting it published with you as an author, with the price depending on the impact factor of the publication. The article also describes other scams, such as bogus peer reviews. The Chinese services are so large scale that it enabled them to be caught out. But that raised the uncomfortable question of how many other vendors there are who operate with more finesse and on a smaller scale and have yet to be exposed.

Debt Collectors Hound Millions of Retired Americans -- Faced with a fixed income and constantly rising cost of living, many seniors now spend their "golden years" juggling bills and fending off debt collectors. "If they get a phone call at 10 o'clock at night and the caller is harassing them for a debt, it can be very scary," said Amy Nofziger with the AARP Foundation. "We know that it causes a lot of stress for seniors because some of these debt collectors can use foul language and other forms of harassment to try to collect the debt." Nofziger told NBC News that some people pay off debts just to stop the calls, even though they don't believe they truly owe the money.The Consumer Financial Protection Bureau (CFPB) recently reported that for older Americans, debt collection is the top complaint. About one out of three complaints submitted to the agency by seniors is about debt collection. The major complaints include being hounded for medical debts currently in dispute, attempts to collect the debts of deceased family members from their relatives, and illegal threats to garnish Social Security and other federal benefits.

The Real Risk of Pension Plans: They Give Retirees False Security - Retirement security is ending the year at an all-time low. The $1.1 trillion last-minute spending bill will allow trustees to cut benefits in multiemployer defined benefit pension plans. And while it affects a relatively small population, 10 million people at most, it opens the door for other employers to make similar cuts. Maybe that’s a long way off; maybe not. But the provision is a rude awakening: We may romanticize guaranteed retirement benefits and lament our 401(k) world, but pensions aren’t safe these days either. Until recently, a pension benefit seemed as good as money in the bank. Companies or governments set aside money for employees’ retirements; the sponsors were on the hook for funding the promised benefits appropriately. In recent years, it has become clear that most pension plans are falling short, but accrued benefits normally aren’t cut unless the plan, or employer, is on the verge of bankruptcy—high-profile examples include airline and steel companies. Public pension benefits appear even safer, because they are guaranteed by state constitutions. By comparison, 401(k) and other defined contribution plans seem much less reliable. They require employees to decide, individually, to set aside money for retirement and to invest it appropriately over the course of 30 or so years. Research suggests that people are remarkably bad at both: About 20 percent of eligible employees don’t participate in their 401(k) plan. Those who do save too little, and many choose investments that underperform the market, charge high investment fees, or both.

Teaching Hospitals Hit Hardest By Medicare Fines For Patient Safety  -- Medicare has begun punishing 721 hospitals with high rates of infections and other medical errors, cutting payments to half of the nation's major teaching hospitals and many institutions that are marquee names.Intermountain Medical Center in Utah, Ronald Reagan UCLA Medical Center in Los Angeles, the Cleveland Clinic, Geisinger Medical Center in Pennsylvania, Brigham and Women's Hospital in Boston, NYU Langone Medical Center and Northwestern Memorial Hospital in Chicago are all being docked 1 percent of their Medicare payments through next September, federal records show.In total, hospitals will forfeit $373 million, Medicare estimates.The federal health law required Medicare to lower payments for the quarter of hospitals with the highest rates of hospital-acquired conditions, or HACs.These avoidable complications include infections from central-line catheters, blood clots and bedsores.The penalties come as hospitals are showing some success in reducing harmful errors. A recent federal report found that the frequency of mistakes dropped by 17 percent between 2010 and 2013, an improvement that Health and Human Services Secretary Sylvia Burwell called "a big deal, but it's only a start." Even with the reduction, 1 in 8 hospital admissions in 2013 included a patient injury.

So Far, 6.4 Million Obtain Health Care Coverage for 2015 in Federal Marketplace - — The Obama administration said Tuesday that 6.4 million people had selected health insurance plans or had been automatically re-enrolled in coverage through the federal insurance marketplace.New customers accounted for 30 percent of the total, or 1.9 million.For 2014 enrollees who took no action by Dec. 15, coverage was automatically renewed for 2015 by the federal government.Sylvia Mathews Burwell, the secretary of health and human services, who is in charge of the federal marketplace, said she did not know how many people had been automatically re-enrolled by her department. But she and her aides suggested that the number was in the range from 2.7 million to three million.  Dec. 15 was the deadline to sign up for coverage that would start on Jan. 1. The automatic or passive re-enrollments, combined with a surge of interest among consumers just before the deadline, produced a big increase in activity in the federal marketplace. People could sign up a first time, switch to new plans, choose to extend coverage in their current plans for a year, or do nothing and be re-enrolled in the same or similar plans.In the first four weeks of the three-month open enrollment period, through Dec. 12, nearly 2.5 million people selected health plans, the administration said. In the week after that, more than 3.9 million people signed up or had their coverage automatically renewed, lifting the total to 6.4 million. The enrollment period ends on Feb. 15. Officials said that about 35 to 40 percent of people already enrolled had returned to the online marketplace, allowing them to shop for new health plans as the administration had recommended.

Obama Administration to Investigate Insurers for Bias Against Costly Conditions - The Obama administration said Monday that it would investigate prescription drug coverage and other benefits offered by health insurance companies to see if they discriminated against people with AIDS, mental illness, diabetes or other costly chronic conditions.The administration said it had become aware of “discriminatory benefit designs” that discouraged people from enrolling because of age or medical condition.In a letter to insurers, administration officials said that a health plan could be engaging in unlawful discrimination if its list of approved drugs excluded all medicines needed to treat a particular condition, or if it restricted access to such drugs by charging large co-payments or requiring prior authorization.The Centers for Medicare and Medicaid Services said it would focus on companies in the federal insurance marketplace. For each health plan, it said, it will try to determine the “estimated out-of-pocket costs associated with standard treatment protocols for specific medical conditions using nationally recognized clinical guidelines.” The conditions, it said, are likely to include bipolar disorder, diabetes, H.I.V., rheumatoid arthritis and schizophrenia.The Affordable Care Act says that insurers must accept all applicants for coverage and cannot charge higher premiums because of a person’s pre-existing conditions or disabilities. Advocates for people with H.I.V./AIDS and certain other illnesses have complained that insurers were unduly limiting access to benefits.

Affordable Care Act’s Tax Effects Now Loom for Filers - If you decided to skip health insurance this year, consider this: Unless you can prove you have a valid excuse, you will be liable for a penalty during the coming tax season — and the time to start making your case is now.That’s not all. People who bought subsidized insurance through one of the marketplaces may have new tax forms to complete, while paying the penalty itself may demand some serious number-crunching.The Internal Revenue Service is gearing up to answer questions, but it warns that only half of the callers may get through — and those who succeed may have to wait a half-hour or more.“There are quite a number of moving parts that taxpayers have not had to deal with,”  .The Obama administration’s Affordable Care Act — including its penalty provision — is in effect for the first time this year and will be reconciled through a person’s tax return. For most taxpayers, this will simply mean checking a box on a tax return indicating they had insurance for the full year. But millions of others will have to grapple with new tax forms and calculations that may generate unexpected results. For instance, most of the 6.7 million people who bought insurance through the exchanges received subsidies, which reduced their monthly premiums. But those subsidies were based on previous years’ income — so people whose incomes have changed will inevitably have to pay some of that money back, while others may receive fatter refunds. Paying the penalty may also deliver some surprises. People who were uninsured for more than three consecutive months may owe something. (And since the penalty will double next year, now is the time to determine how much that might cost, before it is too late to buy a health policy through a federal or state-run marketplace for 2015.)

Hold the Mayo! It's eating up billions in 'nonprofit' funds -- When I recently read an article on the Mayo Clinic web site, I saw a declaration I've never noticed before: "Mayo Clinic is a not-for-profit organization."  Nonprofit really doesn't mean a damn thing anymore, except that the institution doesn't have to pay taxes. The noble administrators and top clinical people allocate to themselves all the big bucks that might otherwise be characterized as profit.   In 2012, the most recent year for which tax filings are available online, Mayo CEO and president John Noseworthy was paid more than $1.7 million in salary and other compensation. Treasurer Harry Hoffman received over a million dollars, and six assistant treasurers received between a quarter million and six hundred thousand dollars. The Form 990 IRS filing lists 63 of the highest-paid trustees, officers and key employees, most of whom hauled in between a half-million and a million dollars. Isn't that special? Plus, they get the priceless benefit of being affiliated with a beloved and trusted "nonprofit."The Mayo Clinic provides first-class travel to meetings and fundraising events, not only to trustees but also to their spouses or companions. There is  a "supplemental retirement plan" that is "designed to roughly approximate an extension of the benefits of the Mayo Clinic pension plan to income above the Internal Revenue code Qualified Plan limit." That is so generous of them, to take such good care of each other, circumventing explicit IRS parameters.  As a "nonprofit," Mayo attracted "charitable contributions" and grants totaling $3 billion during the years 2008-1012.  Total revenue for 2012 was nearly $4 billion.  The Mayo Clinic is not an outlier among the nation's large charities and "nonprofits." Many if not most of them pay exorbitant salaries, invest billions in grandiose edifices, expend millions on fund-raising travel and galas, receive massive taxpayer support in the form of grants and waivers, and divert charitable giving from organizations which help the needy, defend the environment and protect civil liberties.

Bank Tellers Serve as Dementia Care Givers in Aging Japan - They would enter the bank and ask for their cash. Yuriko Asahara, behind the counter, would check where they would stash it -- in the side pocket of a handbag or perhaps deep down in a shoulder bag. Asahara wasn’t spying. She knew she’d have to remind them within an hour or two. Many of her clients suffered from dementia, and over two decades the bank manager became a self-taught expert in the disease. Globally, an estimated 44.4 million people suffer from dementia and the figure is projected to triple to 135.5 million in 2050 as the population ages, Alzheimer’s Disease International estimates. Nowhere is the problem more acute than in Japan, where an estimated 8 million people have dementia or show signs of developing it. By 2060, 40 percent of Japanese will be over 65, up from 24 percent today, according to National Institute of Population and Social Security Research.

Life choices 'behind more than four in 10 cancers': Latest figures from Cancer Research UK show smoking is the biggest avoidable risk factor, followed by unhealthy diets. The charity is urging people to consider their health when making New Year resolutions. Limiting alcohol intake and doing regular exercise is also good advice. According to the figures spanning five years from 2007 to 2011, more than 300,000 cases of cancer recorded were linked to smoking. A further 145,000 were linked to unhealthy diets containing too much processed food. Obesity contributed to 88,000 cases and alcohol to 62,200. Sun damage to the skin and physical inactivity were also contributing factors. "Leading a healthy lifestyle can't guarantee someone won't get cancer but we can stack the odds in our favour by taking positive steps now that will help decrease our cancer risk in future."

Our brains are being “continuously reshaped” by smartphone use - Extensive use of smartphone touch screens is changing the sensory relationship between our brains and our thumbs, a study published in Current Biology has revealed. The plasticity of the human brain and how it adapts to repetitive gestures has been tested in multiple contexts previously, including in musicians and gamers, but neuroscientists from the University of Zurich and ETH Zurich believe smartphones provide a unique opportunity to understand how everyday life can shape the human brain on a huge scale.Linking this "digital history" to brain activity was a case of using electroencephalography (EEG) to examine how regular smartphone users responded in tests compared to those who use older-style feature phones. Each set of phone users had their brain response to various mechanical touches recorded, with a focus on the thumb, forefinger, and middle finger. The results showed that in smartphone users, electrical brain activity was enhanced when each of the three fingers were being touched. The level of activity in the cortex was also found to be directly proportional to the intensity of phone use, which was qualified by the battery logs. The very tip of the thumb was even found to be sensitive to day-to-day fluctuations in phone use. The shorter the period of time that had elapsed after the last episode of intense touchscreen use, the more activity was observed in the brain.

Pharmacists Charged with 25 Murders in Meningitis Outbreak - Responsible for the deaths of at least 64 people resulting from injections of contaminated medication, the co-owner and supervisory pharmacist of a compounding pharmacy were charged this week with 25 acts of second-degree murder. Sacrificing safety standards for profit, 14 suspects associated with the pharmacy have been charged with 131 counts including conspiracy, mail fraud, racketeering, and violations of the Food, Drug, and Cosmetic Act.  In response to the 2012 nationwide fungal meningitis outbreak, the U.S. Centers for Disease Control and Prevention (CDC) reported that 751 patients in 20 states were diagnosed with a fungal infection after receiving injections of a contaminated corticosteroid called methylprednisolone acetate. Of those 751 patients, the CDC reported that 64 patients in nine states died. The Justice Department discovered the tainted corticosteroids had been compounded and shipped from the New England Compounding Center (NECC) in Massachusetts. Co-owner and head pharmacist at NECC, Barry Cadden and his supervisory pharmacist, Glenn Chin, have been charged with 25 counts of second-degree murder for their wanton negligence and complete disregard for safety protocols. Instead of sterilizing their equipment or clean room, the pharmacists allowed bacteria and mold to contaminate the room while falsifying logs claiming they had disinfected the area. Using expired ingredients, Cadden and Chin also failed to test medications for sterility before shipping them to hospitals and pain clinics. Aware that unsterile medications could kill their patients, Cadden and Chin allegedly ignored basic safety regulations in order to turn a quick profit. With over 750 patients receiving the tainted injections mostly for back pain, roughly half of them contracted a rare fungal form of meningitis. Although the fungal meningitis is not contagious, it caused the deaths of at least 64 people.

CDC Admits Its Researchers Were Exposed To Ebola Several Days Ago - The WaPo reports that researchers studying Ebola in a highly secure laboratory "mistakenly" allowed potentially lethal samples of the virus to be handled in a much less secure laboratory at the Centers for Disease Control and Prevention in Atlanta, agency officials said Wednesday. As a result, one technician in the second laboratory may have been exposed to the virus and about a dozen other people have been assessed after entering the facility unaware that potentially hazardous samples of Ebola had been handled there.  The "discovery" did not take place half a year ago when nobody had any idea how extensive the Ebola epidemic would be: it took place three days ago, on Monday afternoon. It was discovered by laboratory scientists Tuesday and within an hour reported to agency leaders.  And now that the most sophisticated disaease fighting agency in the US was exposed, literally and metaphorically, the damage control is unleashed: "At this time, we know of only the one potential exposure,” CDC Director Tom Frieden said in a telephone interview.

Harvesting crop insurance profits - Over the past three years, proposals from the Obama administration and the House Budget Committee to reform the $80 billion-a-year federal crop-insurance program have been defeated by opposition centered in the House and Senate agricultural committees. With the new Congress, Republicans and Democrats who stand for fiscal responsibility have an opportunity to finally implement reforms. Farmers have a sweet deal with crop insurance: Taxpayers currently cover all the administrative costs associated with marketing and managing the program and fund more than 60% of the premiums to cover anticipated crop-insurance payouts, according to annual data from the Agriculture Department’s Risk Management Agency. Farmers pay only about one-third of the real costs of their crop-insurance coverage. From 2003 to 2012, crop-insurance subsidies cost U.S. taxpayers $55.4 billion—66% of the cost of the program.  Proponents of federal crop insurance argue that roughly $6 billion a year in subsidized premiums is a small price to pay to guarantee the financial stability of the nation’s food supply. That argument is specious, not least because 85%-90% of all crop-insurance subsidies are channeled to the largest 10%-15% of farm operations, few of which would face any risk of going out of business because of short-term fluctuations in their revenues.

Russia Plans Grain-Export Duties to Combat Rising Bread Costs - Russia, the world’s fourth-largest wheat exporter, plans to introduce export duties on cereals as it tries to rein in domestic prices that leapt amid the rout in the country’s currency. The government will draw up proposals for the duties in the next 24 hours, Deputy Prime Minister Arkady Dvorkovich said at a meeting with Prime Minister Dmitry Medvedev outside Moscow today. Russia already has shipped out about 21 million metric tons of grains since the 2014-2015 season started July 1, with the country’s export potential seen at 28 million tons, Dvorkovich said. Russia needs to take measures to restrict grain exports in order to stem increases in domestic prices, Valentina Matviyenko, speaker of the parliament’s upper chamber, the Federation Council, said today, RIA reported. Exports of above 28 million tons may limit domestic supplies, Dvorkovich said. Restrictions should be temporary and flexible, Medvedev said. “At least there’s some certainty now,” Vladimir Petrichenko, director general of Moscow-based market researcher ProZerno, said by phone. “A lot will now depend on the rates of these duties.”

Ruble Crisis Ripples Through Wheat as Bulls Advance  -  The ruble crisis is rippling through the global wheat market. As Russia’s currency extended a plunge to a record low against the dollar last week, the nation slowed grain shipments to preserve stockpiles and keep domestic prices in check. Russia is the fourth-largest exporter and the measures spurred hedge funds to triple their bets on higher prices. Futures jumped to the highest since May last week after an exporters’ association said Russia denied certificates that grain sellers and buyers need. The government will draw up proposals for export duties on grains in the next 24 hours, Deputy Prime Minister Arkady Dvorkovich said today. President Vladimir Putin warned Dec. 18 that the economic crisis could drag on for two years, at a time when cold is threatening winter crops in the U.S., the biggest grain shipper.

Global warming will cut wheat yields, research shows -- Global wheat yields are likely to fall significantly as climate change takes hold, new research has shown. .. The researchers found that wheat production would fall by 6% for every 1C increase in temperatures. The world is now nearly certain to warm by up to 2C compared with pre-industrial levels, with political efforts concentrated on holding the potential temperature rise to no higher than that limit. But some analyses suggest that if greenhouse gas emissions continue to grow at current rates then warming of as much as 5C could be in store. In forecasting the effect on wheat production – one of the world’s most important staple crops – the researchers tested 30 computer models against field experiments to establish the most likely scenario. A fall of 6% in yield may not sound dramatic, but as the world’s population grows the pressure on staple crops will increase. Food price riots have been seen in several developing countries following sudden rises of less than 10% in food prices in recent years, demonstrating the vulnerability of the poor to grain prices. The global population is currently over 7bn and is forecast to rise to at least 9bn, and potentially up to 12bn, by 2050, which will put more pressure on agricultural land and water sources. The research also counters the optimistic projections of some climate change sceptics, who argue that more carbon dioxide in the atmosphere will increase plant growth, as they take up carbon from the air for photosynthesis. But that hypothesis has been widely questioned, as the boost to growing is likely to be outweighed by other effects, such as higher temperatures affecting germination and water availability.

Big food --- In 2008, food writer Michael Pollan published an open letter to President-Elect Barack Obama. He began with a warning. "It may surprise you to learn that among the issues that will occupy much of your time in the coming years is one you barely mentioned during the campaign: food."  Take climate change. "After cars," Pollan wrote, "the food system uses more fossil fuel than any other sector of the economy." As for health-care reform, the chronic diseases forcing spending ever upward are rooted in the way Americans eat. "You cannot expect to reform the health care system, much less expand coverage, without confronting the public-health catastrophe that is the modern American diet." Five years later, Pollan is disappointed that Obama didn’t listen. "There’s been a timidity when it comes to looking at the food system," he says.  Consider the Environmental Protection Agency’s recent announcement that it would begin regulating emissions of methane, a powerful greenhouse gas. "The agricultural sector generates more methane than any other sector," Pollan says. "But for reasons I can’t fathom, when they announced the new rules governing methane in the energy sector, they called for voluntary measures in the agricultural sector." In a wide-ranging interview, Pollan, the author of the recent — and excellent — Cooked: a Natural History of Transformation — explained what studying the food system teaches you about capitalism, why he’s more excited about meat made from vegetables than meat made from clones, and whether it’s time to add anything to his famous triplet: "Eat food. Not too much. Mostly plants."

New Zealand’s Crusade Against Mammals -- New Zealand may be the most nature-loving nation on the planet. With a population of just four and a half million, the country has some four thousand conservation groups. But theirs is, to borrow E. O. Wilson’s term, a bloody, bloody biophilia. The sort of amateur naturalist who in Oregon or Oklahoma might track butterflies or band birds will, in Otorohanga, poison possums and crush the heads of hedgehogs. As the coördinator of one volunteer group put it to me, “We always say that, for us, conservation is all about killing things.” The reasons for this are in one sense complicated—the result of a peculiar set of geological and historical accidents—and in another quite simple. In New Zealand, anything with fur and beady little eyes is an invader, brought to the country by people—either Maori or European settlers. The invaders are eating their way through the native fauna, producing what is, even in an age of generalized extinction, a major crisis. So dire has the situation become that schoolchildren are regularly enlisted as little exterminators. (A recent blog post aimed at hardening hearts against cute little fuzzy things ran under the headline “Mrs. Tiggy-Winkle, Serial Killer.”) Not long ago, New Zealand’s most prominent scientist issued an emotional appeal to his countrymen to wipe out all mammalian predators, a project that would entail eliminating hundreds of millions, maybe billions, of marsupials, mustelids, and rodents. To pursue this goal—perhaps visionary, perhaps quixotic—a new conservation group was formed this past fall. The logo of the group, Predator Free New Zealand, shows a kiwi with a surprised expression standing on the body of a dead rat.

Restored Forests Breathe Life Into Efforts Against Climate Change - NYTimes - Over just a few decades in the mid-20th century, this small country chopped down a majority of its ancient forests. But after a huge conservation push and a wave of forest regrowth, trees now blanket more than half of Costa Rica.Far to the south, the Amazon forest was once being quickly cleared to make way for farming, but Brazil has slowed the loss so much that it has done more than any other country to limit the emissions leading to global warming.And on the other side of the world, in Indonesia, bold new promises have been made in the past few months to halt the rampant cutting of that country’s forests, backed by business interests with the clout to make it happen.In the battle to limit the risks of climate change, it has been clear for decades that focusing on the world’s immense tropical forests — saving the ones that are left, and perhaps letting new ones grow — is the single most promising near-term strategy.That is because of the large role that forests play in what is called the carbon cycle of the planet. Trees pull the main greenhouse gas, carbon dioxide, out of the air and lock the carbon away in their wood and in the soil beneath them. Destroying them, typically by burning, pumps much of the carbon back into the air, contributing to climate change.

2014 will be the hottest year on record --For those of us fixated on whether 2014 will be the hottest year on record, the results are in. At least, we know enough that we can make the call. According the global data from NOAA, 2014 will be the hottest year ever recorded. I can make this pronouncement even before the end of the year because each month, I collect daily global average temperatures. So far, December is running about 0.5°C above the average. The climate and weather models predict that the next week will be about 0.75°C above average. This means, December will come in around 0.6°C above average. Are these daily values accurate? Well the last two months they have been within 0.05°C of the final official results. What does this all mean? Well, when I combine December with the year-to-date as officially reported, I predict the annual temperature anomaly will be 0.674°C. This beats the prior record by 0.024°C. That is a big margin in terms of global temperatures. For those of us who are not fixated on whether any individual year is a record but are more concerned with trends, this year is still important. Particularly because according to those who deny the basic physics and our understanding of climate change, this year wasn’t supposed to be particularly warm.For those who thought that climate change was “natural” and driven by ocean currents, this has been a tough year. For instance, using NOAA standards, this year didn’t even have an El Niño.

China confirms its southern glaciers are disappearing —Glaciers in China that are a critical source of water for drinking and irrigation in India are receding fast, according to a new comprehensive inventory. In the short term, retreating glaciers may release greater meltwater, “but it will be exhausted when glaciers disappear under a continuous warming,” says Liu Shiyin, who led the survey for the Cold and Arid Regions Environmental and Engineering Research Institute in Lanzhou. In 2002, Chinese scientists released the first full inventory of the country’s glaciers, the largest glacial area outside of Antarctica and Greenland. The data came from topographical maps and aerial photographs of western China’s Tibet and Xinjiang regions taken from the 1950s through the 1980s. That record showed a total glacial area of 59,425 square kilometers. The Second Glacier Inventory of China, unveiled here last week, is derived from high-resolution satellite images taken between 2006 and 2010. The data set is freely available online. Liu and his colleagues calculated China’s total glacial area to be 51,840 square kilometers—13% less than in 2002. That figure is somewhat uncertain because the previous inventory used coarser resolution images that may have mistaken extensive snow cover for permanent ice,. Methodological quibbles aside, the latest inventory flags a marked retreat of glaciers in the southern and eastern fringes of the Tibetan Plateau. “We found the fastest shrinking glaciers are those in the central upper reach of the Brahmaputra River, between the central north Himalaya [and] the source region of the tributary of the Indus River,” Liu says.

The answer on human-caused climate change is in - Peter Gleick - As our planet warms, scientists and the general public are increasingly asking if human-caused climate change influences the extreme weather events we see all around us. Until recently, the answer was always “we don’t know yet.” Today, the answer is increasingly “yes.”  Earth is in a remarkable transition from a world in which human influence on climate has been negligible to one in which our influence is increasingly dominant. One of the most active research areas in the climate sciences is the field of detection and attribution: the effort to see and identify the fingerprint of climate change in our extremes of weather.This is tough because the day-to-day fluctuations in weather are naturally large or “noisy.” But scientists have long known that as climate change worsens, we would eventually reach the point when the signal of human influence would rise above and become distinguishable from the noise of natural variability. The California drought is a case in point.  For the past three years, California has been experiencing a bad drought, most simply defined as the mismatch between the amounts of water nature provides and the amounts of water that humans and the environment demand. The state, like any other region of the world, experiences extreme hydrologic events naturally, including floods and droughts.  Reconstructions of ancient climates from tree rings, ice cores, pollen records and other paleoclimatic assessments reveal extensive and persistent droughts in the past. But the current California drought isn’t bad just because of a severe shortage of rain and snow – previous droughts have seen less precipitation. It’s so bad because the past three years also have been by far the hottest in the 119-year instrumental record. An analysis recently released by researchers from the Woods Hole Oceanographic Institute concluded these factors make the current drought the most severe in 1,200 years.

Record-Breaking Sea Surface Temperatures in 2014: Has the Climate Shifted? -- The record for the warmest monthly global sea surface temperature (SST) has been broken three times this year and the five warmest months of sea surface temperature ever recorded have all taken place in 2014. Although the year is not yet over, 2014 looks set to break the annual SST record too. This record warming of the ocean surface has, not surprisingly, had a big impact on global surface temperatures as well with 2014 currently on track to beat 2010 as the warmest year recorded in several data sets. As we have pointed out in numerous posts over the years that global warming has actually sped up in recent times, with an increase of heat being absorbed into the subsurface ocean despite a slower (short-term) rate of surface warming. A prime (but not only) culprit in the slower rate of global surface warming in the last decade and a half has been the temporarily strengthened wind-driven ocean circulation and, at some point, this was likely to weaken. In short; during the negative phase of the Interdecadal Pacific Oscillation (IPO) stronger winds mix more heat into the oceans, which leads to below average surface temperatures, whereas  the positive phase of the IPO sees weaker winds which result in reduced ocean heat mixing and thus above average surface temperatures.

Rising air and sea temperatures continue to trigger changes in the Arctic - A new NOAA-led report shows that Arctic air temperatures continue to rise at more than twice the rate of global air temperatures, a phenomenon known as Arctic amplification. Increasing air and sea surface temperatures, declining reflectivity at the surface of the Greenland ice sheet, shrinking spring snow cover on land and summer ice on the ocean, and declining populations and health of some polar bear populations are among the observations released today in the Arctic Report Card 2014.  “Arctic warming is setting off changes that affect people and the environment in this fragile region, and has broader effects beyond the Arctic on global security, trade, and climate,” Craig McLean, acting assistant administrator for the NOAA Office of Oceanic and Atmospheric Research, said during a press conference today at the annual American Geophysical Union Fall Meeting in San Francisco. “This year’s Arctic Report Card shows the importance of international collaboration on long-term observing programs that can provide vital information to inform decisions by citizens, policymakers and industry.” McLean joined other scientists to release the Arctic Report Card, an annual update provided since 2006, that summarizes changing conditions in the Arctic. Some 63 authors from 13 countries, United States and other nation’s federal agencies and academia contributed to the peer-reviewed report. This year’s report features updates on key indicators as well as a new report on the status of polar bears.

U.S. approaching ‘tipping points’ for sea level rise-related flooding earlier than expected: By 2050, a majority of U.S. coastal areas are likely to be threatened by 30 or more days of flooding each year due to dramatically accelerating impacts from sea level rise, according to a study published today in Earth’s Future, a journal of the American Geophysical Union. The new study, presented at a press conference today at the AGU Fall Meeting in San Francisco, used data from NOAA tide gauges to show the annual rate of daily nuisance floods has drastically increased, even accelerating in recent years. This type of flooding is now five to 10 times more likely today than 50 years ago. “Coastal communities are beginning to experience sunny-day nuisance or urban flooding, much more so than in decades past,” said William Sweet, oceanographer at NOAA’s Center for Operational Oceanographic Products and Services (CO-OPS) in Silver Spring, Maryland, and lead author on the study. “This is sea level rise. Unfortunately, once impacts are noticed, they will become commonplace rather quickly. We find that in 30-40 years even modest projections of global sea level rise – 1.5 feet by 2100 – will increase instances of daily high tide flooding to a point requiring an active, and potentially costly, response and by the end of this century, our projections show that there will be near-daily nuisance flooding in most of the locations that we reviewed.”

Ethanol Producers Poised To Gain From Oil Price Drop -- Widely used as a fuel additive in Brazil and the United States, ethanol production has grown exponentially, largely due to government incentives and regulations that mandate a continued increase in the amounts of ethanol fuel required to be blended with gasoline.  U.S. ethanol production increased 15-fold between 1990 and 2010, from 900 million gallons to 13.5 billion gallons. A watershed year for ethanol was 2005, when the Renewable Fuel Standard was passed by the U.S. Environmental Protection Agency. Created by the EPA to drive production of alternatives to gasoline that would thereby reduce the nation's dependence on foreign oil and also lower greenhouse gas emissions, the RFS mandated increased production of ethanol up to the year 2022. That year, the RFS will require 36 billion gallons of ethanol to be produced for the gasoline market.  Naturally, ethanol producers love the RFS, since it creates a guaranteed, state-imposed demand for their product. Not only that, the RFS also provides them some fairly generous tax credits and subsidies.  Critics, however, heap scorn on the program, saying it does little to address climate change and has actually done more harm than good, including creating more greenhouse gases through growing corn, the main feedstock for U.S. ethanol. Steady and growing demand for ethanol is blamed for rising food prices.  And while ethanol was supposed to make gas cleaner, critics say E10 – 10 percent ethanol and 90 percent gas – actually has lower fuel economy, meaning drivers have to buy more fuel to drive the same distance. More fuel-efficient cars and lower-sulfur gasoline have made the need for ethanol blends more questionable. As for reducing America's dependence on imported oil, the shale revolution has pretty much taken care of that argument.  So given all these knocks against ethanol, why would anyone consider buying stock in the producers of the stuff? In a word: exports.

New study shows ethanol worse for air than gasoline - The University of Minnesota College of Science and Engineering recently released a study that shows ethanol is worse for air quality than gasoline. The scientists followed the production of ethanol from start to emission and found that any environmental benefit is completely overshadowed by destruction caused during the production process. CBS interviewed the researchers on the project and reported:  But it is when you take into account the energy used to make the ethanol that the notion of a “cleaner burning” fuel is called into question. “That is not true. In fact, corn ethanol is about twice as damaging to the air quality as gasoline,” Hill said. U Of M Study Finds Ethanol Worse For Air Quality Than Gasoline – For years, the state’s corn and ethanol industries have touted the environmental benefits of burning the alternative fuel in our vehicles. But newly released research from the University of Minnesota College of Science and Engineering is raising eyebrows. The study compared pollution levels from gasoline fuel and 10 alternative energy vehicles, including hybrid electric, natural gas and corn-based ethanol One of the most surprising findings is that ethanol might actually be worse for air quality than conventional gasoline fueled transportation. Researchers looked not only at the end result at the tailpipes but also took into account the full cycle of energy production. For instance, the authors calculated the entire pollutant stream, meaning everything generated from the growing of the corn to the process used to turn it into ethanol.

Natural Gas: Abundance of Supply and Debate - Natural gas is the Rorschach test of energy policy. Depending on one’s point of view, it can be either an essential tool for meeting the challenge of climate change or another dirty fossil fuel that will speed the planet down the path to calamitous warming.President Obama is in the first camp. He sang the praises of natural gas in his State of the Union address in January, saying, “If extracted safely, it’s the bridge fuel that can power our economy with less of the carbon pollution that causes climate change.” But many environmental activists have denounced shale drilling because of the potential health risks that were cited by Gov. Andrew Cuomo of New York last week when he announced a ban on hydraulic fracturing in the state.They also say that the growing use of plentiful natural gas is accelerating climate change and sapping the urgency to promote energy efficiency and developing renewable energy sources like wind and solar power. Because burning natural gas produces about half the planet-heating carbon dioxide than coal does for the same energy output, many energy experts suggest that natural gas has an important role to play in reducing carbon emissions. But in the debate over natural gas, nearly every fact is contested, including the amount of methane, a potent greenhouse gas, that escapes into the atmosphere while the gas is being drilled and transported. There is little doubt, however, that the abundant natural gas unearthed by hydraulic fracturing (also known as fracking) and other drilling technologies have transformed the energy economy. Natural gas now produces 27 percent of the electricity generated in the United States, and the percentage is rising. The plentiful oil and gas from the drilling boom has reduced America’s dependence on foreign oil to levels not seen in decades, and has contributed to falling oil prices. But recent studies suggest the effects of relying on natural gas and expanding its use will provide no lasting benefit to the environment compared with burning coal unless policies are enacted to hasten the adoption of renewable technologies — to make the bridge a short one.

How Congress Snuck Changes to U.S. Environmental Policy into the New Budget Bill - The $1-trillion bill keeps agencies from acting on clean air and water and energy.   It took 1,603 pages of legalese to keep the U.S. government running for another year. That is the length of the 2015 Fiscal Year Omnibus Appropriations Bill, which was approved by the Senate on Saturday to appropriate $1.01 trillion dollars for most federal agencies and departments through September 2015. The bill is on Pres. Obama’s desk waiting for his signature.  It is not all about dollars. Congress also loaded the bill with special instructions, called policy riders, which dictate how government funds must be spent. Because the bill was rushed through just before the government ran out of money, and Congressional leaders did not want another government shutdown if the bill did not pass, lawmakers seized the opportunity to tack on controversial riders that might otherwise have been debated.  A lot of those 11th-hour mandates will affect science and environmental policy. The U.S. Environmental Protection Agency, for example, got $8.1 billion. That’s $60 million less than last year and the agency now has to operate at its smallest budget since 1989. But even that money comes with conditions. Although agriculture is a major source of atmospheric methane, Congress forbade the EPA from using its funds to require farmers to report greenhouse gas emissions from “manure management systems.” And the agency is no longer permitted to regulate farm ponds and irrigation ditches under the Clean Water Act.  Here are a few of the key riders and their effects in different areas:

US energy policy review reveals US doesn’t have an energy policy - The US oil-and-gas boom benefits the US, but lack of an overarching policy hamstrings US potential and poses environmental risks, according to a report released this week by the Paris-based International Energy Agency (IEA). Low oil prices could divert attention from renewables, the IEA said, and cheap natural gas could discourage electric providers from pursuing lower-carbon options like nuclear, solar, and wind. Calls for clearer US energy policy aren’t exactly new – Congress has long lamented a lack of purpose and coordination throughout the nation’s varied and expansive energy sector. But the issue is gaining new importance as the US finds itself at the center of a North American energy boom. If the US is to emerge as a global energy superpower in the coming decade, shouldn’t it make sure it has its own house in order first?   “Developments in the US energy sector have bolstered the country's energy security, sustainability, and economic competitiveness – but challenges remain,” IEA Executive Director Maria van der Hoeven said Thursday at an event with US Energy Secretary Ernest Moniz. A chief obstacle in US energy policy a lack of clarity, the report says. This month’s temporary, one-year renewal of the wind production tax credit is an example of that uncertainty, van der Hoeven said; a one-year renewal of the tax break doesn’t provide wind power producers with the certainty they need to plan long-term investments. Uncertainty also hangs over crude oil exports. Earlier this year, the Commerce Department approved permits to export lightly-processed condensates, but many in the oil industry have struggled to interpret what exactly the department’s ruling means. Many have also questioned the logic of cutting coal use at home, only to export the carbon-heavy fuel overseas.

Risk in Fukushima No. 4 reactor mitigated as last of nuclear fuel removed - --Tokyo Electric Power Co. removed the last four nuclear fuel assemblies that remained in the No. 4 reactor building of the crippled Fukushima No. 1 nuclear power plant from its storage pool on Dec. 20. The No. 4 reactor was offline at the time of the March 11, 2011, Great East Japan Earthquake and tsunami. However, an explosion occurred in the building four days later, seriously damaging it. After the accident, experts pointed to the risk of nuclear fuel in the pool melting from insufficient cooling and releasing a large amount of radioactive materials. However, the threat has been mitigated with the removal of the last assemblies. On Dec. 20, TEPCO allowed the media to watch the removal work. Workers pulled up from the pool a cask containing the last four unspent nuclear fuel assemblies. They plan to transfer it to the No. 6 reactor building, which sustained relatively minor damage in the disaster, within a few days after decontaminating the outside of the cask. The transfer will mean that all of the nuclear fuel in the No. 4 building has been removed from the building as scheduled by year-end. The pool had held a total of 1,535 nuclear fuel assemblies, which consisted of 1,331 spent and 204 unspent nuclear fuel assemblies.

Black Mesa Navajo face ‘scorched earth campaign’ spurred by coal mining interests -- In Waging Nonviolence, Liza Minno Bloom reported on recent federal campaigns to forcibly impound sheep herded by Navajo living in the Hopi Partition Lands (HPL) of Black Mesa in NE Arizona. (Yep, impound, like a car, for us city folk.) The government claims that the livestock were impounded because there are too many and they were overgrazing and harming the land, but the weight of history and the violence of what’s currently happening suggests a different reason. The sheep being impounded from the communities on Black Mesa indicate the continued use of scorched earth policies by the federal government and the continued use of Black Mesa as a resource colony for ever more unsustainable Southwestern cities. More specifically, Minno explains the history and current state of Peabody Energy on the land, going back to the 1970s when the Partition Lands were created, forcing relocation off of the HPL and ushering the way for a grab of the coal-rich land. The herders facing the pressure continue to live on these lands despite the forced relocation. She also clarifies that Peabody Energy now wants to expand mining into the areas used by the Navajo herders that are being targeted. The three families targeted so far need to pay about $1000-2000 to get their sheep back, but also have to sign a condition of release and sell the majority of the sheep right away.

Nat Gas Tumbles Below $3 For The First Time Since 2012, Plunges 30% In 2014 - For the past few months, the one silver lining to the energy complex - with crude oil plummeting to levels not seen since 2009 - was nat gas, which soared to the mid-$4s in early November on expectations of a brutal polar vortex for the second year in a row sending heating demand surging. Well, so far the "harsh" weather, which was blamed for the epic collapse in the US economy in Q1 has not materialized, and all those buyers of natgas contracts have been scrambling to sell all of their exposure afraid they may suffer the same fate as their crude trading brethren. End result: as of moments ago, nat gas finally slide under $3, the first time it has done so since 2012! This also means that while crude oil longs have had a horrible year, with nat gas now down 29% in 2014, and headed for the first annual decline since 2011 as mild weather leaves stockpiles at a surplus to year-ago levels for the first time in two years, yet another commodity is set to ring in margin calls

Evacuated families in Monroe County await answers on fracking-well gas leak - Columbus Dispatch: This hollow used to be peaceful. On Dec. 13, that stillness shattered. Crews lost control of a fracked well on a hilltop near Heater’s house. Natural gas surged into the air. From their backyard, less than a mile from the well, the Heaters heard it. The rushing gas sounded like a broken air hose, Heater said — a deep, steady WHOOOOSH. As the weekend approached, gas was still spewing uncontrollably. Families within a mile and a half of the well have been evacuated, although not all have left their homes. They’ve been allowed back during the day, to grab clothes and feed animals, but they are supposed to be elsewhere at night. The county emergency management agency says the families might be allowed home for good by Wednesday, Christmas Eve, but officials aren’t sure. “We weren’t given any answers,” But this is Day 6, right here, and we still don’t have answers.” The well is just outside Sardis, a community of about 560 people about 145 miles east of Columbus.   An elementary school that closed in 2011 has been open as a shelter for families during the day. Triad Hunter, the company that owns the well, didn’t return calls last week. But people who were evacuated from their homes said the company told them they would be reimbursed for meals, mileage and hotel rooms. There aren’t many hotels near Sardis, however, and the closest ones, in New Martinsville, W.Va., are filled, mostly by temporary oil and gas workers. Triad Hunter offered to put people up in hotels in Marietta, a 45-minute drive from Sardis.

Some families to return to area around leaking Monroe County oil and gas well - Columbus Dispatch (12/23/2014) A blown-out oil and gas well in eastern Ohio has been capped this afternoon. Crews lost control of the well on Dec. 13. The well had been drilled and fracked a year ago to tap into oil and gas in the shale deposits thousands of feet below ground in Sardis, in Monroe County, about 145 miles east of Columbus. But drilling company Triad Hunter had plugged the well to await production. Crews were unplugging it when they lost control of the well, according to the Ohio Department of Natural Resources, which oversees fracking operations. Since then, the well has been spewing a thick plume of natural gas. Nearby residents say the plume reaches 70 feet in the air. Emergency crews evacuated about 30 houses within a 1.5-mile radius of the well. Today, they reduced that evacuation area to one-half mile, said Phillip Keevert, director of the Monroe County Emergency Management Agency.

Utica Shale well blowout in Ohio brought under control: A high-pressure “blowout” Dec. 13 at a Utica Shale gas well in Monroe County, Ohio, that caused the evacuation of 28 families was finally brought under control Tuesday. Bethany McCorkle, a spokeswoman for the Ohio Department of Natural Resources, said “surface control” of the 10,653-foot-deep shale gas well, operated by Triad Hunter, a subsidiary of Texas-based Magnum Hunter Resources Corp., was re-established by Wild Well Control, a company specializing in fixing well fires and blowouts. “The new wellhead has been successfully installed, the values are shut and no more natural gas is being released,” she said in an email response to questions. “Contractors will now pressure test the new wellhead.” No explosion or fire occurred during the 10 days that well gas emissions flowed out of control, and the well was continuously doused with water to reduce the risk of an explosion. Families in the area were evacuated on Dec. 13 and kept out for several nights. No residents or well workers were injured. “The local fire department issued an evacuation of 1.5 miles out of an abundance of caution when the incident occurred,” Ms. McCorkle wrote in an email. “Residents were permitted to be in their homes during the day but not during the night. The evacuation was later reduced to a 0.5- mile radius.”

Crews cap gas leak at Monroe County fracking well - Crews regained control of a blown-out well in eastern Ohio yesterday, 10 days after the well shot a plume of natural gas into the atmosphere and caused about 30 homes to be evacuated.That means everyone who has been staying in hotels and with family and friends for the past week and a half will be home for Christmas, said Phillip Keevert, director of the Monroe County Emergency Management Agency.After the well blew out on Dec. 13, the county emergency-management agency ordered people who live within a 1.5-mile radius to find other places to stay.State emergency responders said they worried that the gas could cause an explosion.The well is on a hilltop near Sardis, about 145 miles east of Columbus.Keevert later reduced the evacuation radius to a half-mile, after an emergency crew from Texas removed a broken wellhead from the well.“Once they took the wellhead off, the gas was going straight up instead of off to the sides,” he said. “So we were able to bring the radius in.” Keevert said the emergency crew put the replacement well in yesterday afternoon, tested the pressure and said the new wellhead should work.

Citizen audit of Ohio wells: Doing the regulators' jobs for them - Melissa English and Nathan Rutz of Ohio Citizen Action published a citizen audit of the well data, and I’m happy to be listed as a contributor. The body of the audit is available as a PDF here (appendices separate). Its purpose: “The authors of this report recommend that the U.S. EPA suspend the ODNR’s authority to operate the Underground Injection Control program until completing a thorough audit of all of Ohio’s active injection wells and only reinstating that authority if and when the ODNR’s competence and independence from industry influence can be demonstrated.” The audit is only 17 pages long and is very readable (though I write that as someone who’s been engaged on the issue for a while), and it’s meant to be understandable even by those who aren’t especially familiar with the issue. Part of the reason for it was because the US EPA promised much better oversight of ODNR than it has delivered. It produced audits in 2005 and 2009, with the latter being (as the Ohio Citizen report notes) an 80% copy and paste of the former. The actual work that was done was somewhat cursory, and in any event this was all before fracking really took off in Ohio. In 2009 the EPA said the next audit would occur in 2012 or 2013, and here we are about to close the books on 2014 with nothing. So part of the reason for the project was simple frustration with the EPA not following up on what it said it would do. Can’t be bothered to do an audit? OK, we’ll try one ourselves.

Pa. industry grows by sending its wastewater to Ohio - In the first half of this year alone, the Vienna wells accepted and deposited underground 350,000 barrels of waste from Pennsylvania — more than 14 million gallons — according to records kept by the Pennsylvania Department of Environmental Protection.   These wells — and more than 200 others like them across Ohio, including one in Monroe Township in Ashtabula County — figure prominently into the natural gas industry’s growth in neighboring Pennsylvania over the past six years.While drillers treat and reuse 90 percent of their liquid leftovers, according to industry estimates, the remaining 10 percent that gets sent to injection wells adds up. And it’s far easier to dispose of it in the Buckeye State than over the border — so much that last year Pennsylvania exported enough drilling wastewater to this state to fill 200 Olympic-sized pools. Not that you’d want to swim in any of them. The brine is two- or three-times more salty than seawater. Regulators have found evidence that it contains chemicals leftover from hydraulic fracturing, or “fracking,” the drillers’ process of busting through underground with high-pressure liquid to release stores of gas. And, environmentalists warn, the wastewater could be radioactive.  A number of reasons explain why Ohio more readily accepts the wastewater than Pennsylvania, which has just eight active injection wells, according to the U.S. Environmental Protection Agency. Geology is one.. Also, regulators in Ohio monitor the disposal wells in their state and are perceived by some as more friendly toward the gas industry, while federal officials watch over the wells in Pennsylvania.

Ohio’s natural gas boom brings flurry of pipeline construction -- A huge supply of natural gas in the shale of northern Appalachia is igniting a mega-boom in gas pipeline construction in Ohio, the likes of which haven’t been seen since the 1940s. “You have interstate, intrastate, local utility service lines upgrades, collection lines for oil and gas utilities, and lines for gas-fired electric utilities. Altogether, there will be 38,000 miles of pipeline development in Ohio over the next decade,”  “I tell people you might not see shale and oil drilling development in your area like in the eastern part of the state, but with pipelines and development, it’s coming your way.” Three proposed pipelines are winding their way through the Federal Energy Regulatory Commission approval process now. The largest project is Energy Transfer Partner L.P.’s $4.3 billion Rover Pipeline, an 823-mile conduit running from southeast Ohio west to Defiance County and then north to Michigan and Canada. The 409-mile main line will have nine new lateral pipelines ranging from 4 to 206 miles to connect it to southeast Ohio, Michigan, and Canada. E.T. Rover will begin moving 3.25 billion cubic feet of gas daily from Appalachia to southern Ontario in 2016. Also aimed at the Canadian market is Spectra Energy/​DTE Energy’s $1.5 billion Nexus, a 250-mile pipeline that will begin in northeast Ohio’s Columbiana County, cut across to Maumee, and turn north through Fulton County to reach Michigan and Canada. It will move 2 billion cubic feet of gas daily starting in 2017. In southeast Ohio, NiSource subsidiary Columbia Pipeline Group is proposing Leach XPress, a $1.75 billion, 160-mile pipeline to send 1.5 billion cubic feet of gas daily from West Virginia and southeast Ohio to central Ohio, where it will connect to lines running to Leach, Ky. Set to be ready 2017, the line is needed to ship gas to the Gulf of Mexico — where Ohio got most of its natural gas in the past.

Get some fracking sense - paying less is paying more: Temur Akhmedov (opinion) -  The United States is currently the world's largest producer of oil and natural gas -- something most people wouldn't think of a decade ago. The United States has recently surpassed Saudi Arabia in raw oil production. It has been holding the position of the biggest natural gas producer for four years. Oil production has reached 9 million barrels a day, and is projected to grow to 13 million by 2019.  As a result, U.S. consumers are experiencing a low per-barrel oil price of about $60 and the lowest gas prices since 2009. All these changes are happening thanks to rapid development of hydraulic fracturing, or fracking, on U.S. shale formations.However, rapid development of fracking hasn't entailed rapid improvements in technology used. We should consider switching to traditional methods of resource extraction and alternative fuels. Meanwhile, the fracking industry must improve the technology of extraction and waste disposal to reduce the indirect cost to society. 

Blogger calls on Ohio to follow New York's example on drilling - Akron Beacon Journal - Governor Cuomo’s decision was backed by the science described at length in the Health Department’s extensive study of the risks fracking poses to public health. New York Health Commissioner Howard Zucker summed up the study simply: he wouldn’t want his child to play outside in a community that allows fracking. Oil and gas companies claim that accidents are few and far between, but leaks, spills, and explosions are not uncommon. And when they do happen, they are often severeOhio, a small shale gas producer compared to states like Texas and Pennsylvania, has seen a distressing number of serious accidents related to fracked wells. Last month, a worker was killed in an explosion and fire at a fracking site. Two weeks before that, Ohio saw three fracking-related accidents in three days, during which a worker was burned, a pipeline fire torched acres of forest, and a well blowout forced 400 families to evacuate.In June, a massive spill and fire forced 25 families to evacuate and killed over 70,000 fish along a 5-mile stretch of a tributary of the Ohio River. The fire took a week to extinguish, with at least 30 explosions occurring over that week, driving dangerous shrapnel though the air. The state lets companies drill up to 100 feet from homes, but explosions at drilling operations are capable of blowing pieces of metal much farther than that.The month before that fire, drillers were unable to prevent the excessive buildup of pressure in a well, which led to a leak of around 1,600 gallons of oil-based drilling fluids into a tributary of the Ohio River. These accidents are unacceptable, yet they are only the most visible instances of pollution. We can’t see the long-term impacts of widespread drilling and fracking—damage to groundwater, the atmosphere, and the public health effects of long-term exposure to chemicals—but they stand to be a much more significant threat.

New York has outlawed fracking. More bans will follow if energy companies don't take action  -  New York Gov. Andrew Cuomo’s statewide ban on high-volume hydraulic fracturing, or fracking, is a vindication for communities around the country that have been hit hard by unconventional natural gas production. For those in the energy industry who have shrugged off the environmental, health and safety concerns of fracking, Cuomo’s decision was the second rebuke in a little more than a month, following the recent vote to ban fracking in Denton, Tex. There have been a number of other bans and moratoriums across the country in the past couple of years: Mora County, N.M.; Boulder County, Colo.; and Dryden, N.Y., to name a few. These bans demonstrate what can happen when oil and gas producers erode public trust by brushing aside legitimate questions. Increasingly, regulators and the energy industry will be called upon to show that unacceptable risks from fracking can be minimized. Minimizing those risks requires strong, sensible regulation. Industry must finally recognize that it is in its own interest to work with regulators to make that happen. I’ve seen firsthand the local impacts that have made fracking, as Gov. Cuomo put it, “probably the most emotionally charged issue that I have ever experienced.” As part of the U.S. Secretary of Energy’s Advisory Board on shale gas in 2011, I saw that fracking’s environmental impacts are real and important health issues remain unresolved. In rural Pennsylvania, I met a mother who told me she had been forced to leave her family farm because of severe air pollution from shale gas wells. The pollution had made her young son ill. He was staying with friends; she was living out of her car. And due to natural gas operations in Pinedale, Wyo.,  the town of 2,000 residents has had to cope with smog rivaling that found in Los Angeles.

New York Department of Health Fracking Review - embedded scribd pdf, graphic

Cuomo gets kudos, scorn for hydrofracking ban: New York Gov. Andrew Cuomo is getting heaped with praise by environmentalists and scorn by business interests for a planned state ban on hydraulic fracturing for natural gas, even as he insists the decision wasn’t his. Residents statewide remain almost evenly split on the issue, and the divisions are clear, pollsters said Thursday. The decision announced Wednesday followed Cuomo’s re-election last month, which the Democrat won easily as expected. Quinnipiac University Poll’s Mickey Carroll said the political impact is likely to be limited and the decision was predictable.Following his pledge again Wednesday to defer to experts on “this highly technical question,” his health and conservation commissioners described analyses that identified contamination threats to water, soil and air, the absence of reliable health studies or proof that drillers can protect the public, as well as diminishing economic prospects. “The time to do it is when gas prices are plummeting,” Miringoff noted. “In the short term, this cushions the blow.” Conservation Commissioner Joe Martens said he’ll issue the ban early next year. He said 63 percent of the state’s 12 million acres with these possible gas deposits would already be off-limits because of protections for the New York City and Syracuse watersheds, other drinking water sources and certain other areas, while court rulings have recognized towns’ authority to individually ban hydrofracking through zoning, further limiting financial prospects. Acting Health Commissioner Dr. Howard Zucker said 4,500 staff hours were spent reviewing health studies about the drilling method of extracting oil and gas from deep underground by pumping huge amounts of water, sand and chemicals at high pressures to break up rock formations. It’s being done in many other states, including neighboring Pennsylvania.

Fracking decision brings elation, dismay -  Robert Aronson, director of the Seneca County Industrial Development Agency, once thought hydraulic fracturing-related industries might find a home at the former Seneca Army Depot and provide jobs for local residents. He doubts it now.  Across the lake in Benton, Scott Osborn of Fox Run Vineyards once worried that fracking might poison the water or generate enough truck traffic to drive away the tourists he relies on. He no longer does. Their reactions to the state’s planned hydrofracking ban highlight both ends of the local opinion spectrum. On the one hand, there was a desire for the economic benefits that fracking might bring. On the other, there was deep concern about its potential impact on the environment. “All the evidence that was coming out — the potential for earthquakes, the water quality issues — there’s so much scientific data that is showing that it’s not a good idea,” Osborn said. “And there’s always the health problems that seem to be created.” Dave Rauscher, owner of Waterloo’s D.C. Rauscher Inc., an oil and gas services company, sees things differently. He believes the state is relying on opinion rather than fact, in relation both to the potential environmental harm and to the potential impact on local communities. “There’s an extreme amount of concern for the people who view the Finger Lakes as a tourist attraction only,” he said. “They do not view it as a mineral owner’s interest or a big farmer or anything like that, and they really believe it’s going to obstruct or destroy that tourism trade. Well, that’s never been proven.”

NY Fracking Decision Puts Spotlight on Gas-Drilling Revenue - New York Gov. Andrew Cuomo's recent decision to ban fracking shines a spotlight on the balancing act governments in potentially oil- and gas-rich regions face weighing economic benefits against environmental concerns. The Democratic governor, who is set to begin his second term on Jan. 1, said in his Dec. 17 announcement that his decision was based on the New York State Department of Health's conclusion that fracking for natural gas cannot be done safely. "All things being equal, I will be bound by what the experts say because I am not in a position to second guess them with my expertise," said Cuomo during a the Dec. 17 cabinet meeting where the state announced the decision to not proceed with fracking. "It is a highly technical field that needs more information and less emotion." New York State Department of Environmental Conservation Commissioner Joe Martens said in a statement that with an increasing number of localities that have enacted fracking bans and moratoriums, "the risks substantially outweigh any potential economic benefits." While many Democratic leaders praised Cuomo's decision, New York State Republican Chairman Ed Cox issued a statement saying this was missed opportunity to capitalize on the recent popularity of fracking across the country. "Andrew Cuomo has given into the radical environmental Luddites in his own party to leave New York as the only one of 35 states with extractable natural gas to be missing out on the hydro-boom," said Cox. "While unemployment in New York's shale-rich Southern Tier remains high, safety regulated natural gas development has led to the creation of a quarter of a million new jobs across the border in Pennsylvania."

The downside of New York's fracking ban: local businesses 'falling apart' -- While environmental groups are doing a victory dance over New York’s decision to ban fracking, farmers such as apple grower David Johnson are grieving for dashed hopes and dreams.“I’m devastated,” Johnson said after governor Andrew Cuomo’s health and environmental commissioners announced on Wednesday that they were recommending a fracking ban. “I have concerns about how to continue this farm that’s been in the family for 150 years.”  Energy companies denied the chance to drill in New York can simply raise their rigs in other states. That is what they have done since the Marcellus Shale gas drilling boom began in 2008 and New York launched an environmental review that effectively put a moratorium in place. But landowners in the state’s Southern Tier region who had hoped to reap royalties from gas production do not have that option. “Frankly, my heart breaks for all those families in the Southern Tier who were denied the opportunity to develop their mineral resources,” said Karen Moreau, executive director of the New York branch of the American Petroleum Institute. New Yorkers have watched other states that sit atop the Marcellus Shale – Ohio, West Virginia and neighbouring Pennsylvania – ride the fracking boom and reap profits from one of the world’s largest natural gas deposits. Some New York landowners signed lucrative leases with energy companies and received multimillion-dollar signing bonuses before the natural gas market and the state’s regulatory climate soured. But many landowner coalitions never got the chance to sell their leases.

New York Fracking Babies Compare Fracking to Jesus! - Per Brad Gill, in what must be the world’s most ridiculously sacrilegious analogy of the New York Frack Wars. If I was any further of a lapsed Catholic, I’d have to be on Mars. But, frankly, for the first time in all this, this pretty much fracking offends me: “The highlight of the conference came at the very end when Cuomo said that this decision was not his and that it is really between Martens and Zucker – absolving himself from all responsibility like Pontius Pilate washing his hands.“  No gashole. Not even close. Not even in the same county as close.  Getting turned down after a lengthy regulatory review process is not akin to crucifixion. Neither fracking nor Frack Babies are anything like Jesus. Try again, gashole. Something a bit less hackneyed, a bit more topical, a bit less fracking nuts. . . Chalk this up as yet another coffin nail in the New York Frack Babies‘ fracking coffin. The Frack Babies jump the shark. Again.

The politics of Cuomo's fracking decision - During last Wednesday's dramatic fracking announcement, Governor Andrew Cuomo took great pains to say that he had no idea how the commissioners for the departments of health and environmental conservation were going to decide on the issue. Whether the state should allow fracking to proceed was their decision alone, Cuomo said seriously and repeatedly, and was one he would respect either way. But between the timing of the decision—it was held up for years with little explanation, only to come together shortly after the Cuomo's re-election—and the way it comported with the direction of public opinion, the politics lined up rather neatly for the governor. A Quinnipiac poll released Monday found that 55 percent of those surveyed said they approved of the ban, compared to 25 percent who did not.It wasn't always that way.There was a time when the administration was preparing to allow a limited number of wells in the Southern Tier, as trial-ballooned in the New York Times in 2012, and as evidenced by its extraordinary care in editing and delaying a federal fracking study around that time to lessen the appearance of environmental risk. But since then, public polls and election results have made approval of fracking steadily less palatable. This year's elections showed anti-fracking forces could be a significant force at the polls. Democratic gubernatorial candidate Zephyr Teachout attributed her strong showing in September's Democratic primary against Cuomo to anti-fracking supporters upstate, where she won dozens of counties.

Editorial: The right fracking decision - Albany Times-Union - In banning fracking, New York goes against the trend in which a growing number of states are attempting to cash in on a natural gas boom. But that very boom provided state Health Department researchers the abundant and ever-expanding foundation of data that led to their overwhelming conclusion. States where fracking has been under way are experiencing myriad problems with methane, benzene and other volatile organic compounds polluting the groundwater and air. Data also link the gas drilling process with earthquakes. Skeptics may say Gov. Cuomo’s decision was politically easy, coming during an oil glut that has reduced demand for natural gas. But by instituting an outright ban on fracking, the Democratic governor is already taking political hits from the drilling industry and many Republicans, particularly in the financially pressed Southern Tier and Western New York . Even there, however, fracking’s wisdom is disputed by many.  Now the governor and his staff must follow through on his pledge to find alternative and safer economic development opportunities for those areas, which have been struggling for decades. Scientific research will continue on fracking, and surely technological improvements will, as well. There might come a time when the process is safe enough for some use in New York . But the science today is clear: that time isn’t now.

Even With Ban, New York Can't Escape Effects of Fracking -- Unfortunately, just because New York banned fracking, and even though more than 150 New York municipalities have banned fracking using local zoning laws, the state won't escape its effects. In fact, New York is already burdened with the fracking industry's health and safety problems and threats to the environment because of gas infrastructure. Gas companies are building pipelines to service increasing demand in New York City. In spite of opposition from groups like OccupythePipeline concerned about radon exposure and the risk of explosion, Spectra Energy's pipeline, which runs under Greenwich Village, went into service in November 2013. On December 1, gas began to flow through the Northeast Connector Project, which will deliver 647,000 dekatherms daily from York County, PA to 1.8 million natural gas customers in Brooklyn, Queens, Staten Island and Long Island. The new delivery point will shift from Long Island to the Rockaway Peninsula via the Rockaway Lateral Project, a disputed 26-inch diameter pipeline currently being constructed under popular beaches, a golf course, and a federally protected wildlife refuge. Two years after Superstorm Sandy hit the Rockaways hard, this high-pressure pipeline may pose some super hazards in the event of another big storm. (Sandy is estimated to have caused 1,600 natural gas pipeline leaks overall.) Pipeline company Williams' record on pipeline incidents and explosions in recent years is troubled, and the company dismissed safety recommendations for Rockaway Lateral from the US Corps of Engineers.

Experts: Cuomo Ban Means Fracking Boom Will Bypass NY - Voters in New York overwhelmingly support Gov. Andrew Cuomo's announcement last week that he was imposing an indefinite statewide ban on fracking, says a Quinnnipiac poll.   But the governor's move is drawing fire from experts who say it was based on flawed science and from residents of struggling rural New York communities who say it will deny state residents the fruits of an economic boom that is transforming other parts of the United States, CNS News reports. According to geologists, the huge Marcellus Shale Formation, beneath parts of New York, West Virginia, Ohio, and Pennsylvania, contains 500 trillion cubic feet of natural gas – enough to supply the entire United States for two years.   The New York ban places 14.1 trillion cubic feet of natural gas in western New York off-limits to drilling. State officials have attempted to play down the significance of Cuomo's Dec. 17 announcement by saying that more than 60 percent of the 12 million acres with potential gas deposits had already been placed off-limits to fracking because of local zoning ordinances or existing environmental regulations from Albany.

New York Fracking Ban Contrary To State's Energy Future --Governor Andrew Cuomo announced last week that hydraulic fracturing would be banned in New York State, citing the lack of scientific data on public health effects. The ban was a huge political success for the Governor and for those opposed to fracking. But it’s a reversal of Cuomo’s previous stance in which he embraced fracking as an economic stimulus and a way to reduce carbon emissions when closing old coal plants. And a 2011 study by the New York State Department of Environmental Conservation didn’t show any great issues not faced by most other industrial processes. I’m a little confused – banning fracking for gas, and banning new pipeline construction to transport it, means more dirty energy from coal and oil during the winter months when gas supplies are insufficient to most of New York and New England (Forbes). EPA considers emissions from natural gas systems to be fairly low, even compared to agriculture and organic digesters. True, there is a lack of scientific data, which is starting to be addressed. But there is also a lack of data suggesting fracking is as bad as opponents claim. And the main contamination culprit is poorly cemented fracking wells and poor handling of the return water, not the fracked sediments themselves (Forbes; Duke University; Forbes Opinion). Plus, no one believes data will show fracking for gas to be anywhere near as environmentally destructive as getting coal or oil out of the ground.  I’m not a big fan of gas, or of fracking, but there are two big reasons for America’s historic reduction in carbon emissions over the last six years – the Great Recession and the shale gas fracking craze. U.S. carbon emissions are lower than at any time since 1994.

Reed: state should compensate landowners because of fracking decision House Representative Tom Reed says that the state’s decision on high-volume hydraulic fracturing is “the wrong decision for New York State ‘s future.” During a conference call this morning, Reed said that the decision is a missed opportunity for the state and that fracking could provide jobs and a boost for the Southern Tier’s depressed economy. The decision is political, he said, and driven by Governor Andrew Cuomo’s presidential ambitions.  Reed’s remarks aren’t much different from those made by other fracking supporters in the wake of the Cuomo administration’s decision to prohibit fracking in New York . But Reed is seizing on a point that other critics haven’t given as much attention.  “You should compensate individuals for taking their property,” Reed said. He’s essentially saying that the property owners should be compensated for the money they could have made from fracking.

Uncommon legal concept may surface in New York after fracking ban: For six years while shale gas extraction in New York was in a state of indefinite hold pending environmental and health reviews, landowners and oil and gas firms talked about “takings.” It’s a legal concept that, like eminent domain, requires the government to compensate private property owners for assets taken away because of government action. When New York Gov. Andrew Cuomo last week announced he planned to permanently ban high volume hydraulic fracturing — the practice used to pull gas out of the Marcellus Shale, for example — legal minds and oil and gas hopefuls said the time is right for a takings lawsuit. Or many takings lawsuits. But it may be an uphill battle for the plaintiffs, if any materialize. “Takings is probably one of the trickiest and less well-defined areas of the law that we practice in,” . The concept has legal backing in both federal and state laws, but is largely circumstantial and based on what assets are being taken away; how they could have been monetized; and what would have been the economic value of doing so. Landowners eager to try out the strategy in court say by depriving oil and gas companies of the option of fracking shale wells on their property, the state government is taking away the landowners’ ability to make money on their oil and gas rights.

New York Winemakers Fight Gas Storage Plan Near Seneca Lake - — Over the last two decades, vintners in the Finger Lakes region of New York State have slowly, and successfully, pursued a goal that could fairly be described as robust, with a lively finish: to transform their region into a mecca for world-class wines, and invite an influx of thirsty oenotourists.But long before the local labels went upscale, the Finger Lakes were known for another earthy, if not so refined, industry: underground gas storage.Now, those two legacies have collided over a long-simmering project that would store tens of millions of gallons of liquefied petroleum gas, and up to two billion cubic feet of natural gas, in subterranean salt caverns thousands of feet below the shores of Seneca Lake.Those who oppose the plan describe it as an existential threat to years of carefully cultivated vinicultural development in the Finger Lakes, just as the area is beginning to bloom.“Do we want to be known for world-class wine grapes, farm-fresh food and great hospitality?” . “Or do you want to be the gas-storage hub of the Northeast?”  The state must approve the portion of the project that involves liquid propane and butane. The expansion of methane-gas storage received approval from federal energy officials in October. Since then, dozens of protesters have been arrested near the natural gas storage site, just outside this upstate village, where rolling hills fall into deep glacial lakes. Anti-gas signs have become nearly as common as grape trellises. And more than 50 local winemakers — joined by several vintners from acclaimed wineries in California, France and Germany — have spoken out against the project, saying the community’s future is tied to the land, not to the gaping holes deep beneath it.

“We are Seneca Lake” protests and arrests continue. Cuomo must stop this dangerous natural gas project! – As New York State released the long awaited Public Health Assessment  on the impacts of fracking, and as Governor Cuomo dramatically announced that High Volume Hydrologic Hydrofracking (fracking) in New York State is banned, actions and arrests continue at Seneca Lake. Yesterday as the Governor spoke, 28 Seneca Lake defenders were arrested. Just the day before, 41 arrests were made.As regular readers of Climate Connections know, Seneca Lake and the Finger Lakes areas of New York are under siege by those in industry that are trying to turn the region into a transportation and storage hub for natural gas.Crestwood Midstream, a Houston-based energy company, is creating extremely dangerous facilities in, around, and under Seneca Lake, including using abandoned salt mines for the energy hub. This project threatens the environment, drinking water, health and well-being of millions of people, including future generations. The negative regional economic impact will be devastating to local farms including many family-owned grape and wine operations.  We call on Governor Cuomo to put a halt to this project immediately and permanently. Be clear Governor Cuomo, we are willing to put our bodies and our lives on the line and we will fill the local jails with grandparents, children, neighbors, health workers, veterans, and the so many others that are defenders of our lands, our health, and our future. We are Seneca Lake. All of us.

Pipeline Threatens Then Trespasses - If you’re in harm’s way, lock the gate and call a lawyer. Don’t sell out cheap and have your land ruined. Grow a pair for the New Year. The New York State Office of the Attorney General has taken a complaint, filed by a landowner who received a threatening letter from Constitution Pipeline, and submitted it to the Federal Energy Regulatory Commission (FERC). This action may indicate that the AG’s office is beginning to respond to complaints by the Center for Sustainable Rural Communities, the Pace Environmental Litigation Clinic and others over the tactics of Constitution’s Lawyers. The AG’s submission to FERC includes a copy of a complaint form in which a landowner states that not only has he received a threatening letter from Constitution’s lawyers but also that representatives of Constitution have trespassed on his posted private property on multiple occasions.  A copy of the AG’s submission can be viewed here: .  Constitution has retained several local law firms to act on their behalf during eminent domain proceedings against landowners, including Stockli Slevin & Peters, LLP, a firm involved in the compressed natural gas plant proposed for a rural tract in the Town of Duanesburg, which withdrew its application in response to organized resistance by Town residents. As of close of business yesterday Constitution has filed condemnations complaints against 110 landowners and is expected to serve those landowners with legal papers during Christmas and New Year’s week. The Center urges landowners who have been served legal papers by Constitution to seek legal assistance from attorneys familiar with eminent domain proceedings in Federal Court. Landowners who suspect that pipeline crews have entered their property without permission should immediately contact law enforcement. They may also contact the Center’s Land Owner Response Line at: 800-795-1467. The Center will dispatch available volunteers to assist the landowner in documenting pipeline crew activity.

New York's fracking ban spurs debate in Pennsylvania | WBFO: Governor Cuomo's decision to ban fracking in New York is triggering discussion in Pennsylvania, where fracking is big business. A reporter who covers gas development issues said the industry views Cuomo's action as an economic benefit, because drillers no longer have to fret about losing business to their northern neighbor. Marie Cusick of WITF tells WBFO some experts predict the New York ban will not affect Pennsylvania's gas development initiatives. "I talked to an industry analyst. He said this will have little to no impact on the drilling business that’s already underway in Pennsylvania and Ohio," said Cusick. "Companies have spent billions of dollars, invested a lot in infrastructure. It’s very expensive to get going and do this, so New York has just kind of been a non-entity in this shale boom since the beginning."  Pennsylvania voters recently elected a new governor who will take office in January. Tom Wolf ran on a platform of taxing natural gas drillers as a revenue-generator for schools and other key services. Still, Wolf has also talked about imposing additional safeguards, including the creation of a public health registry, in light of some environmental issues that have been raised in New York. "He says he wants stronger regulations. But he said he thinks New York made the wrong decision, and he thinks fracking is safe and that it could really help Pennsylvania's economy," Cusick said.

Pennsylvania lags in studying health risks of shale fracking: New York and Pennsylvania share a border, but on shale gas policy the states are separated by a gulf. The breach widened last week when New York Gov. Andrew Cuomo’s administration announced that state will ban fracking, citing uncertainty about the health risks posed by the oil and gas extraction process. In Pennsylvania, where elected officials from both parties embrace shale gas development, government leaders are still debating whether to fulfill a three-year-old recommendation for how to study the potential impact of shale gas development on public health. Gov. Tom Corbett’s Marcellus Shale Advisory Commission urged the state Department of Health in 2011 to create a health registry to track the well-being of people who live near natural gas drilling sites over time. The project was not funded, and the registry was never created.  Mr. Crompton said proposed funding for a health department registry was withheld in the past out of fear that regularly testing residents who live near wells would be “improperly unnerving” for communities. “We have always been careful about this subject because we don’t like a study or some sort of analysis done under the premise that it’s unsafe,” he said. A state health department spokeswoman said the agency tracks and responds to all Marcellus Shale-related health complaints, which now number 76 since 2011.

Fracturing the Keystone:  Why Fracking in Pennsylvania Should Be Considered an Abnormally Dangerous Activity - During the early morning hours of December 15, 2007, Thelma and Richard Payne, an elderly couple, were startled awake when an explosion in their basement dislodged their Ohio home from its foundation. Their homestead for more than a half-century was completely destroyed due to nearby hydraulic fracturing (“fracking”) operations. In a similar instance in 2010, high levels of methane were discovered in a Pennsylvania family’s basement. The discovery came after Michael Leighton found his drinking water bubbling over the top of his 100-foot well and twenty small geysers on his property spewing water mixed with methane into nearby streams. Again the likely culprit was a nearby fracking operation. Such events epitomize just some of the risks associated with fracking, which have led many concerned citizens to vehemently voice their opposition to the practice in the Marcellus Shale region. Analyzing those risks, this comment argues that unconventional horizontal fracking should be considered an "abnormally dangerous" activity in Pennsylvania because such a classification is both legally appropriate and paramount in mitigating the future harms of fracking. Part II(A) describes the geological characteristics of the Marcellus shale deposit, including its potential gas reserves and the technological challenges of extracting it. Part II(B) provides a detailed description of the recently pioneered fracking procedure and the environmental risks it presents. Part III discusses the current regulatory framework that applies to fracking in Pennsylvania and discusses the failures of that framework to sufficiently protect the public. Part IV traces the common law development of strict liability, applies the current rule to fracking, and discusses the negative results of alternatively analyzing fracking under a negligence regime. Part V concludes that fracking will become increasingly safer through the imposition of strict liability, which will mitigate the negative environmental impacts of the industry, and in time, allow for expanding gas production through safer methods.

Duke professor: Water samples show fracking contamination in Wolf Creek - Water testing by Duke University reveals that contaminants associated with oil and gas wastewater have migrated into Wolf Creek, a tributary of the New River, above a drinking water intake. During evidentiary hearings before the West Virginia Environmental Quality Board in Charleston, Dr. Avner Vengosh, professor of geochemistry and water quality in the Nicholas School of Environment at Duke, presented a summary of his water testing and research findings. According to court documents, Vengosh said he and graduate student Jennie Harkess collected two water samples from Wolf Creek, 200 feet directly downstream from an injection well site at Danny E. Webb Construction Inc. in Lochgelly on Sept. 14, 2013. He concluded the samples contained elevated levels of chemicals associated with fracking wastewater — chloride, bromide, sodium, manganese, strontium and barium. Vengosh noted this chemical composition is typical of oil and gas wastewater observed in Pennsylvania and West Virginia. He said samples were filtered, acidified, and transported according to standardized U.S. Geological Survey field sampling techniques.  He noted that the elevated water quality in stream samples near Webb Construction are not consistent with contamination from acid mine drainage sources, but matches the migration of oil and gas wastewater discharged into the environment.

Fracking Fumes: Where There's a Well, All is Not Well -- Emissions from oil-and-gas production pose a significant threat to human health, and immediate steps must be taken to reduce exposure to the toxic pollution, according to an analysis of scientific studies by the Natural Resources Defense Council. After reviewing the findings of 24 studies conducted by both government agencies and academic organizations, the evidence shows that people living both close to and far from oil-and-gas drilling are exposed to fracking-related air pollution that can cause at least five major types of health problems, according to the NRDC's report, Fracking Fumes. The report says fracking threatens air quality as much as it does water quality and calls for an immediate moratorium on any new wells until a comprehensive analysis of health effects can be performed. Putting a halt to fracking won't jeopardize jobs or local economies, said Kate Sinding, a senior attorney for the NRDC. It will encourage development of alternative energy sources that will mean jobs and financial growth, she said. She argues that these new energy sources will be more sustainable and consequently have a longer-lasting financial impact than oil-and-gas extraction.

Regulators have to require drillers to come clean on what's in fracking fluids -  Chris Faulkner -- Baker Hughes, an energy firm in Houston, is about to make history. The company just pledged to publicly disclose the chemical makeup of its fracking fluid. This decision is revolutionary. In most states, energy companies aren't required to be transparent about how, exactly, they extract oil and gas embedded in underground rock formations. So most keep their fracking recipes a secret. There's a budding activist movement urging regulators to step in and mandate full disclosure.As the CEO of an oil and gas company, most people assume I'm against such a mandate. But I'm not. In fact, new regulations requiring increased fracking transparency would be a boon for the oil and gas industry. Fracking disclosure requirements vary wildly by state. California requires full disclosure. Ohio only mandates that firms publicize some of their chemicals and privately report the rest to the state's Department of Natural Resources. North Carolina classifies fracking recipes as trade secrets, effectively criminalizing disclosure. This patchwork of polices scares off investment. Contrary to the activist hysteria, fracking fluids themselves are actually harmless. Typically, they're over 99 percent water and sand. Only very small amounts of chemicals included. Certain acids help create cracks in the rocks. Propping agents keep cracks open. And corrosion inhibitors stop the acids from eroding well pipe casings. These trace-level chemicals pose effectively zero environmental risk. No less of an authority than the U.S. Groundwater Protection Council has reported that there is not a single recorded instance of water contamination due to fracking fluids. Fracking fluids are safe. And the public deserves to know what goes into them. That's why, as an energy industry CEO, I'm firmly in support of fracking disclosure laws.

ExxonMobil slammed with $2.3 million fine for fracking-related water pollution -The EPA just hit XTO Energy, a subsidiary of ExxonMobil and the nation’s largest natural gas company, with a cool $2.3 million fine for Clean Water Act violations related to its fracking activities in West Virginia. This is big: you rarely hear about frackers being held federally accountable for polluting water supplies, thanks to Bush-era legislation commonly known as the “Halliburton Loophole.” Basically, it ensures that fracking is exempted from the portions of the Safe Drinking Water Act and Clean Water Act that would typically make it accountable to federal oversight; as such, the EPA is mostly prevented from regulating both the process and the chemicals it injects into the ground.  The EPA’s approach is a clever workaround of those restrictions. As CleanTechnica’s Tina Casey explains, the pollution targeted by the EPA wasn’t caused by fracking itself, but instead by other, ordinary violations committed by XTO: the company, it charges, dumped sand, dirt, rocks and other dirty fill materials into streams and wetlands without a permit, in violation of the Clean Water Act.  In total, the company damaged 5,300 linear feet of streams and 3.38 acres of wetland — making the $2.3 million fine comparatively large, particularly when you consider the extra $3 million it agreed to pay in restoration costs.  This isn’t the first time the EPA has pursued this roundabout policy of holding frackers accountable. Last year, it nailed fracking giant Chesapeake Energy for the same violation, resulting in a record $6.5 million settlement.

North Dakota Moves to Ease Oil-and-Gas Radioactive Waste Rules Dramatically - North Dakota regulators recently announced plans to bump up the state's allowable oil-and-gas radioactive waste disposal limit by tenfold. The current threshold is one of the strictest in the country, at 5 picocuries per gram. That's roughly the equivalent of the natural radiation levels found in North Dakota soil. Consequently, many companies truck their waste out of state to places with higher limits, including the neighboring Minnesota and Montana. But the new limit of 50 picocuries per gram, proposed by the state's Department of Health last week, on Dec. 12, would change all that. Although it's far from the loosest limit around, it would be one of the highest in the Great Plains region. Both the state's energy and waste industries welcome this rulemaking, which would save oil and gas companies significant transport costs and bring in new waste-disposal business to local landfills. But landowners who live near the disposal sites in rural western North Dakota don't want their home to transform into a regional dumping ground and are wary of the waste's threat to public health.  The new limit is based on "the absolutely best science available," said Scott Radig, who heads up the division of waste management at the state's Department of Health.  Regulators commissioned research institution Argonne National Laboratory last fall to study the issue. The group's report, published in November, said raising the state's threshold up to the 50 picocuries per gram limit could still be protective of human health and welfare. That's as long as other conditions are met, such as allowing industrial or oilfield waste landfills to receive as much as 25,000 tons of this waste annually and requiring that the waste is buried a minimum of 10 feet below the top of the landfill. North Dakota regulators did include these criteria in the draft rules.

Natural Gas Glut Isn’t Deterring Southwestern Energy - — Across the giant Fayetteville shale gas field here, country roads that were clogged by truck traffic just a few years ago are empty again. Once aglow at night from the bright lights twinkling on drilling rigs, the roads are now dark under the starry Arkansas sky.  Virtually all of the few remaining rig and frack crews belong to one survivor: Southwestern Energy, a stubborn believer in the future profitability of natural gas.“I’d rather have the gas to myself with no one following,” Steven Mueller, Southwestern’s chief executive, said last month as he watched his rig hands pull pipe and mud from a new natural gas well here in northern Arkansas.  With the price of natural gas plunging along with oil in recent weeks, virtually no one is following his lead outside of Southwestern. Twelve of the 13 rigs still drilling among the chicken farms and cattle ranches are Southwestern’s. The 45 other rigs — once operated by giants like Chesapeake Energy, BHP Billiton and Exxon Mobil’s XTO Energy a few years ago, when natural gas prices were more than twice as high — are gone.“  Most of the companies — on the pure economics, oil versus gas — think we are crazy,”  After so much hype and billions of dollars in investment, the nation is deluged with gas and not enough pipelines to carry the bounty to consumers. One energy company after another, year after year, has written off or slimmed down its investments here and in Texas and Louisiana. But not Southwestern Energy, a Houston-based company that has risen from being the nation’s 40th to become the fourth-largest producer of natural gas. Since 2007, Southwestern’s Fayetteville production has risen 800 percent and its reserves are up 570 percent. It still drills more than 30 new wells every month here.

Even more natural gas being flared in Eagle Ford Shale - San Antonio Express-News: Gas flares in the Eagle Ford Shale burned more than 20 billion cubic feet of natural gas and released tons of pollutants into the air in the first seven months of 2014 — exceeding the total waste and pollution for all of 2012.Intro video to flaring project:New records analyzed by the San Antonio Express-News show flaring in the oil patch has continued to increase in the Eagle Ford, an upward trend first revealed in a yearlong San Antonio Express-News investigation called Up in Flames that was published in August.The Express-News obtained new flaring data from the Railroad Commission of Texas, which oversees the oil and gas industry. The updated database shows that from January to July, energy companies flared and wasted enough natural gas to fuel CPS Energy’s 800-megawatt Rio Nogales power plant during the same seven-month period.The newspaper also found some of the top sources of flaring in 2014 lacked state-mandated permits to flare natural gas.

Natural gas flaring in Eagle Ford Shale already surpasses 2012 levels of waste and pollution — Gas flaring in the most profitable shale field in the U.S. is on pace to surpass to 2013 levels of waste and pollution in South Texas, according to a newspaper analysis of state records published Sunday. The Eagle Ford Shale burned off more than 20 billion cubic feet of natural gas in the first seven months of this year, according to the Railroad Commission of Texas, which oversees the oil and gas industry. The tons of pollutants released into the air already exceed levels for 2012. Experts say plummeting oil prices likely won't stifle Eagle Ford production anytime soon. The San Antonio Express-News ( ) also found some of the top sources of flaring in 2014 lacked state-mandated permits to flare natural gas. The goal of flaring is to incinerate impurities, but it generates air pollution and carbon dioxide, a greenhouse gas that scientists say contributes to climate change. Railroad Commission spokeswoman Ramona Nye said Friday that the agency sent violation notices to three energy companies after the newspaper asked about their permitting status. "The commission expects all operators to fully comply with all commission rules including our flaring rules," Nye said. She said violators could be fined or blocked from selling their oil, and added that nearly 300 other warning letters have been sent in the past five months to bring other companies into compliance.

Three Reasons Not to Panic About Oil Prices  In 2014, the United States became the world’s largest producer of oil, and Texas, of course, is the single biggest oil-producing state in the country. Over the past three years, production has nearly doubled to more than three million barrels a day, a volume not seen in this state since the late 1970s. All of which raises the question: how screwed is Texas right now? Since October, oil prices have dropped by half. As Aman Batheja and Jim Malewitz explain over at the Texas Tribune, that has a lot of people nervous. Some are reporting painful flashbacks to the 1980s, when a collapse in oil prices sent Texas plunging into a lonely and seemingly punitive recession.  Here’s my take: Don’t worry. Or at least, don’t worry about a recession. Oil prices have measurable effects on the state’s revenue streams, its employment numbers, and its overall output. But in all three of those areas, Texas is less vulnerable than it once was and less vulnerable than one might think. My main concern, at this point, is that politics (like energy markets) are affected by beliefs and expectations as much as events. With the 84th regular session set to begin in a few weeks, the last thing we need is panic in the ranks. Conversely, if the price drop prompts thoughtful reflection, that would be good. So here’s the case for calm.

Texas drilling permits dropped 50 percent, Railroad Commission reports - Oil drilling activity in Texas is falling dramatically, as the steep decline in crude prices since the summer takes hold, state regulators reported Tuesday. The Texas Railroad Commission issued 1,353 permits for oil drilling last month, 50 percent less than it did the previous month. And in the months ahead, that will likely translate to rigs being shut down and layoffs across oil fields in West and South Texas. “There’s more to come in the months ahead,” . “This isn’t pleasant, but this is how the market rebalances itself.” For now drilling rig counts are holding relatively steady, as companies wind down their contracts. Since peaking in October, the number of drilling rigs operating in the United States has declined by just 5 percent, according to the oil field service company Baker Hughes. That number should continue a steady decline as companies make the decision to delay drilling on their leased land. In recent weeks companies including Conoco Phillips and Marathon have both announced their drilling budgets for next year will be 20 percent less than 2014. For smaller companies, which fill out the bulk of the oil field, the reductions are even more dramatic. Even so, oil production in Texas continues to grow, as existing wells flow and new wells come online. The Railroad Commission reported Texas produced 2.2 millions barrels a day in October, a modest increase from the previous month.

Oil Crash Exposes New Risks for U.S. Shale Drillers - Tumbling oil prices have exposed a weakness in the insurance that some U.S. shale drillers bought to protect themselves against a crash. At least six companies, including Pioneer Natural Resources and Noble Energy, used a strategy known as a three-way collar that doesn’t guarantee a minimum price if crude falls below a certain level, according to company filings. While three-ways can be cheaper than other hedges, they can leave drillers exposed to steep declines. “Producers are inherently bullish,” “It’s just the nature of the business. You’re not going to go drill holes in the ground if you think prices are going down.”  The three-way hedges risk exacerbating a cash squeeze for companies trying to cope with the biggest plunge in oil prices this decade. West Texas Intermediate crude, the U.S. benchmark, dropped about 50 percent since June amid a worldwide glut. Shares of oil companies are also dropping, with a 49 percent decline in the 76-member Bloomberg Intelligence North America E&P Valuation Peers index from this year’s peak in June. The drilling had been driven by high oil prices and low-cost financing. Companies spent $1.30 for every dollar earned selling oil and gas in the third quarter, according to data compiled by Bloomberg on 56 of the U.S.-listed companies in the E&P index.  Financing costs are now rising as prices sink. The average borrowing cost for energy companies in the U.S. high-yield debt market has almost doubled to 10.43 percent from an all-time low of 5.68 percent in June, Bank of America Merrill Lynch data show.   Locking in a minimum price for crude reassures investors that companies will have the cash to keep expanding and lenders that debt can be repaid. While several companies such as Anadarko, Bonanza Creek, Callon Petroleum Co., Carrizo Oil & Gas Inc. and Parsley Energy Inc., use three-way collars, Pioneer uses more than its competitors, company records show.  Pioneer used three-ways to cover 85 percent of its projected 2015 output, the company’s December investor presentation shows.

The Dangerous Economics of Shale Oil -- For years, we've been warning here at that the economics of the US 'shale revolution' were suspect. Namely, that they've only been made possible by the new era of 'expensive' oil (an average oil price of between $80-$100 per barrel). We've argued that many players in the shale industry simply wouldn't be able to operate profitably at lower prices. Well, with oil prices now suddenly sub-$60 per barrel, we're about to find out.  Using the traditional corporate income statement, it is difficult to determine if shale drilling companies make money. There are a lot of moving parts, some deliberate obfuscation at some companies, and the massive decline rates make analysis difficult – since so much of reported profitability depends on assumptions made regarding depreciation and depletion. So, can shale oil be profitable? If so, at what price? And under what conditions? I try to deconstruct all this here.

Chart Of The Day: Natural Gas Suggests $33 Oil -- As I discussed at length previously, the current problem in the energy price is a realization of a supply / demand imbalance. While the economists and analysts are hopeful for a sharp recovery in oil prices, the current decline in oil prices is nothing more than a return to historical normalcy. Let me explain,  If you ask virtually any oil and gas professional, that has been around the industry longer than the graduating class of 2000, they will tell you that the historical relationship between oil and gas prices is roughly $8. The chart below shows the highly correlated history of oil and gas prices until 2008. Not surprisingly, the divergence between oil and gas prices came to fruition in conjunction with the massive interventions by the Federal Reserve, which lowered borrowing costs enough to sufficiently provide for funding of higher cost shale exploration. As Yves Smith recently stated: “The oil and gas sector is capital intensive. Drillers have borrowed phenomenal amounts of money, which was nearly free and grew on trees, to acquire leases and drill wells and install processing equipment and infrastructure. Even as debt was piling up, the terrific decline rates of fracked wells forced drillers to drill new wells just keep up with dropping production from old wells, and drill even more wells to show some kind of growth. One heck of a treadmill. Funded in part by junk debt.Junk bond issuance has been soaring as the Fed repressed interest rates and caused yield-hungry investors to close their eyes and take on risks, any risks, just to get a teeny-weeny bit of extra yield. Demand for junk debt soared and pushed down yields further. And even within this rip-roaring market for junk bonds, according to Bloomberg, the proportion issued by oil and gas companies jumped from 9.7% at the end of 2007 to 15% now, an all-time record.” With an excess supply now realized, particularly as global demand continues to wane, oil prices are now returning back towards their historical long-term relationship.

First casualties in oil price war – US fracking pioneer sharply reduces drilling -- Billionaire Harold Hamm, whose early adoption of shale drilling in North Dakota helped usher in a U.S. energy renaissance, plans to cut spending by 41 percent at his company after the plunge in oil prices. Continental Resources Inc. and other U.S. producers can adjust quickly to the crude collapse and will be able to withstand the downturn better than many producing countries, which face economic “ruin,” Hamm said in an interview. “The oil and gas industry has lowered the cost of gasoline to consumers in this country,” Hamm , chairman and chief executive officer of Continental, said yesterday. “It’s been good for America , this increase in supplies that we have here. We don’t want to see it all go for naught.” Continental and rivals including ConocoPhillips and Apache Corp. plan to trim spending and move rigs to more profitable areas while prices remain under pressure. Crude has fallen by almost 50 percent since June to a five-year low as demand forecasts fell amid a glut in supply fed in part by the shale revolution.

"Houston, You Have A Problem" - Texas Is Headed For A Recession Due To Oil Crash, JPM Warns -  It was back in August 2013, when there was nothing but clear skies ahead of the US shale industry that we asked "How Much Is Oil Supporting U.S. Employment Gains?" The answer we gave: The American Petroleum Institute said last week the U.S. oil and natural gas sector was an engine driving job growth. Eight percent of the U.S. economy is supported by the energy sector, the industry's lobbying group said, up from the 7.7 percent recorded the last time the API examined the issue.Fast forward to today when we are about to learn that Newton's third law of Keynesian economics states that every boom, has an equal and opposite bust. Which brings us to Texas, the one state that more than any other, has benefited over the past 5 years from the Shale miracle. And now with crude sinking by the day, it is time to unwind all those gains, and give back all those jobs. Did we mention: highly compensated, very well-paying jobs, not the restaurant, clerical, waiter, retail, part-time minimum-wage jobs the "recovery" has been flooded with. Here is JPM's Michael Feroli explaining why Houston suddenly has a very big problem.

Drilling Our Way Into Oblivion -  Ilargi -  The damage done must be epic by now, throughout the financial system, but we’re not hearing much about that yet, are we? We will in time, not to worry. Everyone’s invested in oil, and big time too, and they’ve all just become party to a loss of about half of what both oil itself and oil stocks were worth just this summer.  Just like all the other money managers who pray every morning and night on their weak knees for this nightmare to pass. Your pension fund, your government, they’re all losing. BIG. They’ll try and hide those losses as long as they can. But trust me on this one: all major funds have oil in a prominent place in their portfolios. And there’s a Bloomberg index that says the average share values of 76 North American oil companies, i.e. not just the price of oil, have lost 49% of their value since June. There will be Blood with a capital B.  Russia must produce full tilt just to make up for those sanctions. The Saudis know that if they cut, other producers, OPEC or not, will fill in the gap they leave behind. At $55 a barrel, everyone’s desperate. Therefore, the Saudis are not cutting, because it would only cost them market share, and prices still wouldn’t rise. So why does everyone in the western media keep talking about OPEC cutting output, and not the US, just as the same everyone is so proud of saying the US challenges the Saudis for biggest producer status?! Why doesn’t the US cut production? It’s almost as big as Saudi Arabia, after all. Why doesn’t Washington order the (shale) oil patch to tone it down, instead of having everyone talk about OPEC? I know, energy independence and all that, but it’s still a curious thing. Want to save the shale patch? Cut it down to size.Anyway, this is what we have on offer: the oil industry faces a triple whammy. Oil prices are down 50%, oil company share valuations are also down 50%, and their production costs are rising, in quite a few cases exponentially so. That’s what they, and we, face while slip-sliding into the new year. Do I need to explain that that does not bode well? Let’s do a news round. Starting with Bloomberg on how the shale boys are stumbling over their hedges and other ‘insurance’ policies. All you really need to know is: “Producers are inherently bullish ..” And then you can take it from there.

Drilling Our Way Into Oblivion: Shale Was About Land Gambling With Cheap Debt, Not Technological Miracles - The shale patch can exist in its present form only if it has access to nigh limitless credit, and only if prices are in the $100 or up range. Wells in the patch deplete faster than you can say POOF, and drilling new wells costs $10 million or more a piece. Without access to credit, that’s simply not going to happen. That’s about all we need to know. Shale was never a viable industry, it was all about gambling on land prices from the start. And now that wager is over, even if the players don’t get it yet. So strictly speaking my title is a tad off: we’re not drilling our way into oblivion, the drilling is about to grind to a halt. But it will still end in oblivion.

First Oil, now US Natural Gas Plunges off the Chart, “Negative Igniter” for New Debt Crisis - Friday, natural gas futures plunged 6%. Monday morning, when folks were thinking about the beautiful Santa Rally, NG futures plunged nearly 10% to $3.12 per million Btu, the lowest since January 10, 2013. But the crazy day had just begun. NG bounced off and jumped nearly 4%, only to give up much of it later. Tuesday morning, as I’m finishing this up, NG continues to decline, now at $3.11/mmBtu. Down 30% from a month ago. NG demand peaks when the heating season starts. It’s a bet on the weather. Our gurus forecast warmer than normal temperatures across the country, so prices plunged. Or shorts piled into the pre-holiday session with exaggerated effect to make a quick buck. Here is what this 30-day, 30% plunge looks like (each bar = 5 hours): Whatever the cause, NG has traded below the cost of production of many wells for years. That lofty $4.40/mmBtu on the left side in the chart above is still below the cost of production for many wells. The price simply fell from bad to terrible. To make the equation work, drillers have shifted from shale formations that produce mostly “dry” natural gas to formations that also produce a lot of liquids, such as oil, natural gasoline, propane, butane, or ethane that were fetching a much higher price. Thus, they’d be immune to the low price of NG. They pitched this strategy to investors to attract ever more money and keep the fracking treadmill going. Much of this new money was in form of junk debt. Now energy companies account for over 15% of the Barclays U.S. Corporate High-Yield Bond Index – up from less than 5% in 2005. But there is no respite for the American oil patch. The price of oil has plunged 50% since June, the price of propane is down 50% since its recent high in mid-September, and natural gasoline is down 32% since recent high in mid-November. None of the fancy charts natural gas drillers have shown to investors work at these prices.

T. Boone Pickens Rages On CNBC: "I Am The Expert, Not You", Says Oil Down Due To "Weak Demand" -- Narrative, we have a problem! No lesser oil-man than T. Boone Pickens made quite an appearance on CNBC this morning - stunning the cheerleaders into first defense then silence as he broke the facts on oil's collapse to them. Oil is down "mainly due to weak demand," he explains... the anchors deny, "I am the expert, not you" Pickens rages as he warns drilling rigs will be laid down on a very wide scale (just as we have noted previously). Arguing over 'peak oil', he calls CNBC chatter "bullshit" and laid out a rather dismal short- to medium-term outlook for the oil & gas sector - not what the cheerleading tax-cut slurping media narrative wants to hear at all... Enjoy some real-life pushback on the narrative... (apologies for audio quality)

Cheap oil is a costly holiday present - This holiday season has brought what seems like a glorious present: cheap gasoline. Fuel at $2 a gallon or so frees up cash for families to spend on gifts or paying down debts. But by the time this gift is fully unwrapped, it will likely leave people covered with greasy economic residue that will be hard to remove. With oil falling from more than $90 a barrel to under $60, the effects go far beyond how much a tank of gas costs. Because Russia relies heavily on oil exports, its economy is already faltering, and we can expect social unrest, perhaps sparking Vladimir Putin to new military aggression to distract people from their plight. Airfares should fall but likely will not because the three major carriers can maximize profits by avoiding competition. Shares of heavily leveraged fracking companies may burn up like so much flared natural gas, wiping out some investors. The Keystone XL pipeline may be delayed or even killed, preventing a pipeline of American cash that Canadians counted on to buoy their economy. The Chinese are hiring tanker ships, quadrupling rental rates, as they convert some of their trillions of American dollars into oil, which will earn a higher return than the minuscule interest now paid on the U.S. government bonds China holds. Most significant, cheap oil is disrupting the transition to renewable energy, which promises to slow global climate change and save many millions of lives.  Our accounting rules ignore much of the damage from relying on oil and natural gas. Corporate profit and loss statements do not record how the slowly heating atmosphere affects crops, sea levels and weather patterns or how diesel fuel particles spewing out of tailpipes affects people’s asthma. But they should: Cheap oil comes at a price that shows up not on your credit card statement but on the universal ledger where all costs must be recorded and paid.

Subsidy Spotlight: Publicly Funding a Utah Disaster in the Making -   Now oil and gas executives are flocking to the Uinta Basin in Eastern Utah , as new technologies––and support from the government––offer the dubious possibility of digging up the region’s vast deposits of oil shale and tar sands. Canadian production of tar sands on a massive scale has familiarized the American public with the petroleum substance that’s comprised of sand, clay, water, and bitumen which, after several rounds of energy-intensive refining, can be turned into fuel that burns dirtier than conventional crude oil, releasing more carbon, heavy metals, and sulphur in the process. But tar sands production has never happened on a commercial scale within the United States , and less attention is paid to domestic reserves––even though several tar sands mining projects have been in the works for a number of years. In Utah , there’s an estimated 15 billion barrels of oil within the state’s tar sands deposits (that’s a little more than twice the total amount of petroleum consumed in the U.S. in 2013). These tar sands are lower quality than Canada ‘s, and would require even more processing––using large quantities of fuel just to make more fuel. One report puts it this way, “Every time you fill your car with gas from made-in-Utah tar sands…pour an extra 4 or 5 gallons on the ground.” Oil shale is even less promising. Not to be confused with shale oil (which is oil released by fracking), oil shale is fossil matter that hasn’t been in the ground long enough to turn into oil. It’s basically sedimentary rock with deposits of solid chemical compounds called kerogen inside. The push is coming from companies that want to strip mine some of the West’s most iconic landscapes for tar sands and oil shale. It’s coming from officials at every level of government with financial ties to the fossil fuel industry. But the people bottom-lining the advancement of oil shale and tar sands production, like it or not, are taxpayers. 

Oil sands leak that contaminated aquifer renews technology questions -  A Canadian Natural Resources Ltd. oilsands operation that has contaminated a groundwater aquifer is renewing questions about a technology that has already been linked to another serious leak in northern Alberta. The Alberta Energy Regulator says CNRL reported a break in a well at its Wolf Lake high pressure cyclic steam stimulation project in late October, and that the company later discovered elevated levels of hydrocarbons in the aquifer about 60 kilometres northwest of Cold Lake.The area is located about 10 kilometres away from the company’s Primrose East property where a bitumen-water mixture was found oozing to the surface last year. CNRL was using the same steam method there as well. “This is a problematic technology. There’s been problems dating back to 2009. And I think Albertans really have to ask themselves, how many times does this company get to say, ‘Oops, we did it again,’ before the government takes proactive action to deal with this technology, which clearly is riskier than this company claims?” Keith Stewart of Greenpeace Canada said in an interview on Saturday. High-pressure cyclic steam stimulation — often described as “huff and puff” — is a process that alternates between injecting steam and drawing the softened bitumen to the surface. Earlier this year, the province’s energy watchdog suggested a link between the process and old drill holes in the Primrose area, which it said may have provided paths for fluids to flow to the surface.

Keystone 'not even nominal benefit' to US consumers, Obama says - President Obama on Friday said building the Keystone oil pipeline would “not even have a nominal benefit” to consumers, pushing back at claims it would lower gas prices further. Obama stressed that the issue at hand for Keystone is “not American oil, it is Canadian oil.” “That oil currently is being shipped out through rail or trucks and it would save Canadian oil companies, and the Canadian oil industry enormous amounts of money if they could simply pipe it all the way down to the Gulf,” Obama said during his final press conference of 2014. “It’s very good for Canadian oil companies, and it’s good for the Canadian oil industry but it’s not going to be a huge benefit to U.S. consumers, it’s not even going to be a nominal benefit to U.S. consumers,” Obama said.Obama has repeatedly criticized Republicans for demanding approval of the $8 billion oil sands project. A Senate vote in November fell one vote short of sending legislation to Obama's desk. Incoming Senate Majority Leader Mitch McConnell (R-Ky.) has vowed to make it the first piece of business for a Republican Senate next year. Obama reiterated that he wants to make sure if the project does go forward it is not add to the “problem of climate change ... which does impose serious costs on American people.” Asked about McConnell's plans, he said:“I’ll see what they do. We will take that up in the new year.”

The Senate, Pipelines and Oil Money - Oil has been in the headlines for the past month or more, mainly because of the rapid downward readjustment in price.  As well, in case we've forgotten, in mid-November the transportation of oil caught the media's attention as Senate Democrats  blocked Bill S.2280 that would have approved construction of the Keystone XL pipeline.  The measure, Senate Roll Call 280, fell one vote short of overcoming a filibuster with a vote of 59 in favour and 41 opposing with 60 votes needed to see the bill proceed.  This followed a vote in the House which saw the bill approved by a relatively wide margin.  As it looks now, voting on Keystone XL is taking on the appearance of a proxy war between the President and the Republican party with the pro-side consisting mainly of Republicans and the anti-side consisting mainly of Democrats.  From Open Congress, here is a summary of who voted for and against the measure: All Republicans (45) voted for Bill S.2280 along with 14 Democrats and 39 Democrats and 2 Independents voted against the bill. What has been little covered by the mainstream media is the real reason why the vote in the Senate was split as it was. According to research by the Center for Responsive Politics, there is a good reason and that reason is money. On average, over the course of their careers, the 59 Senators who voted for the pipeline have received significantly more money from the oil and gas industry than those who voted against the construction of Keystone XL. Here is a graphic showing the total amounts received by both the pro- and anti-pipeline Senators: In total, the 59 Senators who voted for the pipeline received over 33 million in campaign donations from the oil and gas sector, averaging out to $572,000 each. By comparison, the 41 that voted against the bill received a total of $4.2 million from the oil and gas sector, averaging out to only $103,900 each. This means that the pro-pipeline Senators received 5.5 times as much in campaign donations from the oil and gas sector as those Senators that voted against Keystone XL. In case you were curious, here is a complete listing of total career donations from the oil and gas sector for each Senator:

Monumental Growth of Crude-by-Rail Ignites Communities to Fight Back - Crude-by-rail has increased 4,000 percent across the country since 2008 and California is feeling the effects. By 2016 the amount of crude by rail entering the state is expected to increase by a factor of 25. That’s assuming the industry gets its way in creating more crude-by-rail stations at refineries and oil terminals. And that’s no longer looking like a sure thing. Valero’s proposed project in Benicia is just one of many in the area underway or under consideration. All the projects are now facing public pushback—and not just from individuals in communities, but from a united front spanning hundreds of miles. Benicia sits on the Carquinez Strait in the northeastern reaches of the San Francisco Bay Area. Here, about 20 miles south of Napa’s wine country and 40 miles north of San Francisco, the oil industry may have found a considerable foe. A recent boom in “unconventional fuels” has triggered an increase in North American sources in the last few years. This has meant more fracked crude from North Dakota’s Bakken shale and diluted bitumen from Alberta’s tar sands. Unit trains are becoming a favored way to help move this cargo. These are trains in which the entire cargo—every single car—is one product. And in this case that product happens to be highly flammable. . If a derailment occurs on a train and every single car (up to 100 cars long) is carrying volatile crude, the dangers increase exponentially. In 2013, more crude was spilled in train derailments than in the prior three decades combined, and there were four fiery explosions in North America in a year’s span, the worst being the derailment that killed 47 people and incinerated half the downtown in Lac Megantic, Quebec in July 2013.

Rail industry group warns oil tanker shortage imminent - The Railway Supply Institute, an industry trade group, is warning that the nation’s rail infrastructure won’t be able to handle American energy demands over the next four years. That’s because the United States Department of Transportation has mandated that rail cars carrying flammable liquids must meet higher safety standards, and the group contends there simply aren’t enough skilled workers to retrofit all the cars in service that require upgrades before federal deadlines. In turn, that would force energy companies to either shift transportation responsibility to trucks, which is more expensive, or cut back on production.

Katie Couric and the Net Petroleum Exporter Myth - To understand what the general public is hearing about oil, I watched a Yahoo video yesterday with Katie Couric explaining the decline in oil prices. In general the piece was very good. Couric started by explaining that the decline in oil prices could be explained in two words: Supply and Demand.  She discussed reasons for more supply and softening demand. Note: from Professor Hamilton "[In October] I discussed the three main factors in the recent fall in oil prices: (1) signs of a return of Libyan production to historical levels, (2) surging production from the U.S., and (3) growing indications of weakness in the world economy."  I'd add to the discussion that the short run supply and demand curves are both very steep for oil, so small changes in supply and / or demand can cause a large change in price (see A Comment on Oil Prices). But then Couric mentioned a myth I've heard several times recently. She said:  In fact, [the U.S.] is now the world’s largest producer of petroleum, and for the last two years, it has been selling more to other countries than it’s been buying. Who knew? "Who knew?"  No one, because it is not true. Yes, the U.S. is the largest producer this year (ahead of Saudi Arabia and Russia), but the U.S. is NOT "selling more to other countries than it's been buying".The source of this error is that the U.S. is a net exporter of refined petroleum products, such as refined gasoline. Here is the EIA data on Weekly Imports & Exports of crude oil and petroleum products.  The U.S. is importing around 9 million barrels per day of crude oil and products, and exporting around 4 million per day (mostly refined products). The U.S. is a large net importer!  Note: Here is some data on natural gas (the U.S. is net importer). Another data source is the monthly trade balance report from the Department of Commerce that shows about a net petroleum trade deficit of about $15 to $20 billion per month this year. The good news is the petroleum contribution to the trade deficit has been declining, but it is still very large.

The Oil Price Crash of 2014 -- Euan Mearns does a good job of explaining the oil price crash here. Briefly, demand for oil is softening (notably in China, Japan, and Europe) because economic growth is faltering. Meanwhile, the US is importing less petroleum because domestic supplies are increasing—almost entirely due to the frantic pace of drilling in “tight” oil fields in North Dakota and Texas, using hydrofracturing and horizontal drilling technologies—while demand has leveled off. Usually when there is a mismatch between supply and demand in the global crude market, it is up to Saudi Arabia—the world’s top exporter—to ramp production up or down in order to stabilize prices. But this time the Saudis have refused to cut back on production and have instead unilaterally cut prices to customers in Asia, evidently because the Arabian royals want prices low. There is speculation that the Saudis wish to punish Russia and Iran for their involvement in Syria and Iraq. Low prices have the added benefit (to Riyadh) of shaking at least some high-cost tight oil, deepwater, and tar sands producers in North America out of the market, thus enhancing Saudi market share. The media frame this situation as an oil “glut,” but it’s important to recall the bigger picture: world production of conventional oil (excluding natural gas liquids, tar sands, deepwater, and tight oil) stopped growing in 2005, and has actually declined a bit since then. Nearly all supply growth has come from more costly (and more environmentally ruinous) resources such as tight oil and tar sands. Consequently, oil prices have been very high during this period (with the exception of the deepest, darkest months of the Great Recession). Even at their current depressed level of $55 to $60, petroleum prices are still above the International Energy Agency’s high-price scenario for this period contained in forecasts issued a decade ago.

Oil Crash: Don’t Believe the Happy Clatter - There is a mushrooming false narrative taking over the business airwaves: lower oil prices lead to lower prices at the pump which put more cash in consumers’ pockets which will lead to a more robust economy in the United States in 2015. Yes, there are certainly lower prices at the pump. Yes, that gives consumers more disposable income. But it will decidedly not lead to a more robust economy in the United States for very long. This isn’t a little speed bump in oil prices. This is one of the most dramatic and rapid crashes in a key industrial commodity in history. Since June, the price of West Texas Intermediate (WTI), the domestic crude oil produced in the U.S., is down by 47 percent. The price of the internationally traded crude oil, Brent, is down by a similar figure. If this price collapse were happening in just crude oil, it could be shrugged off as a supply glut problem attributable to growing shale production in the U.S. and over production among OPEC members. But other industrial commodities are in freefall as well. Iron ore prices are down 49 percent this year while copper has declined 15 percent. The price of natural gas is down 30 percent in just the past month, including a plunge of 9 percent just yesterday. Data from the Bureau of Labor Statistics shows that a broad gauge of industrial commodity prices entered a gradual decline in June and then began to plunge in September. That chart looks suspiciously similar to the price action in industrial commodities in the same time period in 2008 – which signaled an early warning to the greatest economic collapse in the United States since the Great Depression. (See charts below.) Industrial commodity prices are a leading indicator of things that are more than pesky details to economic stability. A robust manufacturing sector and robust consumer demand is simply not compatible with crashing industrial commodity prices.

Saudi Arabia Vows to Ride Out Oil Price Slump - — The world’s top petroleum exporter, Saudi Arabia, said on Sunday that it would not cut output to prop up oil markets even if nations outside OPEC did so, in one of the strongest signals that it planned to ride out the market’s biggest slump in years. Referring to countries that are not members of the Organization of the Petroleum Exporting Countries, Ali Al-Naimi, the oil minister of Saudi Arabia, told reporters: “If they want to cut production they are welcome. We are not going to cut, certainly Saudi Arabia is not going to cut.”He added that he was “100 percent not pleased” with prices but said they would improve, although when was unclear.He said speculators were responsible for the fall in prices to half their levels of six months ago and what he called a lack of cooperation from non-OPEC producers.His remarks at a conference here in the capital of the United Arab Emirates were the second time in three days that the kingdom has signaled that it would not change output levels, preferring to allow the market to stabilize on its own.His tone was echoed by some other Arab oil ministers at the conference.The oil minister for the United Arab Emirates, Suhail Mohamed Faraj Al Mazrouei urged all producers not to raise their oil output next year, saying this would quickly steady prices.The world is forecast to need less OPEC oil in 2015 because of a rising supply of shale oil from the United States and other competing sources, with no significant increase in world demand.

Oil slides as Saudi Naimi tells market to forget OPEC cuts (Reuters) - Oil prices resumed their downward march on Monday, doubling back on the biggest one-day gain in over two years, after Saudi Arabia's powerful oil minister said OPEC would not cut production at any price. After a weekend of comments from several Gulf OPEC members reiterating their intent not to intervene in oil markets despite oil prices that have halved since June, Ali al-Naimi told the Middle East Economic Survey it was "not in the interest of OPEC producers to cut their production, whatever the price is" - his starkest comments yet. U.S. crude's front-month contract settled down $1.87, or 3.3 percent, at $55.26 a barrel. It fell $2 earlier to a session low at $55.13. On Friday, U.S. crude finished up nearly 5 percent, the largest gain since August 2012, as some traders took profits on short positions after prices hit five-year lows. Brent closed down $1.27, or 2 percent, at $60.11 a barrel after a session bottom of $59.84. Naimi also said the Saudis might boost output instead to grow their market share and that oil "may not" trade at $100 again. "The best thing for everybody is to let the most efficient producers produce," he told a conference in Abu Dhabi at the weekend. "The Saudis seem to be continuing with their game plan to shock prices lower by sticking it to the market that they will put more oil out if they have more customers for whatever price they are comfortable in selling,"

Saudi Arabia and UAE blame oil rout on countries outside Opec - Saudi Arabia and the United Arab Emirates on Sunday blamed the oil price rout on producers outside Opec and reaffirmed their stance to keep output at current levels. Ali al-Naimi, Saudi Arabia’s oil minister, said he was “100 per cent not pleased” with the near 50 per cent slide in crude oil prices since the middle of June, but said it was a lack of non-Opec co-operation that was a key contributor to the sharp decline. “The kingdom of Saudi Arabia and other countries sought to bring back balance to the market, but the lack of co-operation from other producers outside Opec and the spread of misleading information and speculation led to the continuation of the drop in prices,” he said at an energy conference in Abu Dhabi, according to Reuters. “Let the most efficient producers produce.” Mr Naimi said for the second time in three days that he was “confident the oil market will improve”, but he did not say when. Speaking at the same gathering, Suhail bin Mohammed al-Mazroui, the UAE energy minister, said one of the principal reasons for the price falls was “the irresponsible production of some producers from outside Opec”. He called for oil producers to maintain, and not expand, production throughout next year to keep supply and demand in check. The comments from the two Gulf producers underline their commitment to production targets that stand at 30m barrels a day, despite calls from some poorer members of the cartel to reduce output to bolster prices.

OPEC Blames Speculators, Non-OPEC Countries, US Frackers for Oil Price Crash - OPEC is pointing the finger at speculators as well as Non-OPEC countries, but especially US shale producers for the crude price crash. Let's explore that idea in a series of charts. But first let's take a look at the allegation.  The Wall Street Journal reports Gulf Oil Exporters Blame Non-OPEC Producers for Glut. Gulf oil officials on Sunday defended OPEC’s decision last month to keep its production ceiling intact, blaming producers outside of the group for the glut of oil on the market that has depressed prices. Speaking at an energy conference in Abu Dhabi, Saudi Oil Minister Ali al-Naimi blamed a lack of coordination from producers outside the Organization of the Petroleum Exporting Countries—along with speculators and misleading information—for the slump.  OPEC officials have singled out American shale producers as a particular problem. U.S. oil production has soared as a result of the shale boom, reducing OPEC exports to the U.S. Non-OPEC producers “will realize that it is in their interests to cooperate to ensure high prices for everyone,” Mr. Naimi said. Are US shale frackers really to blame for the price crash? Let's take a look using OPEC's own data. Please consider charts and other analysis from the OPEC December Monthly Oil Market Report.

OPEC Calls For Widespread production Cuts: The oil ministers of two powerful OPEC members, Saudi Arabia and the United Arab Emirates, say they had no choice but to avoid cutting production to shore up oil prices at their meeting last month because non-OPEC producers refused to do the same. “The share of OPEC, as well as Saudi Arabia, in the global market has not changed for several years … while the production of other non-OPEC [countries] is rising constantly,” Saudi Oil Minister Ali al-Naimi said in an article published Dec. 18 in the Saudi Press Agency (SPA). “In a situation like this, it is difficult, if not impossible, for the kingdom or OPEC to take any action that may result in lower market share and higher quotas from others, at a time when it is difficult to control prices,” al-Naimi said.The energy minister of the United Arab Emirates (UAE), Mohamed Faraj al-Mazrouei, agreed. Quoted by the UAE news agency WAM, he said, “No one likes the price drop, but it is not right that one party should interfere to fix the matter. [The party] responsible for the price fall [by causing the current oil glut] should contribute to fix the imbalance in the market.” Al-Naimi represents the most productive and most influential state among OPEC’s 12 members, widely held as the most responsible for the cartel’s decision not to cut the group’s production from 30 million barrels a day during OPEC’s meeting in Vienna on Nov. 17. Al-Naimi’s comments show he has finally decided to give in to demands that he explain his decision, which ignored pleas for production cuts by poorer OPEC members such as Venezuela and Iran, which can’t weather lower oil prices for as long as wealthier Persian Gulf countries in the cartel.

Saudis to Non-OPEC Producers: Cut Your Own Output, We're Good -  Saudi Arabia and the United Arab Emirates reiterated pledges to keep pumping the same amount of crude, blaming non-OPEC producers for the glut of oil that’s driven prices to the lowest in five years. Suppliers from outside the Organization of Petroleum Exporting Countries should cut “irresponsible” output, U.A.E. Energy Minister Suhail Al Mazrouei said in Abu Dhabi yesterday. Even if non-OPEC producers were to offer cuts, OPEC probably wouldn’t follow suit, Saudi Oil Minister Ali Al-Naimi said. The biggest oil producers outside OPEC are the U.S. and Russia. Oil fell about 20 percent since OPEC chose to maintain its production target at a Nov. 27 meeting, seeking to defend market share rather than prices. The highest U.S. crude output in at least three decades is contributing to a glut that Qatar estimates at 2 million barrels a day. Saudi Arabia is confident prices will rebound as economic growth boosts demand and “inefficient producers” trim output, Al-Naimi said.

Saudis Tell Shale Industry It Will Break Them, Plans to Keep Pumping Even at $20 a Barrel - Yves Smith  -- When the Saudis announced their intention not to support oil prices when they were sliding towards $90 and plunged quickly through that level, we deemed the move to be a masterstroke. It served to damage both economic and political enemies. On the economic front, the casualties would include renewables, Canadian tar sands, and the US shale gas industry. On the geopolitical front, the casualties would include Iran, Syria, Russia.... and the US. Even though Riyadh is nominally still an ally, relations with the US are fraught. The Saudis are mighty unhappy with America over its failure to get rid of Assad, its refusal to indulge Saudi demands of attacking Iran (our leaders may be drunk on power, but they haven't quite gone over the deep end) and or indirectly working with Iran against ISIS (which started out as Prince Bandar's private army and may still have the kingdom as a stealth patron). So the Saudis are not at all unhappy if the US suffers as a result of the whackage of its energy industry. First, that's an inevitable outcome if the Saudis are to succeed in maximizing the value of their oil assets, which is a survival issue for the royal family. Second, since relations between the US and Riyadh are frayed right now, it is an opportune time to show that the kingdom is not to be treated casually. Yesterday, the Saudis made it even more clear that they are not pulling out of their game of chicken with other energy producing nations. The Saudis will keep pumping and by implication, will force production cuts on others.

Not everyone “deserves” oil market share according to Naimi -- Izabella Kaminska - For seasoned oil watchers the latest spew of “informed commentary” hitting the media waves is probably becoming nauseating.  That’s because everyone from Robert Peston and Peter Hitchens to Vitol’s Ian Taylor seem to have a view on the oil price decline, some making claims that “the market may have hit bottom”, others hinting that the fall was too “mysterious” to be market led and the latter even admitting that even oil traders can’t predict what’s going to happen next. But it’s the words of Saudi Oil Minister Ali Naimi that matters most. And as he explained to Mees Energy on December 21 — echoing what FT Alphaville has been saying for a long time now — in a price war, everything turns into a market-share-based game of chicken, meaning there’s no incentive for the world’s most efficient and financially buffered producer to cut at all.  A good insight into Saudi thinking comes by way of the following paragraph: It is also a defense of high efficiency producing countries, not only of market share. We want to tell the world that high efficiency producing countries are the ones that deserve market share. That is the operative principle in all capitalist countries.You see, it’s not just that Saudi Arabia wants to defend market share, the kingdom believes it deserves the market share it has achieved due to the superior quality of their fields, its prudent investment over the years and the financial reserves it has diligently accumulated. So the view from Saudi Arabia is basically that, well, it’s unfair for the world to expect the Opec states to take the cuts so that inefficient producers can be spared.

OilPrice Intelligence Report: Cold War In The 21st Century - The modern era is replete with new forms of warfare that have recently started to emerge in a far more ostentatious manner than ever before.  Amid multiple conspiracy theories regarding Saudi Arabia’s plans to end the U.S. shale boom through an oil price war, or Russia putting the squeeze on European energy security in response to sanctions which have crippled its own energy sector, one thing is for sure: energy is being increasingly weaponized on a global scale.  The recent fall in oil prices (WTI closed at $55.26, Brent at $60.13 on December 22), with a resultant knock-on effect on commodity prices in general, has shot energy security to the top of the international agenda.  This has led to multiple deals on an unprecedented scale and the early signs of a shift in global energy and political dynamics.  While not wishing to fan the flames of sensationalized conspiracy theory that are already flooding the media, it is more important now than ever before to examine the shifting geopolitical landscape and the potential consequences for the energy sector as a whole. 

Ready for $20 Oil? - When the U.S. Federal Reserve ended its quantitative-easing program in October, it also ended the primary driver of U.S. stocks during the past six years. . At the same time, investors must cope withslower growth in China, minuscule growth in the euro area and negative growth in Japan. Such widespread sluggish demand -- along with ample supplies of oil and most everything else -- is the reason commodity prices are falling. They have been since early 2011, but many people failed to notice until recently, when crude oil prices nosedived. Saudi leaders must grind their teeth over the last decade's unchanged demand for OPEC oil, while all the global growth has been among non-OPEC suppliers, principally in North America. That may explain why, while Americans were enjoying their Thanksgiving turkeys, OPEC surprised the world. Pressed by the Saudis and other rich Persian Gulf producers, it refused to cut output despite a 38 percent drop in the price of Brent crude, the global benchmark, since June. OPEC, in effect, is challenging other producers to a game of chicken. Sure, the wealthier producers need almost $100 a barrel to finance bloated budgets. But they also have huge cash reserves, which they figure will outlast the cheaters and the U.S. shale-oil producers when prices are low. The Saudis also seized the opportunity to damage their opponents, especially Iran and what they see as Iran-dominated Iraq, in the Syria conflict. They also want to help allies Egypt and Pakistan reduce expensive energy subsidies as prices fall.

The reason oil could drop as low as $20 per barrel - How low can it go — and how long will it last? The 50 percent slump in oil prices raises both those questions and while nobody can confidently answer the first question (I will try to in a moment), the second is pretty easy.  Low oil prices will last long enough for one of two events to happen. The first possibility, the one most traders and analysts seem to expect, is that Saudi Arabia will re-establish OPEC’s monopoly power once it achieves the true geopolitical or economic objectives that spurred it to trigger the slump. The second possibility, one I wrote about two weeks ago, is that the global oil market will move toward normal competitive conditions in which prices are set by the marginal production costs, rather than Saudi or OPEC monopoly power. This may seem like a far-fetched scenario, but it is more or less how the oil market worked for two decades from 1986 to 2004. . The history of inflation-adjusted oil prices, deflated by the U.S. Consumer Price Index, offers some intriguing hints. The 40 years since OPEC first flexed its muscles in 1974 can be divided into three distinct periods. From 1974 to 1985, West Texas Intermediate, the U.S. benchmark, fluctuated between $48 and $120 in today’s money. From 1986 to 2004, the price ranged from $21 to $48 (apart from two brief aberrations during the 1998 Russian crisis and the 1991 war in Iraq). And from 2005 until this year, oil has again traded in its 1974 to 1985 range of roughly $50 to $120, apart from two very brief spikes in the 2008-09 financial crisis.  What makes these three periods significant is that the trading range of the past 10 years was very similar to the 1974-85 first decade of OPEC domination, but the 19 years from 1986 to 2004 represented a totally different regime. There are several reasons to expect a new trading range as low as $20 to $50, as in the period from 1986 to 2004. Technological and environmental pressures are reducing long-term oil demand and threatening to turn much of the high-cost oil outside the Middle East into a “stranded asset” similar to the earth’s vast unwanted coal reserves. Additional pressures for low oil prices in the long term include the possible lifting of sanctions on Iran and Russia and the ending of civil wars in Iraq and Libya, which between them would release additional oil reserves bigger than Saudi Arabia’s on to the world markets.

Saudi Arabia Ready For $20, $30, $40 Oil - Brent crude and West Texas Intermediate (WTI) fell 2 and 3.3 percent respectively to start the week and Saudi Arabia is prepared to go much lower in a bid to trim the fat. Oil Minister Ali al-Naimi said as much in an interview with the Middle East Economic Survey on Monday. Naimi defended the Saudi position and made clear that OPEC nations will not cut production at any price. His comments dismiss any notion of collusion with the United States and spell trouble for producers everywhere. Since its November meeting, OPEC production has remained relatively steady while trending upward. Libya has had a few slip-ups and Venezuelan production is hurting, but the 12-member cartel exceeded their collective target for the sixth straight month, pumping 30.56 million barrels per day (mbpd). For its part, Saudi Arabia accounts for nearly one-third of current OPEC production, or approximately 9.86 mbpd in the month of November. Still, production capacity is nearing 12 mbpd and Naimi suggested the oil-rich nation might put it to use sooner rather than later. It’s all part of a plan to demonstrate that high-efficiency producing countries deserve the greatest market share – an idea Naimi describes as the operative principle of all capitalist countries. OPEC produces around 40 percent of global output, but non-OPEC production is projected to grow 2.3 percent next year after a 3.5 percent expansion this year.

Annotated History Of Oil Prices Since 1861 - Oil prices have crashed since the summer. But oil price volatility is not new. Indeed, the price of WTI crude surged by 5% today alone. In a new note to clients, Goldman Sachs analysts offer this cool annotated chart of the history of crude oil prices.

Seven Questions About The Recent Oil Price Slump - IMFdirect - The IMF Blog - Oil prices have plunged recently, affecting everyone: producers, exporters, governments, and consumers.  Overall, we see this as a shot in the arm for the global economy. Bearing in mind that our simulations do not represent a forecast of the state of the global economy, we find a gain for world GDP between 0.3 and 0.7 percent in 2015, compared to a scenario without the drop in oil prices. There is however much more to this complex and evolving story. In this blog we examine the mechanics of the oil market now and in the future, the implications for various groups of countries as well as for financial stability, and how policymakers should address the impact on their economies.   What follows is our attempt to answer seven key questions about the oil price decline:

  1. What are the respective roles of demand and supply factors?
  2. How persistent is this supply shift likely to be?
  3. What are the effects likely to be on the global economy?
  4. What are likely to be the effects on oil importers?
  5. What are likely to be the effects on oil exporters?
  6. What are the financial implications?
  7. What should be the policy response of oil importers and exporters?

The Positive Side Of Low Oil Prices -  In a year of plummeting oil prices and the dismay it brings to producers and traders, two senior economists at the International Monetary Fund (IMF) haven’t taken their eyes off the bright side, something that every oil customer already knows: Cheap oil can be very, very good.  In fact, they wrote in a blog on Dec. 22 that the low price of oil could increase global gross domestic product (GDP) in 2015 by between 0.3 and 0.7 percent above the Fund’s baseline world growth forecast of 3.8 percent, made in October. The assessment was made by two of the IMF’s highest-ranking officials, Olivier Blanchard, its chief economist, and Rabah Arezki, the head of the Fund’s commodities team. They emphasized that their conclusions are merely a numerical simulation not a formal forecast for next year, which is handled by others at the IMF. But they also say if the Fund’s formal forecast, released in January, has similar numbers, it would mean a dramatic shift in the IMF’s outlook for the world economy. The organization’s forecast issued in October expected drops in economic growth worldwide during 2015 by between 0.2 percentage points and 3.8 percentage points because of economic sluggishness in Brazil, Russia and the eurozone – the 18 European Union countries that have adopted the euro. Blanchard and Arezki’s report says the lower oil prices should increase GDP in China, for example, by between 0.4 and 0.7 percentage points in 2015 above the IMF's baseline estimate made in October. Chinese GDP growth could be even greater in 2016, up by between 0.5 and 0.9 percentage points.

Saudi Arabia Seen by Former Adviser Assuming $80 Oil - Bloomberg: Saudi Arabia’s 2015 budget is probably assuming an oil price of $80 a barrel, and will be seen as a sign of confidence in the market, according to a former economic adviser to the country’s government. The assumption is down from $103 a barrel for this year, John Sfakianakis, who used to be chief economic adviser to Saudi Arabia’s Ministry of Finance, said by phone after the budget was announced yesterday. The world’s biggest crude exporter set 2015 spending at 860 billion riyals ($229 billion) with revenue falling to 715 billion riyals from 1.046 trillion riyals in 2014, the Finance Ministry said. Oil, which has slumped 47 percent this year to $60.23 a barrel in London, accounted for 89 percent of its 2014 revenue. Brent crude tumbled into a bear market this year as the U.S. pumped the most oil in more than three decades, leading the United Arab Emirates Energy Minister Suhail Al Mazrouei to urge producers from outside the Organization of Petroleum Exporting Countries to trim output. Iraq, the second-biggest producer in OPEC, said this week its 2015 budget is based on $60 oil. “Everyone was expecting to see a budget built on a price around $60 but that would have sent a negative message to the oil market,” Sfakianakis said from Riyadh. “With a fiscal break even price of $80 a barrel, the government is sending a message to the market that we are expecting to see a rebound in oil prices.” Sfakianakis is Middle East director at London-based Ashmore Group Plc.

Oil heavyweights differ on catalyst for crude price rebound - Oil is going to rebound. That is the view of both Harold Hamm, a leading figure in the US shale industry, and Ali al-Naimi, the veteran Saudi oil minister. However, both have sharply contrasting views on how that recovery will come about. Oversupply of oil has caused a near-50 per cent fall in prices during the past six months, and producers worldwide have been locked in a battle over who will cut output to bring the market back into balance. Mr Naimi suggested in an interview with the Middle East Economic Survey this week that he expected higher-cost production, in Russia, Brazil, west Africa and the shale oilfields of the US, to be squeezed out of the market. Oilfields in the Gulf, he said, had production costs of just $4-$5 per barrel, and in any market economy, “high-efficiency producing countries are the ones that deserve market share”. He was confident the Gulf countries, and especially Saudi Arabia, could afford to hold out. Those comments were described by Mr Hamm as “bravado”. Mr Hamm argued that pressure was building on Saudi Arabia and other large oil-producing countries because of their need to fund expensive social welfare programmes. “They can’t live with these prices,” he told the Financial Times. “They can talk pretty bravely, until people are knocking on their door.” Either they would decide voluntarily to cut their production, he suggested, or political instability would do it for them.

EIA December Crude Inventories Surge To Record Highs -- WTI Crude is down over 3.5%, dropping back towards $55 - dismissing yesterday's dead-cat-bounce deja vu - as EIA inventory builds more than expected at 7.27 million barrels (biggest build in 2 months to 6-month highs). This is the largest inventory for the time of year since records began. Of course, while energy stocks are fading broad equity indices do not care at all... EIA Inventories rose most in over 2 months... This is the highest inventory for December on record... WTI Crude slipped once again back towards $55, remaining in the broad $54.50 to $59 range for now... Energy stocks ripped yesterday... dropping now... Because fun-durr-mentals... Charts: Bloomberg

Oil Slides as U.S. Supplies Jump Most in Two Months - Oil dropped as a government report showed U.S. crude inventories increased the most in two months. West Texas Intermediate fell as much as 3.6 percent in New York. Stockpiles climbed 7.27 million barrels in the week ended Dec. 19 as imports surged, the Energy Information Administration said. The report was projected to show a 2.5 million-barrel decline, according to the median estimate in a Bloomberg survey of nine analysts. Gasoline supplies advanced to a seasonal record. “This report provides us with a very consistent picture that we’ve got supply outpacing demand and inventories are piling up,” . “There’s too much crude coming in. Refineries are operating at a high rate but not high enough to make a dent in this.” Oil is heading for the biggest annual drop since 2008 amid a global glut exacerbated by the highest U.S. output in more than three decades. Prices have dropped about 20 percent since the Organization of Petroleum Exporting Countries decided Nov. 27 to maintain its output ceiling at 30 million barrels a day. WTI for February delivery fell $1.59, or 2.8 percent, to $55.53 a barrel at 12:47 p.m. on the New York Mercantile Exchange. The volume of all futures traded was 43 percent below the 100-day average for the time of day. The U.S. benchmark grade is down 44 percent this year.Brent for February settlement dropped $1.58, or 2.6 percent, to $60.11 a barrel on the London-based ICE Futures Europe exchange. Volume was 62 percent below the 100-day average. The North Sea crude is down 46 percent this year. The European benchmark traded at $4.58 premium to WTI on ICE, down from $4.57 yesterday. The gain left U.S. crude stockpiles at 387.2 million barrels, the highest level since June, according to data from the EIA, the Energy Department’s statistical arm. Imports surged 17 percent to 8.29 million barrels a day, the most since September 2013.

Oil companies seen cutting spending 25 pct in 2015 due to falling crude (Reuters) - Plunging oil prices will prompt energy companies to cut investments in new projects by 25 percent or more in 2015, analysts said over the past week, as firms try to stay cash-flow positive and keep debt in check. With oil prices down more than 40 percent since June, some companies, including ConocoPhillips, have slashed spending by 20 percent. But because crude prices have yet to stabilize, other companies are waiting to draw up budgets. "Many are buying time on 2015 capex and production guidance while hoping for a stable baseline to plan from," Capitol One Securities said in a note to clients. "We think cuts of 25 percent or more versus a year ago are on the way and won't be unusual." Whiting Petroleum Corp said on Monday it will not release its 2015 capital spending plan until February, citing volatile oil prices. Budgets from Chevron Corp and Exxon Mobil Corp are also due out in early 2015, along with comprehensive spending surveys from industry analysts at Cowen and Barclays. The spending reductions, once announced, are likely to be the biggest in years. But the U.S. government still expects output to be the highest in decades as productivity for new wells rises. Investment bank Simmons expects average U.S. oil production growth of about 900,000 barrels per day (bpd) next year, up from around 9 million bpd in November. Bernstein Research said if benchmark Brent crude oil was at $80 per barrel, then global exploration and production spending would fall 20 percent to $640 billion.

Chevron puts Arctic drilling plans on hold indefinitely -  Chevron Canada, in a letter to the National Energy Board, has announced it's put its Arctic drilling plan on hold "indefinitely," in part due to “the level of economic uncertainty in the industry.” The company bid $103 million to explore a parcel of deep water in the Beaufort Sea about 250 kilometres northwest of Tuktoyaktuk, N.W.T.  In the letter, sent yesterday, Chevron announced it's withdrawing from a process whereby the NEB would evaluate the company's proposed blowout response plan. A ruling on Chevron's blowout response plan would have been followed by an actual application to drill, according to a two-phased approach recommended by Chevron. The company's postponement does not come as a shock to Doug Matthews, an analyst and former oil and gas director with the Northwest Territories government. With the price of oil down by 40 per cent since June, "Companies all over the world are starting to pull in their horns," he says. "They have to conserve their cash. So we're seeing delays everywhere."

If Shell Backs Out, Arctic Oil Off The Table For Years -- The next several months may be pivotal for the future of oil development in the Arctic. While Russia has proceeded with oil drilling in its Arctic territory, the U.S. has been much slower to do so. The push in the U.S. Arctic has been led by Royal Dutch Shell, a campaign that has been riddled with mistakes, mishaps, and wasted money.  Nearly $6 billion has been spent thus far on Shell’s Arctic program, with little success to date. Now, 2015 could prove to be a make or break year for the Arctic. Shell may make a decision on drilling in the Chukchi and Beaufort Seas by March 2015. If it declines to continue to pour money into the far north, it may indefinitely put Arctic oil development on ice (pun intended).The crossroads comes at an awful time for Shell. Oil prices, hovering around $60 per barrel, are far too low to justify Arctic investments. To be sure, offshore drilling depends on long-term fundamentals – any oil from the Arctic wouldn’t begin flowing from wells until several years from now. That means that weak prices in the short-term shouldn’t affect major investment decisions.Unfortunately, they often do. Just this week Chevron put its Arctic plans on hold “indefinitely,” citing “the level of economic uncertainty in the industry.” Chevron had spent $103 million on a tract in the Beaufort Sea in Canadian waters, but weak oil prices have Chevron narrowing its aspirations. Shell is now the only one left standing, still mulling its next move. According to Platts, a decision on whether or not Shell plans to proceed with drilling in 2015 will be made by March. And if they turn their back on drilling, it could mean closing the doors on the Arctic for years to come.

Oil Drillers Are Under Pressure to Scrap Rigs to Cope With Downturn - Offshore oil-drilling contractors, who last year were able to charge record rates for their vessels, are now under pressure to scrap old rigs at an unprecedented pace. The recent five-year low in oil prices is threatening an industry already grappling with a flood of new vessels and weakening demand. More than 200 new rigs are scheduled to be delivered in the next six years. That’s a 25 percent jump from the number currently under contract. To cope, many rig owners will try to keep revenue up by culling older vessels to balance supply and demand. “The older assets, particularly those built before the 2000 time period, are really less desired by the industry,”  Those vessels “are only causing the customer base to use those rigs against higher quality rigs to get pricing lower.”About 140 older rigs would need to be scrapped to make way for the new vessels scheduled for delivery by 2020, according to Andrew Cosgrove, an analyst at Bloomberg Intelligence. That pace would double the number scrapped in the previous six years and even eclipse the 123 vessels retired since 2000, according to data compiled by Bloomberg. Booming offshore exploration earlier in the decade encouraged a flurry of rig orders. That’s now leading to a potential market crash in a global industry pegged to generate revenue of $61.5 billion this year. Low oil prices are compounding the problem, alarming investors.

Drilling Cutbacks Mean Service Companies Forced to Scrap Rigs -- Despite the decline in oil prices, the U.S. is expected to boost production by 300,000 barrels per day in 2015, up to a yearly average of about 9.3 million barrels per day, according to the most recent government estimates.  But the number of oil and gas rigs in operation is already beginning to drop. For the week ending in December 19, the rig count dropped to 1,875 active rigs, down from 1,893 a week earlier. The fall off is an indication that exploration companies are beginning to pare back investments. Pulling back on drilling may result in a lower future production, which could hurt the growth prospects of some oil firms. However, the slowdown in drilling activity is having a much more immediate and acute effect on a separate set of companies – those supplying the rigs. Offshore oil contractors such as Halliburton or Transocean have seen their share prices tank worse than exploration companies because their revenue comes from being paid to drill, not necessarily from oil production after wells are completed. That means that when drilling slumps, their profits take an immediate hit. Even worse, exploration companies may see rising profits from existing production as oil prices rebound, but drilling service companies don’t benefit if their drilling contracts had been put on hold or cancelled. The problem is compounded by the fact that a slew of new offshore oil rigs are set to come into operation – an estimated 200 over the next six years. As Bloomberg reports, these new rigs will mean there could be a surplus of about 140 rigs, meaning offshore oil contractors will have to scrap that many to bring new ones online. If oil prices stay where they are now – in the neighborhood of $60 per barrel – a deep contraction in shipping rig supply will be inevitable. In 2015, spending on offshore exploration may be slashed by 15 percent, which will mean taking a deep knife to companies providing rigs and contracting. Transocean has already announced that it is idling seven deepwater rigs, along with several other drillships.

Hopes, Fears, Doubts Surround Cuba's Oil Future - One of the most prolific oil and gas basins on the planet sits just off Cuba's northwest coast, and the thaw in relations with the United States is giving rise to hopes that Cuba can now get in on the action. It's a prospect welcomed by Cubans desperate for economic growth yet deeply concerning for environmentalists and the tourism industry in the region. But a Cuban oil boom is unlikely anytime soon even if restrictions on U.S. businesses are relaxed because of low oil prices and far better drilling opportunities elsewhere. "(Cuba) is not going to be the place where operators come rolling in," says Bob Fryklund, chief strategist for oil and gas exploration and production at the analysis firm IHS. Although Cuba's oil and gas industry has long been open to foreign investment, the U.S. embargo has denied it some of the world's best deep-water drilling technology and expertise. As a result, Cuba produces just 55,000 barrels of oil per day. About one-third of that is produced by a Canadian firm called Sherritt International. Cuba needs 155,000 barrels per day, and it fills the gap with oil from Venezuela, part of a trade agreement established under former Venezuelan President Hugo Chavez. By comparison, a single large oil platform in the deep water U.S. Gulf of Mexico can produce 200,000 barrels per day. The few major exploration projects in Cuba in recent years have had little success. Most recently, the Spanish company Repsol abandoned a yearslong exploration project in 2012 when an offshore exploratory well failed to find much oil.

Cuban Oil May Prove A Boon For U.S. Companies --With diplomatic relations warming between the U.S. and Cuba, oil and gas companies may train their sights on what’s off Cuba’s coast — large oil reserves. Right now Cuba produces just over 50,000 barrels per day of oil and relies on Venezuela for around another 100,000 bpd. However with Venezuela’s economy reeling from the staggering drop in oil prices this year, Cuban officials want to avoid the impacts of a sudden drop in Venezuelan support. The commitment by Cuba and the U.S. to normalize relations may allow Cuba to buy more oil on the open market, and for U.S. companies to bring expertise and experience to tap into the country’s offshore reserves.This outcome is far from certain. With Saudi Arabia refusing to cut oil output, which would stabilize prices, and previous offshore efforts yielding unsuccessful results, many experts believe that most of Cuba’s 124 million barrels will remain inaccessible. Brazilian, Malaysian and Spanish companies have failed to produce any major wells during exploration efforts in the last few years. Pavel Molchanov, an energy company analyst with Raymond James, told Politico that there is “not going to be a Cuban oil rush.”  Even if there is no rush, the arrival of U.S. oil and gas firms could help boost production through better drilling services. Jorge Piñon told FuelFix that if companies like Halliburton and Schlumberger gave technological assistance to Cuba, the country could significantly increase the amount of oil it recovers from its current wells.

OilPrice Intelligence Report: 2015 Will Not See A Cuba, Mexico Oil Boom -  Mexico’s sweeping energy reforms and Washington’s normalization of relations with Cuba are both great victories of 2014, but issues of security dull the potential for major projects in Mexico, while downward spiraling oil prices render deep-sea Gulf of Mexico projects too expensive.     The news earlier this week that the US would finally normalize diplomatic relations with Cuba following the release of an American government subcontractor and a swap of intelligence assets opens up a plethora of commercial opportunities for American business, but it will be some time before oil and gas are ready to take advantage of this. Plummeting oil prices make significant exploration of the billions of barrels of crude believed to be buried off Cuba’s part of the Gulf of Mexico prohibitive right now. It’s there somewhere, but efforts over the past two years by majors such as Spain’s Repsol and Malaysia’s Petronas to find the oil have come up dry—or at least not wet enough for commercial development. Drilling offshore Cuba will be expensive, and US and Mexican auctions of exploration licenses in the Gulf of Mexico will for now be prioritized by explorers. Even then, catastrophically low oil prices promise to put these big projects on hold. In a soon-to-be-published exclusive interview with, Breitling Energy CEO Chris Faulkner notes that current oil prices will put large offshore projects on hold. “These are $100 million wells. The only oil that is more expensive than this is Canadian oil sands,” he said.

Egypt And The Double-Edged Sword Of Cheap Oil -- The good news for Egypt: Inexpensive oil means the government needs to spend less on its fuel subsidies for its energy-hungry population of 86 million people, the third largest in the Middle East.  The bad news: Rich oil-producing countries in the region are making less money on their primary exports and thus may eventually have to reduce the financial aid they’ve been showering on Cairo. The price of oil has plummeted by nearly 50 percent since June, leaving benchmark crudes now trading at around $60 per barrel, down from their peak of more than $110. If the current price of oil holds, the Egyptian government is expected to save $4.2 billion on fuel subsidies in the fiscal years that spans parts of 2014 and 2015, a 30 percent reduction, says Egypt’s Petroleum Minister Sherif Ismail. The low price of oil has benefits that go far beyond the subsidies, according to one company, Citadel Holding, also known as Qalaa Holding, a major business conglomerate in Egypt. In a report issued Dec. 18, the conglomerate claimed that cheap oil would help cut the country’s budget deficit and balance of payments by at least $5.5 billion.

Oil’s Swift Fall Raises Fortunes of U.S. Abroad -  A plunge in oil prices has sent tremors through the global political and economic order, setting off an abrupt shift in fortunes that has bolstered the interests of the United States and pushed several big oil-exporting nations — particularly those hostile to the West, like Russia, Iran and Venezuela — to the brink of financial crisis.The nearly 50 percent decline in oil prices since June has had the most conspicuous impact on the Russian economy and President Vladimir V. Putin. The former finance minister Aleksei L. Kudrin, a longtime friend of Mr. Putin’s, warned this week of a “full-blown economic crisis” and called for better relations with Europe and the United States.  But the ripple effects are spreading much more broadly than that. The price plunge may also influence Iran’s deliberations over whether to agree to a deal on its nuclear program with the West; force the oil-rich nations of the Middle East to reassess their role in managing global supply; and give a boost to the economies of the biggest oil-consuming nations, notably the United States and China. It might even have been a late factor in Cuba’s decision to seal a rapprochement with Washington.  After a precipitous drop, to less than $60 a barrel from around $115 a barrel in June, oil prices settled at a low level this week. Their fall, even if partly reversed, was so sharp and so quick as to unsettle plans and assumptions in many governments. That includes Mr. Putin’s apparent hope that Russia could weather Western sanctions over its intervention in Ukraine without serious economic harm, and Venezuela’s aspirations for continuing the free-spending policies of former President Hugo Chávez.

The upcoming petrodollar bifurcation risk? - Izabella Kaminska - One of the still to be appreciated side-effects of falling oil prices is a reduction in so-called petrodollar recycling by oil producers. As we’ve already noted, there are analysts who believe petro-induced liquidity shortages may already be impacting certain eurodollar markets. Furthermore, there’s also the fact that as liquidity shortfalls manifest in external markets, the opposite could become true for internal US markets. So, just as the dollar liquidity tap gets switched off externally, it gets turned on with gusto back at home. But Bank of America Merrill Lynch’s Jean-Michel Saliba gets to the same point somewhat differently. As Saliba noted last week: Lower oil for longer could imply material shifts in petrodollar recycling flows. Petrodollar recycling through the absorption channel has generally been USD negative, helping an orderly reduction of global imbalances though greater domestic investment. Although recycling through the financial account is less well understood, the bulk has likely, directly or indirectly, ended up in US financial markets and has thus been USD-positive. A prolonged period of low oil prices is thus likely to lead to lower petrodollar liquidity with, in time, an allocation shift towards more inward-looking repatriation and financing flows, in our view.

Children are cleaning up a devastating oil spill in Bangladesh—with their bare hands – (pictures) The Sundarbans, which literally translates as “beautiful forest,” straddles the border between India and Bangladesh along the eastern Indian state of West Bengal. India has 40% and Bangladesh has 60% of the mangroves. Both areas are designated wildlife sanctuaries and reserve forests. This mangrove margin is home to some of the world’s most endangered creatures: the masked finfoot; the Irrawaddy, Gangetic, and four other kinds of dolphins; the Bengal tiger and the beautiful, endangered Sundari tree (Heritiera fomes). Almost a million forest people depend upon this ecosystem for their livelihood.  By definition and by law, heavy shipping traffic carrying hazardous cargo has no place in the Sundarbans. Yet in Bangladesh, tankers carrying “modified cargo”—oil, pesticides, fertilisers, insecticides, fly ash, cement, sand, and salt—travel through these channels every day. On Dec. 9, the inevitable happened. Two ships collided and 230,000 liters of oil flowed into this corner of the Sundarbans. Our boat, the Gol-Patta, reached the Sundarbans on Dec. 14, four days after the spill. Men, women, and children were knee deep in the mudflats and elbow deep in heavy fuel oil. They were scraping black, viscous goo from sedges, reeds, leaves, trunks and roots. Each painstaking handful of black pulp collected was smeared off along the rim of a cooking pot. Then, they turned back to the plants for more. Children, mostly aged between 10 years and 16 years, were covered in black from toe to waist. Save for the blackened fishermen and children, no one else was cleaning the spill. The slick sloshed forward in the ebbing tide. We followed it: four km past the spill site, eight km past the spill site, 12km past the spill site and eventually, 40km past. The slick sloshed ahead of us, beside us, behind us. Films of oil of varying thicknesses floated in the main channel and pooled in the smaller khals. The tide went out by nightfall and came back in at dawn. The oil was no different. Fishermen claimed that the slick was visible almost 80km down the river.

Experts Arrive To Help Barehanded Children Clean Up Massive Bangladeshi Oil Spill -- In the early morning of December 9, foggy weather in the estuarine waters of the Sela River caused a cargo ship to ram the Southern Star 7, a tanker ship laden with between 66,000 and 92,000 of thick furnace oil bound for one of the nation’s oil-burning power plants. The tanker had dropped anchor because of the fog, and when the cargo ship ran into it, the collision was strong enough to kill the tanker’s captain and spill most of the thick, black, sludgy liquid cargo. The estuary was protected as a sanctuary for rare dolphin species, but that designation did not stop the oil from gushing into the mangrove forest. Even worse, twice-daily tidal flows in and out of the estuary spread the oil spill over 40 miles along the Sela and Pusur Rivers, deep into the area’s mangroves, shorelines, and wetlands. For more than a week following the collision, oil spill response comprised little more than local fishermen, villagers, and even children manually scooping up oil with buckets and pans, with no protective gear. Following an official request from the Bangladeshi government, the United Nations has mobilized an international response team. That group left for the Sundarbans on Monday, “comprised of multi-disciplinary experts from seven different countries including Bangladesh,” . The team was chosen for this expertise, as well as the specialization in mangrove forest systems. In support of the Bangladeshi government, the team will assess the situation, work to contain the spill, clean it up, and “develop an action plan for a phased response and recovery.” The situation facing the response crew is as daunting as it is depressing. First, the fishermen and their children who have been the front line defense in the cleanup effort have been covered in oil containing toxic chemicals all day, and bring the fumes home with them at night. As Quartz put it, exposure to these chemicals “can have dire digestive, pulmonary, and dermatological effects and, if the exposure extends over time, also neurotoxic effects.”

Low Oil Prices Pushing Venezuela Towards Default: Low oil prices are putting major oil producers in a squeeze. The Russian central bank has been forced to cough up foreign exchange in order to defend itself from a currency crisis. But it may be Venezuela that is the least prepared and most in danger of an economic freefall because of the dramatic decline in oil prices.  Venezuela is particularly vulnerable as its economy depends on oil for 95 percent of its export revenue. The economy was stagnant even when oil prices were in triple digit territory. In fact, the violent protests that broke out in Caracas in February 2014 occurred when oil prices were well over $100 per barrel. But mismanagement of the economy is not a new phenomenon – inflation-adjusted per capita GDP in Venezuela is 2 percent lower today compared to what it was in 1970. However, the South American OPEC member saw its fortunes go from bad to worse when oil prices started to decline. In October, prominent Harvard economists Carmen Reinhart and Kenneth Rogoff predicted that Venezuela would most likely default on its bonds as a result of oil prices. And that was when Brent crude was trading above $80 per barrel. Since then, it has tumbled another 25 percent to $60 per barrel.

Age of Plenty Seen Over for Gulf Arabs as Oil Tumbles - The boom that adorned Gulf Arab monarchies with glittering towers, swelled their sovereign funds and kept unrest largely at bay may be over after oil prices dropped by almost 50 percent in the last six months. The sheikdoms have used the oil wealth to remake their region. Landmarks include man-made islands on reclaimed land, as well as financial centers, airports and ports that turned the Arabian desert into a banking and travel hub. The money was also deployed to ward off social unrest that spread through the Middle East during the Arab Spring. “The region has had 10 years of abundance,” . “But that decade of plenty is done. The drop in oil prices will hurt performance in the near term, even if the Gulf’s buffers are powerful enough to ensure there’s no crisis.” Brent crude, which has averaged $102 a barrel since the end of 2009, plunged to about $60 by the end of last week. The slump accelerated after the Organization of Petroleum Exporting Countries, whose top producer is Saudi Arabia, decided in November to keep output unchanged. At $65 a barrel, the six nations of the Gulf Cooperation Council, which hold about a third of the world’s crude reserves, would run a combined budget deficit of about 6 percent of gross domestic product, according to Arqaam Capital, a Dubai-based investment bank.

Kazakhstan says prepared for oil as low as $40 per barrel (Reuters) - Kazakhstan, the second largest ex-Soviet oil producer after Russia, has plans in place should global oil prices fall as low as $40 per barrel, President Nursultan Nazarbayev told local TV channels. "Kazakh people should not be worried. We have a plan if oil price are $70, $60, $50, $40 per barrel," he said, according to a transcript published on his website "There are reserves which could support people, preventing living conditions from worsening," he said, without providing any details. Kazakhstan's National Fund, which collects oil revenues, stood at $76.8 billion at the end of November. Separately, the central bank's net gold and foreign exchange reserves stood at $27.9 billion. true Nazarbayev has also urged the Kazakh people not to worry about the slide in Russia's rouble currency, which has lost some 45 percent of its value versus the dollar this year.

Saudi Rulers to Curb Wages as Kingdom Confronts Oil Slump -   Saudi authorities pledged to curb wages and push ahead with investments next year as the world’s largest oil exporter seeks to counter the effect of tumbling crude prices on the economy. The government said it expects the budget deficit in 2015 to widen to 145 billion riyals ($39 billion), from 54 billion riyals this year, the Finance Ministry said today. That amounts to about 5 percent of gross domestic product, according to Arqaam Capital, a Dubai-based investment bank. The Finance Ministry said the government will continue to invest in areas such as education and health care, while exerting “more efforts” to curb spending on wages and allowances, which make up about 50 percent of spending. The kingdom will resort to borrowing and use of reserves to plug the budget deficit, the state-run Saudi Press Agency said, citing Economy Minister Mohammad Al-Jasser. Projected revenue will drop more than 30 percent next year to 715 billion riyals, while expenditure was set at 860 billion riyals, budget data show. Spending in 2014 is estimated to have been 1.1 trillion riyals, 29 percent higher than target. During his nine-year reign, King Abdullah, 90, has allocated a record amount of money to raise wages, build roads, industrial centers and airports as he sought to bolster growth and keep political unrest at bay. Government spending has been driven by crude prices averaging above $107 a barrel since the end of 2011. Oil is now trading at nearly half that level, having slumped to its lowest since 2009.

Rosneft Repays $7 Billion and Sees No Need to Buy Dollars - OAO Rosneft repaid $7 billion of debt and said it’s generating enough dollars to meet the obligations it took on for an acquisition last year to become the world’s largest traded oil producer. Rosneft has sufficient foreign currency and would use ruble funds received from the state for domestic projects, Chief Executive Officer Igor Sechin said in a statement. The latest repayment doesn’t mean the end of pressure on Rosneft. The oil producer, which contributes almost 40 percent of Russia’s total output, has to grapple with the slump in oil prices, U.S. and European sanctions that limit its borrowing and a Russian economy at risk of sliding into recession. The state, which depends on oil taxes for about half its budget, may help defend itself by supporting Rosneft output. “If they have to, they will go to government and there is not much the government can do but give them money,”

China Buys Record Russia Crude as Putin Seeks to Avoid Recession - As oil’s slump threatens to plunge Russia into recession, President Vladimir Putin can at least rely on China to keep buying its crude. The world’s biggest producer sold a record volume to its Asian neighbor last month, according to data e-mailed by the General Administration of Customs in Beijing today. Exports rose 65 percent from the same period last year to 3.31 million metric tons, or 810,000 barrels a day, as prices dropped to the lowest in four years. China’s increasing demand for Russia’s oil is a boon to an economy weakened by U.S. and European sanctions over Ukraine and a collapse in the value of the ruble. The Asian nation is benefiting as benchmark prices head for their worst slump since the global financial crisis in 2008. China’s purchases from Russia last month cost an average $90 a barrel, the lowest since December 2010, data compiled by Bloomberg show. Prices are sliding as the Organization of Petroleum Exporting Countries maintains its output quota to defend market share against U.S. shale producers amid a global glut in supplies. “With the current low oil price and a consensus not to cut production, major oil producers have no choice but to increase overseas supplies to secure revenue,” Gao Jian, an analyst at SCI International, a Shandong-based consultant, said by phone today. “With Russia introducing tax cuts for exports, supplies are forecast to rise more next year.”

China Offers Russia Help With Currency Swap Suggestion - Two Chinese ministers offered support for Russia as President Vladimir Putin seeks to shore up the ruble without depleting foreign-exchange reserves. China will provide help if needed and is confident Russia can overcome its economic difficulties, Foreign Minister Wang Yi was cited as saying in Bangkok in a Dec. 20 report by Hong Kong-based Phoenix TV. Commerce Minister Gao Hucheng said expanding a currency swap between the two nations and making increased use of yuan for bilateral trade would have the greatest impact in aiding Russia, according to the broadcaster. While the offer won’t relieve the main sources of pressure on the ruble -- capital outflow tied to plunging oil prices and sanctions linked to Russia’s annexation of Crimea from Ukraine - - the currency gained 3.1 percent against the dollar by 12:37 p.m. in Moscow. The Micex Index was little changed, and the yield on Russia’s 10-year bond fell 30 basis points to 13.3 percent, according to data compiled by Bloomberg.

Chinese Banks Hemorrhaging Deposits, 1st Quarterly Drop Since 1999; Banks Offer iPhones, Even Cars for Large Deposits - Chinese banks have experienced an outflow of deposits for the quarter for first time since 1999. Customers are attracted to trust funds and the stock market which has been on a tear, up 43% in the last six months. In the first week of December, Chinese investors opened almost 600,000 stock-trading accounts, a 62 percent increase over the previous week, according to China Securities Depository and Clearing Co. To compete for funds, Chinese banks offer anything from fresh vegetables for small deposits to a Mercedes A180 for deposits big enough and long enough. The effective yield on the Mercedes is approximately seven percent! China Daily explains the setup in Lenders Look to Attract Deposits with GoodiesLenders in China, desperate to attract customers who are finding alternatives for their savings, are turning to giveaways. On offer at one branch in Beijing: An iPhone 6 Plus or a Mercedes-Benz. Cash rebates, trips abroad, interest rates at the highest premium ever over the official benchmark rate, even free vegetables are among other goodies banks are dangling to get Chinese savers to deposit their yuan in savings account.

China's Christmas Present To The World: Beijing Eases Again, Sets Non-Bank Deposit Reserve To Zero -- In another Christmas surprise, China once again decided to adjust the cost of money, only this time instead of hiking, it eased, and in an effort to shore up the world's second-largest economy, China Business News reported that the PBOC will waive reserve requirements for non-bank deposits.  As the WSJ adds, at a meeting with big financial institutions on Wednesday, the People's Bank of China told participants that they will soon be able to add deposits from nonbank financial institutions to their calculations of their loan-to-deposit ratios, according to the executives. The move would add considerably to the banks' deposits and allow them to lend more. Chinese stocks, which had been pricing in further easing by the PBOC for the past 3 months, a period during which the Shanghai Composite soared over 50%, were delighted by the latest easing move and surged even more, surging higher by the most in the past three weeks.

Pettis on Strains in China's Banking System; Avoiding the Fall  -- In his last email of the Year Michael Pettis takes stock of the current state of China's rebalancing. It's an 18 page PDF, with no online link. Taking Stock of China’s Transition by Michael Pettis.  Special points to highlight in this issue:

  • While policymakers almost certainly understand that the interest rate cuts announced by the PBoC two weeks ago will slow the pace of rebalancing, the asymmetry of the change in rates was designed to minimize the adverse impact on rebalancing, and indicate just how complex China’s adjustment is likely to be.
  • Next year will be a very important year for China because possible strains in the banking system and the intensity with which the reformers present their case will give us a better sense both of how much debt capacity the country retains and of how well positioned Xi Jinping and his allies are to implement the needed reforms.
  • The completion of [prior] reforms [under Deng Xiaoping] left China ready for an investment-driven growth model that delivered astonishing increases in wealth. It also delivered unprecedented imbalances. China’s leaders under Xi Jinping will once again have to liberalize the economy and dramatically change the institutional structure of power in spite, once again, of elite opposition.

I should start by saying that I was a little disappointed, but not terribly surprised, by the PBoC’s announcement two weeks ago that it would cut interest rates. The fact that rates were cut, even though many reformers within the administration were very much opposed, exemplifies the challenges that Beijing will face in 2015.

Causes and consequences of China’s contagious case of deflation - The 50 per cent fall in oil prices this year is self-evidently good news for all but oil-producing states, regions and companies. It also reminds us that the world economy is deflation-prone — both because of deficient demand in Europe, Japan and several big emerging markets and because China’s deflation, rooted in excess capacity, is structural and of growing significance. A persistent and as yet unfinished slowdown in the country’s economic growth has been accompanied by the emergence of substantial overcapacity, a significant rise in non-financial corporate debt and a big drop in inflation. Between 2011 and November 2014, Chinese producer prices fell by 10 per cent — the annual change has been negative for 33 months — and the annual rate of consumer price inflation has fallen from 6 per cent to 1.4 per cent over the same period. The ratio of output to capacity in many sectors — for example, steel, plate glass, construction materials, chemicals and fertilisers, aluminium, shipbuilding, and solar panel and wind turbine manufacturing — has fallen sharply. Last year it was about 70-72 per cent, and it is likely to have dropped further since. China’s nominal GDP growth has roughly halved since 2011 to 8 per cent this year, and the aggregate debt to GDP ratio has risen by 80 percentage points to 250 per cent. The increased burden of debt has been exacerbated by passive tightening from the rise in real interest rates. These have doubled to 4 per cent, deflated by consumer prices; and surged from zero to 8 per cent, using producer prices. The share of interest payments in GDP has doubled to about 15 per cent. Although credit expansion is slowing, it is still running at almost twice the rate of nominal GDP, and much is probably sustaining excess capacity to avoid shutdowns and job losses.  The consequences of China’s deflation problems are ubiquitous and spilling into the rest of the world. Slower economic growth and a steady decline in the economy’s commodity intensity is already affecting commodity producers from Perth to Peru, with negative multiplier effects arising from lower revenues and reduced capital spending by resource companies. Moreover, as Chinese companies cut prices to clear excess supply, global competitive pressures intensify, forcing foreign manufacturers to do so too.

Macau's Evolution: Life Beyond Gambling - By now everyone is aware that Macau is by far the world's largest gambling destination, dwarfing Las Vegas in terms of gaming revenues. Las Vegas only earns one-seventh of its revenues at this point. Yet, for all this success in attracting gamblers--high-rollers especially--there are downsides. The recent crackdown on PRC officialdom using state funds to gamble in Macau, initiated by President Xi Jinping, has resulted in a rather severe deterioration in the fortunes of casino operators in Macau? How severe, you ask? Try wiping out $75 billion in market capitalization, for starters: Macau, half of the size of Manhattan and the only place in China where casinos are legal, is viewed as a conduit for officials and businessmen to bypass currency controls and send money out of the mainland to safer havens. While anti-graft campaigns have been short-lived in the past, Xi is stepping up the effort in a bid to bolster the legitimacy of the ruling Communist Party.  “It’s more important for China’s government to see Macau in a healthy economic development, and the reliance on corrupted official gamblers is not healthy,” said Chen Guanghan, deputy director of the Chinese Association of Hong Kong and Macau Studies, a policy research institute backed by China’s government. So, having long since surpassed Las Vegas in terms of gaming revenues, PRC leaders seemingly concede that much of Macau's recent gains have come from "the reliance on [PRC] corrupted official gamblers." In a case of do as I say and not what I do--the mainland certainly hasn't moved past manufacturing as its main source of growth--the likes of President Xi are telling Macau to diversify its sources of revenue. In other words, instead of pitying Las Vegas, Macau should be more like the US destination in gaining business from shows, sporting events and so on:

Taiwan Reaps Reward From Reviving U.S. Demand —Record exports of iPhone components put Taiwan back on many economists’ watch list this year. Will the island of 23 million people–with an economy just 5% the size of neighboring China–continue apace in 2015? More than its regional neighbors, Taiwan is able to capture the benefit of reviving U.S. demand–and that export lift will continue to trickle through the domestic economy. As a result, Taiwan will notch 3.4% growth in 2014 according to government estimates. Economists predict gross domestic product will grow 3.5% or more next year. While that’s a far cry from the blistering growth more than 10% in the late 1990s and early 2000s, an International Monetary Fund projection in October says that Taiwan will likely replace New Zealand as the second-fastest growing economy among advanced Asian countries next year behind South Korea. Taiwan owes much of its growth to an improving U.S. economy, after years of postcrisis accommodative monetary policy finally have started to spark demand. The IMF expects the U.S. to grow 3.1% next year, after expanding at rates below 2.5% over the past five years. “Taiwan is much affected by U.S. growth,” In November, Taiwan’s exports to the U.S., mostly electronics and machines, rose 11% from a year earlier—the biggest growth among all of Taiwan’s overseas markets. Although direct shipments to the U.S. were only about one-tenth of Taiwan’s total exports of $26.68 billion last month, much of the island’s exports to China and Southeast Asia–totaling $15.69 billion at nearly 60% of Taiwan’s overall exports–were actually further processed and then re-exported to the U.S.

Japan Struggles to Escape Recession as Production Drops: Economy -  Tumbling oil prices could push Japan’s inflation as low as 0.5 percent by the middle of next year, according to economists at NLI Research Institute and Dai-ichi Life Research Institute.Japan’s inflation slowed for a fourth month in November, and industrial production and retail sales unexpectedly dropped, pointing to further weakness in an economy Prime Minister Shinzo Abe is trying to revive from recession. Output (JNIPMOM) fell 0.6 percent in November from a month earlier, the trade ministry said today, against a median estimate of a 0.8 percent increase in a Bloomberg News survey of economists. Retail sales slid 0.3 percent, while consumer prices excluding fresh food rose 2.7 percent from a year earlier. Real wages fell the most since 2009. With little sign of a rebound in domestic demand, the world’s third-largest economy may rely on exports to avert a third straight quarterly contraction in the final three months of the year. Today’s reports add pressure on Abe, whose government tomorrow will unveil a stimulus package, and who pledged growth-inducing structural changes after winning re-election this month.

Japan’s savings rate turns negative for first time: For the first time since records were collected in 1955, Japan's population is drawing down its savings and the savings rate, calculated as savings divided by disposable income plus pension payments, was negative 1.3%. It's a dramatic change from when the Japanese saved nearly a quarter of their income (23.1%) when the savings rate peaked in 1975. Japan had the highest household saving rate in the OECD in the 1960s until it fell to the lowest. After all, an aging population draws down savings and Japan is the fastest-aging country in the world; its population has been shrinking for a decade. It's another blow to the Japanese Prime Minister Shinzo Abe, who just won another term to try and implement his policies dubbed Abenomics. On the campaign trail, he said that Abenomics aimed to raise wages and employment to revive the economy and defeat deflation or price falls. Yet, earnings (adjusted for inflation) dropped 4.3% from a year earlier in November. It's the steepest decline since the 2009 global crisis and marks the 17th month of falls. Indebted country Unsurprisingly, households are spending less. The average spend has dropped by 2.5%, which is the eighth consecutive drop - a trend that won't help boost domestic demand and prices. Indeed, inflation has clocked in at a 14 month low. There's no price pressure on nominal yields on government bonds. The 10 year bond yield has fallen to a record low of below 0.3%.

Japan’s Savings Rate Turns Negative in Challenge for Abe - Japanese drew down savings for the first time on record while wages adjusted for inflation dropped the most in almost five years, highlighting challenges for Prime Minister Shinzo Abe as he tries to revive the world’s third-largest economy. The savings rate in the year through March was minus 1.3 percent, the first negative reading in data back to 1955, the Cabinet Office said. Real earnings fell 4.3 percent in November from a year earlier, a 17th straight decline and the steepest tumble since December 2009, the labor ministry said today. A higher sales tax combined with the central bank’s record easing are driving up living costs, squeezing household budgets and damping consumption. Abe’s task is to convince companies to agree to higher wages in next spring’s labor talks to sustain a recovery. “Households are suffering from a decline in real income,” said Hiromichi Shirakawa, an economist at Credit Suisse Group AG who used to work at the Bank of Japan. Abe is trying to generate a virtuous cycle in the economy, where higher incomes fuel consumer spending, which in turn prompts companies to boost investment and wages. Last week he secured a pledge from business leaders to do their best to boost pay next year

Game Over Japan: Real Wages Crash Most In 21st Century, Savings Rate Turns Negative - We said it was only a matter of time before the Japanese economy implodes. Terminally. We didn't have long to wait and last night the barrage of Japanese economic data pretty much assured Japan's transition into failed Keynesian state status.   In fact, after last night's abysmal Japanese eco data, we doubt even the most lobotomized Keynesian voodoo priests have anything favorable left to say about Abenomics: not only did core inflation miss expectations and is now clearly in slowdown mode despite Japan openly monetizing all gross Treasury issuance, not only did industrial production decline 0.6% missing expectations of an increase and record its first decline in 3 months with durable goods shipments crashing, not only did consumer spending plunge for the 8th straight month dropping 2.5% in November (with real spending on housing in 20% freefall), but - the punchline - both nominal and real wages imploded, when total cash wages and overtime pay declined for the first time in 9 months and 20 months, respectively.

BOJ’s Kuroda Cites Darwin’s Theory of Evolution to Spur Higher Wages - In a Christmas Day speech, Bank of Japan Gov. Haruhiko Kuroda drew on Charles Darwin to make a point about wages. The central bank is trying to encourage companies to raise wages next year, part of its campaign to reverse Japan’s “deflationary mindset” and achieve 2% inflation.  Speaking to business leaders, Mr. Kuroda alluded to the English naturalist, saying: “It is not the strongest of the species that survives, but the one that is the most adaptable to change.”  While he refrained from calling directly for wage increases, he explained that the environment surrounding companies has changed because prices have begun to rise in Japan, albeit slowly, after 15 years of deflation. Companies that adapt to the new environment by investing more aggressively and securing workers ahead of their rivals will become “the winners of the competition and enjoy prosperity in the new era,” he said. Companies benefiting from a weak yen and falling energy prices will find it easier to respond to Mr. Kuroda’s call. The question is whether others suffering from higher import costs will raise wages and, even if they do, whether wages will keep pace with inflation. If he can’t persuade a broad spectrum of firms to get on board, Mr. Kuroda might find the need for his own policies to evolve.

Japan's Prime Minister Abe plans billions in stimulus to fight recession as vital signs weaken  — Japanese Prime Minister Shinzo Abe is planning about 3.5 trillion yen ($29 billion) in fresh stimulus, including subsidies and job-creating programs, to help pull the world's third-largest economy out of recession. Officials said Friday that details of the plan would be approved by the Cabinet on Saturday as it wraps wrap up work for 2014. The plan reportedly includes 420 billion yen ($3.5 billion) in help for stagnant regional economies. Abe took office for a third term on Wednesday and faces strong pressure to do something to restore growth after a sales tax hike in April put Japan back in recession. Data released Friday showed inflation eased slightly in November as household spending dropped, hindering the government's effort to get the economy out of recession and back to sustainable growth. Core consumer prices, excluding food, rose 2.7 percent, while the inflation rate, excluding food and energy, was 2.1 percent. The inflation rate was 2.9 percent in October. Overall incomes fell 1.1 percent in November from a year earlier, while household spending was down 2.5 percent. Unemployment was flat at 3.5 percent.

Japan 10-Year JGB Yield Hits Fresh Record Low of 0.300% (MNI) - The yield on the 10-year Japanese government bonds Friday hit a new record low of 0.300% on small-lot buying backed by continued favorable bond supply and demand conditions. The benchmark long-term interest rate surpassed the previous record low of 0.310% marked only Thursday. The 10-year bond yield at midday closed at 0.305%, down 0.5 basis points, after briefly falling to 0.300%. March 10-year bond futures ended the morning session at 147.91, up 0.08. JGB players expect the benchmark 10-year bond yield to fall below 0.300% as early as Friday afternoon but buying will be met with profit-taking before the weekend. Bond yields tend to fluctuate sharply in thin trading before the year-end. Tuesday is the last trading day for JGBs this year. JGBs will resume trading on Jan. 5. The Bank of Japan is expected to offer to buy JGBs either Monday or Tuesday, which should give additional support to the bond market. Bond players are focused on the 10-year bond auction scheduled on Jan. 6 to see the strength of the current downward pressure on bond yields. JGBs continue to be well supported by BOJ's massive asset purchases and the weak inflation outlook, which will increase speculation that the BOJ will ease again around April when the BOJ board updates its medium-term GDP and CPI projections. Excluding the direct impact of the April consumption tax hike, the November core CPI is estimated by the BOJ to have risen only 0.7% (subtracting 2.0 percentage points), down from +0.9% in October and +1.5% in April, official data showed Friday.

2015: Breakthrough in India? - The safe bet is always that India won’t get its act together economically. For risk-takers, next year may be a time to make the unsafe bet. It’s possible that India will finally adopt a unified goods and services tax (GST). This would constitute a major step toward a unified market, which is a basic contributor to prosperity that has been absent to now. It seems bizarre to outsiders but India does not have a true national economy. States do not freely trade with each other. Perhaps the worst problem is the application of different taxes at each state border, which discourages inter-state commerce. The solution is a single tax system, the GST.  The problem dates back to independence and solutions have been considered for almost three decades. They have all either failed or been plainly inadequate. But the necessary votes, both procedural and substantive, to create a unified GST have now been scheduled for 2015. This could be the breakthrough reform India and its friends have been waiting for since Narendra Modi’s electoral triumph in May. Of course, a number of things can still go wrong. The GST can be rejected by the legislature or, despite their tentative agreement, by the states themselves. Opposition to GST could be substantial enough that it is postponed again rather than forcing anyone to actually make a difficult choice. This would hardly be a surprise in India. Or the GST could be modified such that the country remains effectively divided economically and few benefits are realized.

Has Modi Stepped Up India's Covert War in Pakistan? --"India has always used Afghanistan as a second front against Pakistan. India has over the years been financing problems in Pakistan".  US Defense Secretary Chuck Hagel Chuck Hagel should know what he's talking about when it comes to intelligence. He served on the US Senate Intelligence Committee before he became the Pentagon chief. India's intelligence agency RAW uses its long and deep ties with the Afghan Intelligence KhAD (Khadamat-e Aetela'at-e Dawlati, also known as the National Directorate) staffed by openly anti-Pakistan agents who are known to support the Pakistani Taliban (TTP).  There are reports that the current TTP chief Mullah Fazlullah is being protected by KhAD agents in Afghanistan. Last year, US troops snatched former TTP chief Hakimullah Mehusd's deputy Latifullah Mesud  from Afghan intelligence agents. Apparently, Latifullah had been traveling back and forth across the Pak-Afghan border to coordinate attacks inPakistan with the Afghan agents.

Nicaragua’s Rival to Panama Canal Set to Start Dec. 22 -  Nicaragua plans to begin building access roads and highways on Monday near the country’s Pacific coast as it starts work on a $50 billion inter-oceanic canal meant to rival Panama’s century-old waterway. President Daniel Ortega and executives from the Hong Kong-based HKND Group, which is building the canal, will attend an inauguration ceremony in the capital of Managua, according to Telemaco Talavera, a spokesman for the project’s development commission. A separate ceremony will be held in Rivas, a town between the Pacific coast and Lake Nicaragua, he said. At an estimated cost more than four times the size of Nicaragua’s $11 billion economy, the project has raised doubts among analysts who point to HKND’s lack of experience in major infrastructure projects and question the need for another Central American canal. Panama is planning to complete a $5.25 billion expansion of its waterway next year. “I think there is some skepticism about it getting built and getting built on time and on budget,” said Lee Klaskow, a marine shipping analyst with Bloomberg Intelligence. “There are a bunch of active volcanoes in and around the area.” Nicaragua’s canal would also require higher locks than Panama’s since it is 20 feet more above sea level, he said. If built, the 278-kilometer (173-mile) shipping channel would connect Punta Gorda on the country’s Caribbean coast with the Pacific’s Brito port. It could be finished by 2019, according to HKND.

Nicaragua starts work on $50bn canal between two oceans — The Nicaraguan alternative to the Panama Canal will be a waterway connecting the Atlantic and the Pacific oceans and is to be the most ambitious construction project in Latin America. On Monday Nicaragua officially began work on a canal which will be a competitor to the Panama Canal 600 kilometers south. The Nicaragua canal will be capable of handling the super-heavy class ships with the capacity of up to 400,000 tons. It will be 278 kilometers long and 30 meters deep, which makes it wider and deeper that the century old Panama Canal. It is expected to be completed and operational by 2019. The canal will reduce the cost of transporting goods via sea between America, Europe and Asia by about 30 percent. Experts believe it will be able to handle more than 5,000 high tonnage vessels a year. The construction of the canal will provide the country with a large number of new jobs and will contribute to the improvement of the economic situation, given the fact that Nicaragua is one of the poorest countries in Latin America,

If energy prices remain near current levels, Canada's economy is in trouble - And so it begins… Collapsing crude prices are starting to make their way through the North American energy sector, as the most unprofitable oil & gas rigs are mothballed. Those flashing red numbers are not just on your screen any more. The closures have been particularly acute in Canada, where some 40 oil & gas rigs have been taken out of operation recently. In fact it's not clear if economists fully appreciate what's about to transpire with the Canadian economy. This decline in rig count is just the beginning. Consider for example the situation with the Canadian oil sands - one of the more expensive sources of crude production. Even if prices recover somewhat, oil sands production will be winding down - nobody wants to operate money-losing businesses for a prolonged period. And those who believe crude will be back above $80/bl any time soon is deluding themselves.  Up until now, production from oil sands has fueled growth in other sectors, including for example transportation and housing in Alberta. This is about come to a screeching halt.  The national situation is not significantly better. Housing markets across the country have continued to rally, even as homes south of the border had undergone an unprecedented price adjustment. While many point out that the reason for avoiding a US-style housing crash has been a stronger mortgage market, that's only part of it. The global commodity boom in which Canada successfully participated is the main reason. Now as the commodity super-cycle has ended and energy prices collapsed, Canadian households are caught with near-record levels of leverage. Some have been pointing out that Canadian mortgage debt service ratio has continued to improve. However that measure is misleading, as it excludes principal payments. In reality the situation is much worse (see chart).   What's clear is that this exposure to energy is going to damage the labor markets, squeezing the nation's overextended households. And the knock-on effect won't be limited to a severe slowdown in residential construction growth.

It Doesn't Matter Who Does the Lobbying: Trade Agreements Aren't the Place for Internet Regulations - The Associated Whistleblowing Press released portions of draft text proposed by the United States for the Trade in Services Agreement (TISA) this week, revealing some alarming provisions that indicate how tech companies have been involved in influencing a secret international deal. The language of the leaked treaty shows provisions that could impact privacy online, and net neutrality—with no public consultation or opportunities for open debate. What is dispiriting is some of the language of these Internet regulations almost certainly comes from tech companies, who have joined the many other lobbyists fighting for their special interests behind closed doors. TISA is yet another so-called trade deal which began negotiations in 2013 and is being hammered out in back room meetings between 23 countries around the world, including the United States, the European Union, Canada, Japan, South Korea, Colombia, Mexico, and Peru. According to the leaked documents, countries involved in the negotiations have agreed to keep the text of this agreement classified for five years after it enters into force. On top of the five-year-embargo, neither the negotiation rounds nor the topics discussed in this agreement have ever been made public.

From Civil War to Trade War: Russia at the WTO -- To paraphrase Carl von Clausewitz, trade war is Cold War by other means. Everything old is new again in international relations. This hackneyed analogy got going when Mikhail Gorbachev, last leader of the Supreme Soviet, recently declared the breakdown in Russia-Western relations as indicating the beginnings of (yawn) a New Cold War. Despite being no particular fan of Vladimir Putin, Gorbachev believes that American actions have exacerbated tensions to such a point by "calling the shots in everything" and denying Russia any say in political-economic matters.Just when you thought American Russia-bashing was done at least for 2014, the US Trade Representative has just released its annual report on Russian trade practices at the WTO. The USTR is required by law to make an annual appraisal of Russia's trade practices after it acceded in 2012:  This Report on Russia’s Implementation of the WTO Agreement is the second annual Report prepared pursuant to section 201(a) of the Russia and Moldova Jackson-Vanik Repeal and Sergei Magnitskiy Rule of Law Accountability Act of 2012 (P.L. 112-208). This provision requires the U.S. Trade Representative not later than one year after the United States extends permanent normal trade relations (PNTR) to the products of Russia, and annually thereafter, to submit a report to the Committee on Finance of the Senate and the Committee on Ways and Means of the House of Representatives assessing the extent to which Russia is implementing the “WTO Agreement”  The Magnitskiy Rule is essentially a holier-than-thou tool for American drone-striking Guantanamo Ghraibers to bash Russia over "human rights" abuses, but I digress. Fortunately for Russia's critics, this reporting requirement has given another venue for the US to bash Russia over its perceived violations of its WTO commitments: 

The week the dam broke in Russia and ended Putin's dreams - Gallows humour is back in Moscow. Asked what he would do to stop the rouble spiralling out of control, the former governor of Russia’s central bank replied: “I would pick up a pistol and shoot myself.” This was the week when the country’s long-festering crisis turned virulent. A last-ditch attempt to defend the exchange rate by raising interest rates to 17pc failed within hours, yet the shock is surely enough to set off a chain of corporate failures and push banks over the edge. Traders in the City watched open-mouthed as the dam broke on Black Tuesday. The event exposed the awful reality that the Kremlin does not have the infinite foreign reserves that many had supposed. “What is happening is a nightmare that we could not even have imagined a year ago,” says the central bank’s deputy chief, Sergei Shvetsov. The currency has since stabilised at 60 to the dollar. But it has lost half its value in a year. Russia’s $2.1 trillion (£1.3 trillion) economy has shrunk to $1.1 trillion, half the GDP of California. The external debt of Russian banks and companies has by mathematical effect ballooned to 70pc of total output. “A Russian downgrade to junk is only a matter or time,” says Tim Ash, from Standard Bank. “The crisis is suddenly filtering into people’s daily lives,” . “55pc of consumer goods in Russia are imported and these are doubling in price. People are buying anything they can that keeps its value.”

What Lies Behind the Plunge of the Ruble? -- Russia’s economy is in trouble. Growth has come to a halt. A recession looms in 2015. Inflation, interest rates, and capital flight are up. The government’s budget is under strain. More than any of these, what makes the headlines is the plunge of the ruble, which, at one point in mid-December, had lost half of its value against the dollar in less than a year. What lies behind the weakness of the ruble? Is it harmful in itself, or is it better understood as a symptom of other problems? What options are open to Russian policymakers as they struggle to manage their currency’s descent? As in many discussions of macroeconomics, we first need to deal with the effects of inflation. Economists use the term nominal to refer to quantities stated in the ordinary way  and  real to quantities that are adjusted to for inflation. {...} Inflation, as we have seen, explains why the rate of change in the real exchange rate can be faster or slower than that of the nominal exchange rate. However, inflation tells us nothing about what causes the real exchange rate to change in the first place. There is no great mystery about that in the case of the ruble. As the next chart shows, movements in the real effective exchange rate of the ruble are dominated by movements in the price of oil. In fact, over the period displayed in the chart, the simple correlation between the world price of oil and the Russian REER is over 90 percent. The strong link between Russia’s real exchange rate and the price of oil has, in some ways, been a blessing, and in others, a curse. In the early 2000s, the steadily rising real exchange rate contributed to a rapid rise in living standards that allowed many Russians to move into the middle class and helped to alleviate the poverty of others. During the same period, under the policies of Finance Minister Alexi Kudrin, high oil prices allowed the Russian government to accumulate reserves that permitted it to get through the 2008 financial crisis with the lowest government debt of any G-20 country.

Putin: Battered, Bruised But Not Broken -- naked capitalism - Yves here. The triumphalism among Western commentators as the ruble plunged last week is more than a little cringe-making. We're not yet in Two Minute Hate territory yet, but this feels like a warmup. Robert Parry provides an insanity checkOfficial Washington’s “group think” on the Ukraine crisis now has a totalitarian feel to it as “everyone who matters” joins in the ritualistic stoning of Russian President Putin and takes joy in Russia’s economic pain, with liberal economist Paul Krugman the latest to hoist a rock... Indeed, much of what Krugman finds so offensive about Putin’s Russia actually stemmed from the Yeltsin era following the collapse of the Soviet Union in 1991 when the so-called Harvard Boys flew to Moscow to apply free-market “shock therapy” which translated into a small number of well-connected thieves plundering Russia’s industry and resources, making themselves billionaires while leaving average Russians near starvation. The piece goes on to debunk in considerable detail the caricature of Putin presented in America, the most important element being the charge that Putin was the aggressor in Ukraine and is therefore getting what he deserved. Mind you, Putin is still an authoritarian, but we don't find that objectionable in many of our putative allies, starting with the Saudis.

How Putin Stopped the Ruble’s Collapse -- The Russian ruble, which last week briefly became the world's worst-performing currency, is rebounding, as is the battered Russian stock market. That doesn't mean President Vladimir Putin's economic team has managed to fully stabilize the currency or resolve any of the underlying problems that led to its recent plunge.  The current rate of less than 55 per U.S. dollar seems miraculous after last week's "Black Tuesday," which saw the ruble almost reach 80 per U.S. dollar. That decline followed a surprise decision by the Russian Central Bank to increase its key lending rate 6.5 percentage points to 17 percent, and it appeared the monetary authorities could do nothing short of introducing currency controls to halt the rout. Nigeria's oil currency, the naira, is only down 4 percent against the dollar in the last 30 days, unlike the ruble, which lost almost 37 percent at its lowest point. Yet the African country's central bank has not been shy to impose a mild version of currency controls. It has banned local lenders from holding open forex positions overnight and required them to use purchased foreign currency within 48 hours, or sell it to regulator. Russia has so far avoided introducing the kinds of measures, such as a moratorium on foreign debt repayment and an order to trade in 100 percent of foreign revenues for rubles, that were applied after its domestic debt default in 1998. Instead, the government is demonstrating the broad formal and informal control over the Russian economy it has acquired during Putin's rule.

Russia May Be Cut to Junk as S&P Says It’s Considering Downgrade - Russia may lose its investment grade for the first time in a decade after Standard & Poor’s signaled it’s considering cutting the country’s rating. “We are reviewing our assessment of Russia’s monetary flexibility and the impact of the weakening economy on its financial system,” S&P said in a statement. The move implies at least a one-in-two likelihood of a “negative rating action” within 90 days, the statement said. S&P said it expects to conclude its review by mid-January.

Russia's Overnight Lending Rate Hits 19%, as Mistrust of Banks Spreads; Ruble Up Again -- In Russia, the overnight lending rates between banks has soared to 19%, a sign of widespread and warranted mistrust between banks, as one bank has failed. To stabilize the situation, Putin is considering bank deposit insurance up to an amount equivalent rate of about $26,000.  Meanwhile, and although Russia is still burning through currency reserves, the value of the Ruble has been rising.  CNN Money reports Russia Empties the Vault to Prop Up RubleSo far this year the central bank has burned through more than $110 billion in foreign currency supplies. That's more than a quarter of what it has in reserves right now.  Spending has ramped up in the last few weeks. Since the start of December, the central bank has blown through more than $21 billion.  That, along with a series of other measures to support the banking sector, has helped to stabilize the ruble.  Russia is working on a plan to pump one trillion rubles ($18.6 billion) into Russian banks next year, and wants to establish deposit insurance to guarantee savings up to 1.4 million rubles ($26,000).

Scaled-Up Banking Rescue to Push Russian Budget Into Deficit - — Russia’s central bank said on Friday that its bailout of Trust Bank – the first major lender to fail as a result of the sharp decline in the ruble – would cost about $2.5 billion, far more than previously anticipated, and the country’s finance minister said emergency measures to rescue the banking system would push the federal budget into deficit.The central bank had previously announced about $500 million in direct aid to Trust Bank, but on Friday it raised that figure to nearly $2 billion and said it would also provide a six-year loan of about $550 million to an “investor” bank that would step in to take control of Trust Bank.Other banks are also expected to need bailouts as a result of the recent currency crisis, which was brought about by a double whammy of lower worldwide oil prices and Western economic sanctions aimed at punishing the Kremlin for its policies in Ukraine.The Russian authorities have been scrambling to contain the damage, including a sharp increase in interest rates and aggressive spending of foreign currency reserves to shore up the ruble, which has stabilized in recent days. On Friday, the ruble was trading in the low to mid 50’s to the dollar, still sharply down for the year but substantially stronger than just a week ago when it was trading at about 60.Data released by the central bank on Friday showed that the government’s overall stockpile of foreign currency reserves had fallen by nearly $16 billion to $398.9 billion. Overall, the Russian government has approved 1 trillion rubles, or about $20 billion, to rescue the banking system.

Ruble Swap Shows China Challenging IMF as Emergency Lender - Businessweek: China is stepping up its role as the lender of last resort to some of the world’s most financially strapped countries. Chinese officials signaled on the weekend they are willing to expand a $24 billion currency swap program to help Russia weather the worst economic crisis since the 1998 default. China has provided $2.3 billion in funds to Argentina since October as part of a currency swap, and last month it lent $4 billion to Venezuela, whose reserves cover just two years of debt payments. By lending to nations shut out of overseas capital markets, Chinese President Xi Jinping is bolstering the country’s influence in the global economy and cutting into the International Monetary Fund’s status as the go-to financier for governments in financial distress. While the IMF tends to demand reforms aimed at stabilizing a country’s economy in exchange for loans, analysts speculate that China’s terms are more focused on securing its interests in the resource-rich countries.

Belarus President Tells "Retailers, Money-Grabbers And Thieves" That Capital Controls "Will Remain Forever" "I was told, and saw it for myself, that some of our scoundrel-officials have been telling entrepreneurs, businessmen and all sorts of thieves that they should wait until around (January) 9th or 15th, everything will be liberalized here, and they would be able to get what they have not until now. People are simply begging to be you know where. I want to say that the trend, as is fashionable to say nowadays, towards control over domestic prices will remain forever. Retailers, middlemen, money-grabbers and thieves working in this sector have become the richest people in our country."

Ruble crisis may spell financial disaster for Europe — All eyes are on the ruble this week after its spectacular crash that sparked fears of a new currency crisis in Russia, and the possibility it could spill over into Europe and put the world economy at risk. The ruble has lost more than 45 percent against the dollar and euro since the beginning of the 2014, mostly due to falling oil prices and the tightening of Western sanctions. “We just rescued all those European banks, and they all have huge loans in Russia. If the ruble devalues as it did in recent days, then Russian companies will have trouble paying back dollar and euro debts. From this perspective we will face even bigger problems,” Michael . Many Russian companies have borrowed money from European and American banks, but now the value of their domestic currency has decreased by more than 50 percent against the dollar, so the cost of the loans has doubled in ruble terms. The risks of a volatile Russia “will come to the surface very soon. Then we will have a banking crisis triggered by the sanctions and also triggered of course by the ruble devaluation,”. The Russian government has debt of about $150 billion it needs to pay off in 2015, much of it foreign held. Sanctions now bar many state-owned Russian credit institutions from borrowing long-term from Western capital markets.

Creative accounting is nothing new for the Eurozone - Frances Coppola blogs on the Austrian government’s crash investigation into the failure of Hypo Alpe-Adria (latest detail – the biggest participant in the run on the bank was its garantor), also known as Haiderbank, and on the related topic of the Juncker Commission’s “investment plan”. The link is that the investment plan relies on a succession of heroic accounting assumptions to bulk up the final number without putting in any, you know, actual munn, and the Austrians’ response to the Haiderbank’s failure was based on a lot of funny figures. Frances so: But what struck me from this report was the sheer naivety of the government officials involved. They were like children playing with fireworks. The instruments they were handling blew up in their faces and they were badly burned. And Juncker wants government officials to do MORE of this sort of thing?   And it is painfully evident that government officials lack the expertise to understand the legal and financial implications of the complex financial instruments involved. The ease with which BayernLB’s experts could deceive Austrian government officials is frightening. I disagree. I would be very surprised if Austrian finance ministry officials were at all naive about the possibilities of structured finance at the edge of the zone of acceptability. Why? Well, way back in the day when Hypo Alpe-Adria was doing its thing funding Jörg Haider’s career and I lived in Vienna, I remember that time Karl-Heinz Grasser, then finance minister before being disgraced in a corruption scandal, got the federal government to sell the lakes of Carinthia to the federal forestry service, for which the government extended its foresters €215m in credit until they could sell other property to meet the bill.

French public debt rises in third-quarter to 95.2 percent of GDP - INSEE - (Reuters) - France's national debt rose to the equivalent of 95.2 percent of gross domestic product by the end of the third quarter, from 95.1 percent at the end of the previous quarter, official data showed on Tuesday. The INSEE national statistics agency said total debt stood at 2,031.5 billion euros at end of the third quarter, compared to 2,024 billion at the end of the second quarter.

Happy Holidays Hollande: French Joblessness Surges To Another New Record High - Having proclaimed the creation of jobs-jobs-jobs as his mandate when elected in 2012, Francois Hollande has so far overseen the loss of nearly 600,000 French jobs. At 3.488 million, French joblessness has never been higher (and French bond yields never lower) and has ben rising - practically unabated - for the 31 straight months since his 'raise taxes on the wealth' election (and 42 months straight overall). The cries for lower rates and Sovereign QE remain but, we ask in a desperate plea for sanity, what is it that QE-driven lower-rates will do going forward that they have utterly failed to do for the last three-and-a-half years?

Thousands in Spain protest ban on demonstrations, burning national flag — Thousands of people protested in Spanish cities Saturday against a proposed law that would set hefty fines for offenses such as burning the national flag and demonstrating outside parliament buildings or strategic installations. The Public Security Law was approved by one house of parliament last week and is expected to be accepted by the other government-controlled one next month. The bill has been heavily criticized by opposition parties and human rights groups as an attempt by the conservative government to muzzle protests over its handling of Spain's financial crisis. The largest demonstrations occurred in cities such as Barcelona, Bilbao and Madrid, while smaller ones took place in Almeria, Granada and Valencia. Some protesters wore tape covering their mouths and carried placards calling the measures a “gagging law.” The proposed law would allow fines of up to $37,000 for disseminating photographs of police officers that are deemed to endanger them or their operations. Individuals participating in demonstrations outside parliament buildings or key installations would be fined as much as $745,000 if they are considered to breach the peace. Those insulting police officers could be fined up $745. Burning a national flag could cost the perpetrator a maximum fine of $37,000.

Greece’s second presidency vote fails — Greece stood a step away from early elections that could repudiate its international bailout and rekindle a eurozone crisis after lawmakers failed today to elect a president. The government candidate, EU Environment Commissioner Stavros Dimas, fell 32 votes short of the required 200 votes in the second attempt by lawmakers to elect a president, meaning a third and final vote will be held on December 29. Prime Minister Antonis Samaras warned after the vote that early general elections, which could be held as soon as January 25, constituted a “national danger”. “I am hopeful...that the country will avoid a national danger” in holding early elections, Samaras told reporters. “Every lawmaker stands before their regards the consequences of their vote on stability, normality and the future of the homeland,” Samaras said.

Greek parliament fails to elect president in second-round vote - Greece’s parliament failed to elect a new president in Tuesday’s second-round vote, increasing the chances of an early general election in February that could bring the anti-bailout Syriza party to power. Stavros Dimas, the governing coalition’s candidate, won 168 votes, eight more than in last week’s first-round ballot, following a last-ditch appeal for consensus by Antonis Samaras, the prime minister. But the former European environment commissioner now appears unlikely to capture the 180 votes needed in the third and final ballot on December 29. Lawmakers from two small opposition parties that could make up the shortfall are expected to abstain. “This is all about the third round. That is when parliamentarians will have maximum leverage to extract as much as they can from the government in exchange for their support,” said Mujtaba Rahman, head of European analysis at the Eurasia Group risk consultancy. The additional support for Mr Dimas came only from independent MPs, while the moderate Democratic Left and rightwing Independent Greeks resisted the appeal for consensus to complete talks on leaving Greece’s four-year bailout and securing a new credit line from international borrowers. Both parties have reportedly been in contact with Syriza with a view to co-operating with a future leftwing government although no details of a specific agreement have emerged.

Greece’s radical left could kill off austerity in the EU -- Another war looms in Europe: waged not with guns and tanks, but with financial markets and EU diktats. Austerity-ravaged Greece may well be on the verge of a general election that could bring to power a government unequivocally opposed to austerity. Momentous stuff: that has not happened in the six years of cuts and falling living standards that followed the collapse of Lehman Brothers. But if the radical leftist party Syriza does indeed triumph in a possible snap poll in the new year, there will undoubtedly be a concerted attempt to choke the experiment at birth. That matters not just for Greece, but for all of us who want a different sort of society and a break from years of austerity. What misery has been inflicted on Greece. One in four of its people are out of work; poverty has surged from 23% before the crash to 40.5%; and research has demonstrated how key services such as health have been hammered by cuts, even as demand has risen. No wonder the country has experienced a political polarisation that has prompted comparisons with Weimar Germany. The neo-Nazi Golden Dawn – which makes other European rightist movements look like fluffy liberals – at one point attracted up to 15% in the polls; though still a menace, its support has thankfully subsided to half that.But unlike many other European societies – with the notable exceptions of Spain and Ireland – fury and despair with austerity has been channelled into the ranks of the populist left. After years on the fringes of Greek politics, Syriza only became a fully fledged party in 2012, and yet it won Greece’s elections to the European parliament earlier this year. The latest opinion polls give Syriza a substantial lead over the governing centre-right New Democracy party. A radical leftwing government could well assume power for the first time in the EU’s history.

Greece to the Eurozone’s Rescue: Why the Troika Should Forgive Greece’s Debt - The European Commissioner for Economic and Financial Affairs, Pierre Moscovici’s unnecessary—and unseemly—visit to Athens served to spotlight Europe’s corrosive politics. Mr. Moscovici chose to all but endorse Antonio Samaras, the beleaguered Greek Prime Minister, who promises to play by the European Union’s dysfunctional rules. And the Commissioner described as “suicidal” the positions held by the opposition party Syrzia, which may well lead the next government and correctly deems the EU’s rules to be intolerant. His boss, European Commission President Jean-Claude Juncker, weighed in by expressing his preference for Greece to be led by “known” faces.  Today, the only right way forward is for the troika to allow Greece to repay its official creditors in, say, 100 years. This will effectively mean debt forgiveness but the cosmetics may help German leaders tell their citizens that they will be repaid.  But, of course, the system fights back all rational thinking. Ireland and Portugal will yelp that they also deserve more relief on their troika borrowings. More fundamentally, the forgiveness will directly contravene the Lisbon Treaty’s no-bailout provision, which prevents one member state from paying another’s debts. That would call into question the constitutionality of the European Stability Mechanism, which was approved by the European Court of Justice on the basis that the loans from the facility would be repaid with an “appropriate margin.”At some point, a new fork in the road has to be taken. Today, Greece offers an opportunity to modestly test the eurozone’s pressure points. The stakes are high not just for the resolution of the crisis but for the future shape of Europe. Through this crisis, Greece has been at the leading edge of testing the eurozone’s most idealistic goal: greater political unity. Moscovici’s visit to Athens accentuates just how far that goal has been setback. 

How can Europe escape recession in 2015? - 2014 will be remembered for two major unexpected developments. First, the European Union was caught by surprise by the return of geopolitics. The annexation of Crimea, the military conflict in Ukraine and the increasing tensions between Putin’s Russia and western leaders were unexpected. The conflicts in Iraq and Syria and the rise of ISIS extremists found the West equally unprepared. One can speculate if the economic and political weakness of the West in recent years has contributed to the rise of alternative political concepts. But certainly, European Union countries have realised that these conflicts on their doorstep matter. From an economic point of view, these events have arguably had negative effects on confidence and have – together with the sanctions imposed on Russia – contributed to disappointing growth figures. Also of concern are the direct effects on trade and especially on the security of energy supply.  Second, the economic performance of the euro area has fallen on the wrong side of official forecasts. In November last year the European Commission predicted real GDP growth of 1.1 percent for the euro area in 2014, but these numbers have been revised downward to 0.8 percent. Inflation has been subject to similar revisions, and is dangerously low to achieve debt sustainability and price adjustment. Some progress has been made with unemployment but it is slow and numbers continue to disappoint in Italy in particular.  Given this backdrop, it is clear that Europe’s New Year’s resolution should be to implement policies needed to reduce military conflicts in EU neighbouring countries, and to increase growth and jobs.

Combating Eurozone Deflation: QE for the People - naked capitalism - Yves here. This post describes why having the ECB give money directly to citizens would do a better job of fighting Eurozone deflation than the US version. The author starts from the premise that QE worked in the US, when there is ample reason to believe it worked only for financial institutions and a small portion of the population. Here, the ECB would engage in what amounts to a fiscal operation, which also would have dome more to stimulate the economy than the Fed's QEs.

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