An oil saviour?

Iraq has the potential to supply much more oil

The growing concerns in the world energy market about the risks of a supply crunch have been a critical factor behind the recent surge in oil prices to a new record of US$135/barrel. Speculators are betting huge sums on the assumption that the oil market (and other primary energy markets) will remain tight for many years to come, owing to the inelasticity of demand and to the constraints on long-term supply. Saudi Arabia, the world's largest oil exporter, is doing its bit to allay these concerns, but has acknowledged that once its current crop of oilfield projects is complete in around 2013, there will be little scope for further capacity increases. Similar strains are evident in most of the other major oil-producing countries. One significant exception is Iraq, which holds (at least) 10% of the world's proven reserves, but accounts for only 2.5% of total production. Iraq has the potential to furnish a long-term solution to the oil market's long-term supply problem, but it will need to improve dramatically on its recent performance before buyers of oil futures will be convinced that it can deliver.

If history had been kinder, Iraq could now be producing at a comparable level to Saudi Arabia. Instead, three wars, 13 years of sanctions and five years of internal conflict have eroded Iraq's oil infrastructure and human capital. However, Iraq also has a history of recovery. Production peaked at over 3.5m barrels/day (b/d) in 1980 on the eve of the Iran-Iraq war, but then averaged less than half that level during the eight-year war. It had nearly recovered to 3.5m b/d in 1990, after which the invasion of Kuwait and the subsequent UN sanctions severely limited exports, and hence production. In the five years before the US-led invasion of 2003, the sanctions regime gradually permitted greater exports, and production was often above 2.5m b/d. However, it fluctuated considerably due to the impact of years of underinvestment, restrictions on the import of spare parts and isolation from the international oil industry. ...

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[Source: The Economist: News analysis

Australia's budget

Tax cuts in Labor's first budget

Australia's Labor government unveiled its first budget on May 13th. The new government's main goals in crafting the budget were to reward the electorate with tax cuts and to keep spending under control in order to curb inflation. A raft of tax breaks and benefits, especially for working-class households, will shift some of the tax burden to high-income earners while reducing taxes overall by A$46.7bn (US$43.5bn) over the next four years. At the same time, government spending is set to increase only by a modest 1.1%, resulting in a projected budget surplus of A$21.7bn. The government also plans to delay a significant portion of its spending until next year, when both economic growth and inflation are set to ease.

The 2008/09 budget represents the new Labor administration's first difficult policy test. Since taking office after winning the federal election in November, the prime minister, Kevin Rudd, has fulfilled several high-profile election pledges?including an official apology to Aborigines, ratification of the Kyoto protocol on greenhouse-gas emissions and a decision to reduce military involvement in Iraq. These measures demonstrated that the new government is more in touch with the electorate, but they were successes in part because they produced a "feel-good" effect without requiring immediate sacrifices. Crafting a budget that would fulfil campaign pledges to cut taxes while keeping inflation under control was a task of a different order, presenting genuine dilemmas as the government sought to balance the interests of various political constituencies and conflicting economic imperatives. ...

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[Source: The Economist: News analysis

Europe's single currency

A decade on from the decision to launch the euro

Ten years after the EU's historic decision to adopt a single currency, the European Commission has presented a detailed analysis of the euro's experience to date and launched a debate on how to address the challenges likely to be faced over the next decade.

In May 1998 European leaders agreed to introduce the euro in 11 countries at the start of 1999. Although euro banknotes and coins did not make their appearance until 2002, economic and monetary union (EMU) started in 1999 with a single exchange rate and monetary policy run by the European Central Bank (ECB). A decade later, the euro zone embraces 15 members with a total population of 320m, greater than that of the US. ...

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The past catches up

Nigeria's president is troubled by his predecessor

Olusegun Obasanjo's reputation as a financially prudent president is being undermined by a series of investigations. This presents his successor with a dilemma.

A year after coming to power, Umaru Yar'Adua is finding it increasingly difficult to fulfil his campaign pledge of tackling Nigeria's endemic corruption. While the Nigerian president made an encouraging start, initiating various investigations and annulling a number of suspect deals, he faces a dilemma: the more investigations that take place, the greater the evidence of misappropriation under the previous administration, headed by Olusegun Obasanjo. Mr Obasanjo's reputation for leading a financially prudent administration is thus being gradually unravelled. Given that President Yar?Adua was hand-picked by his predecessor, and that Olusegun Obasanjo is widely perceived to be his mentor, this is something of an embarrassment to the head of state, and many Nigerians are now watching to see how he responds to the mounting evidence of mismanagement and corruption during the Obasanjo era. ...

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[Source: The Economist: News analysis

And the cupboard was bare

British banks start to pass round the begging bowl

EVER since the emperor bought new clothes, there have been few instances of self-delusion quite as stark as that of cavalier British bankers at the start of 2008. Just as rivals in America and other parts of Europe were writing down billions on their investments in dodgy mortgage loans and frantically raising money, the bosses of Britain?s biggest banks were instead blithely increasing their dividends in a blustery display of financial strength. Just how hollow it was became apparent on Friday April 18th when it emerged that Royal Bank of Scotland, the country?s second biggest bank, might have to raise money to satisfy bank regulators.

The amount will not be trivial, not will be its impact on shareholders. Analysts reckon that Royal Bank may have to raise between GBP10 billion ($19.9 billion) and GBP13 billion, about a third of its current market value of GBP37 billion. It is expected to do so through a share sale which will probably be announced at its annual shareholders? meeting on April 23rd. ...

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[Source: The Economist: News analysis -

Merrill Lynch announces job cuts after $2 billion loss

Merrill Lynch, the investment bank, posted a loss Thursday and announced that it would lay off about 2,900 additional workers. Including about 1,000 jobs already eliminated this year, the company's work force is to shrink by 10 percent, or about 4,000 jobs, over the course of 2008.

The bank reported worst-than-expected earnings for the first quarter, including $6.5 billion in write-downs and adjustments to assets in its mortgage, leveraged finance and other divisions. The write-downs bring the total taken by Merrill Lynch in the last three quarters to more than $30 billion.

Merrill Lynch said it suffered a loss of $1.96 billion, or $2.19 a share, after its write-downs, in the first three months, down from a profit of $2.11 billion, or $2.26 a share, a year ago.

Analysts surveyed by Bloomberg News had expected a loss of $1.79 a share. Revenue, including interest and dividends, was $2.9 billion - down 69 percent from a year ago.

The job cuts will come from the company's global markets and investment banking division, which includes fixed income, currency, commodity and equity trading as well as banking. That part of the bank recorded a pre-tax loss of $4 billion for the first quarter and negative revenue of $690 million. The layoffs will save $800 million a year in compensation expenses, the bank said.