A global fiasco is brewing in Japan

I have felt rather lonely after suggesting in my New Year Predictions thatJapan is dangerously close to blowing up on its sovereign debts, with consequences that will be felt across the world.

My intended point — overly condensed — was that 2010 will prove to be the year that Japan flips from deflation to something very different: the beginnings of debt monetization by a terrified central bank that will ultimately spin out of control, perhaps crossing into hyperinflation by the middle of the decade.

So it is nice to have some company: first from PIMCO’s Paul McCulley, who said that the Bank of Japan should buy “unlimited amounts” of long-term government debt (JGBs) to lift the country out of a “deflationary liquidity trap” and raise the souffle again.

His point is different from mine, in that he discerns deflation “as far as the eye can see”. But in a sense it is the same point. Once a country embarks on such policies, the game is nearly up. The IMF says Japan’s gross public debt will reach 227pc of GDP this year. This is compounding at ever faster speeds towards 250pc by mid-decade.

The only reason why this has not yet blown up is because investors (mostly Japanese) have not yet had the leap in imagination required to understand their predicament, and act on it. That roughly is the argument of Dylan Grice from Societe Generale in his latest Popular Delusions note released today. “A global fiasco is brewing in Japan.”

Japan’s deficits are already within the hyperinflation “red flag” zone identified by historian Peter Bernholz (”Monetary Regimes and Inflation” .. the Bible on this subject). As you can see from the charts below, prices start to spiral into the stratosphere once the deficits as a share of government expenditure rises above a third and stays there for several years.

The Bernholz range for the five hyperinflations of France, Germany, Poland, Brazil, and Bolivia over the centuries is surprisingly wide, from 33pc to 91pc. Japan has been in the that range almost continuously for the last eight years. The US joined the party in 2009. Japan’s Bernholz index will rise above 50pc this year for the first time, meaning that it will have to borrow more from the bond markets than raises in tax revenue. You see the problem.

We all know that Japan has been racking up debt for Two Lost Decades, yet the sky has refused to fall. Borrowing costs have slithered down to 1.36pc on 10-year JGBs and under 1pc on shorter debt, though they are not as low as they were .. nota bene. This seeming defiance of gravity has emboldened the Krugmanites and Keynesian prime-pumpers to call for a repeat in the US, UK, and Europe. There lies a great danger.

Mr Grice said Japan was able to pull off this feat only because its captive saving pool was large enough to cover the short-fall, and because the Japanese people continued to be reassured by the conjurer’s illusion that all was well. This cannot continue.

The country tipped into outright demographic decline in 2005. Households have already stopped adding to their stock of JGBs. As the aging crisis accelerates, the elderly are running down their assets. The savings rate will soon crash below zero.

Japan can turn to foreign investors to plug the gap, or course, but at what price? If yields reached UK or US levels of 4pc, debt costs would soak up nearly all the budget, leaving nothing for schools, roads, the police, or salaries for the Ministry of Finance. “I doubt there is any yield that international capital markets can find acceptable that will not bankrupt the Japanese state,” he said.

Note too that the Japanese will also have to run down their holdings of US Treasuries, currently $750bn or 10pc of the entire stock of US Treasury debt, as well as selling a lot of Gilts and Belgian bonds.

“This might very well precipitate other government funding crises. At the very least I’d expect it to trigger an international bond market rout scary enough to spook all other asset classes. So maybe we should all be concerned that Japan is in the hyperinflationary range. And if so, maybe we should think a little more carefully about how Western governments consider their debt burdens. Maybe Japan’s will be the crisis that wakes up the rest of the world,” he said.

Will it happen, this week, this month, this year, or will Tokyo keep the illusion of solvency going for years longer? Who knows. Japan is an endlessly mystifying society. But as Mr Grice puts it, if you are sitting on a tectonic fault line, expect an earthquake.

Global Crude Supply: Is the Oil Peak Near?

by Matthew R. Simmons

Chairman and CEO
Simmons & Company International

http://www.energybulletin.net/node/1036

http://www.physorg.com/news187622107.html

In February, one of the more remarkable events in a remarkable industry took place as senior figures in Saudi Arabia's energy administration appeared before a group of industry experts gathered in Washington, D.C., to defend their country's petroleum policies and assure the world that there is no impending crude oil shortage...

http://articles.moneycentral.msn.com/Investing/JubaksJournal/will-oil-hit-200-dollars-after-all.aspx

The Saudis were moved to appear before the Center for Strategic and International Studies after I posed a very serious question: is Saudi oil production near its peak? That question was framed in an extensive study I conducted and supplied to the Saudis prior to presenting it on February 24 before the Center. It also anchors a book that I will soon publish.

In response, the Saudis sent Mahmoud Abdul-Baqi, vice president of exploration for the Saudi national oil company, Aramco, and Dr. Nansen Saleri, manager of Aramco's reservoir management, to present the Arabian case. The fact that Aramco would send such talented and experienced oilmen to address my question demonstrates, in my opinion, that the Saudis' commitment to their stated goal of being the world's most dependable and conscientious supplier of crude oil is genuine.

http://www.businessinsider.com/spend-nuclear-fuel-rods-could-unlock-dirt-cheap-tar-sands-oil-2010-2

On that note, I will recapitulate my concerns, log in the Aramco position and then let you come to your own conclusion....

http://www.thenational.ae/apps/pbcs.dll/article?AID=/20100121/REVIEW/701219978/1008/review

Saudi Arabia's Giant Fields

As readers of this publication are entirely aware, stable and reasonably priced energy supplies have brought civilization to its current status, and a continuation of these supplies is absolutely essential to keep us from receding to the Stone Age.

Of all the known reservoirs of crude oil in the world, none has been more prolific than those beneath a portion of Saudi Arabia's eastern province, a small part of a kingdom of just 26,500 square miles, roughly two-thirds the size of the state of Virginia. Underneath this territory lie five giant oilfields that have produced some 90 percent of all Saudi Arabian production for the last half century. Up to 60 percent of all Saudi oil has come from Ghawar, the world's largest oil field, discovered in 1948.

These simple facts bring us to the crux of my question: When will these few fields finally peak? It has to happen sometime. And even more worrisome is the follow-up question: What is our backup plan when the end is finally in sight?

The Saudis' response, in a nutshell, is that the end isn't in sight; not even close. But I'm an energy worrier. In my lifetime, I've already seen U.S. oil and gas production peak and go into decline. I've seen the signs that the North Sea has peaked, although there will be some who say I'm premature. Just in the last couple of years, I've seen the rest of non-OPEC crude supply flatten when it was supposed to have surged. And juxtaposed with these ominous signs is a world appetite for oil and natural gas that grows inexorably.

http://www.culturechange.org/cms/index.php?option=com_content&task=view&id=597&Itemid=1

The End of the Commodity Price Cycle?

What all of us in the energy business have had drummed into our heads is the cyclical nature of the world's most precious and critical commodity - energy. Time and time again we've seen demand overtake supply, prices go up to the point that production increases while demand is either curtailed or destroyed, and finally a point where supply once again overtakes demand, and prices crater.

No one in the industry likes that grim reality, and no one has done more to take the peaks and valleys out of oil prices than Saudi Arabia, the leading member of OPEC. Granted, OPEC took its initial lessons from the Texas Railroad Commission, which began controlling production of crude in the early days of the East Texas oil field. It has certainly gone much further, though, and on a far grander scale. After all, Texas is no longer a major crude producer, and Saudi still is.

But as I asked last year in this publication ("The Dawning of a New Oil and Gas Era: Is a Sea Change Ahead?" World Energy Vol. 6, No. 3), is something fundamentally different under way that will usher in a dramatically new era? That question was posed after I concluded a study that indicated higher natural gas prices had not triggered the increase in production and gas reserves that we would have expected due to increased exploration and development activities.

My study also showed that although high prices no longer trigger any significant supply increases, any price collapse still causes a rapid downturn in drilling and delay or cancellation of expensive new energy projects. Add to this unsettling situation the fact that just 1-3 percent too much energy creates a glut capable of knocking down prices, and even 1 percent too little can bring an economy to its knees with a crisis that slows the wheels of progress to a crawl or even a halt.

The Saudi "Plug" Factor

In this picture of global energy uncertainty, the Saudi crude oil juggernaut has been - and still is to many people - the friendly giant that can put things to rights with a snap of his fingers, plugging in an increased flow of crude to prevent or ameliorate an oil shock. That, of course, is the contention of Aramco, and why it sent two of its top experts to the U.S. to deliver the most detailed presentation of its operations ever made.

Currently, according to Mr. Abdul-Baqi and Dr. Saleri, Aramco has a production capacity of 10 million barrels a day (b/d), which can easily be increased by up to 5 million b/d if the world requires it. While I have no reason to doubt the integrity of the gentlemen from Aramco, I have certainly been in the position of questioning production figures in the past. And I'm not alone in questioning the Saudi crude oil situation.

In a copyrighted story published the same day that the Aramco executives and I appeared before the group assembled at the Center for Strategic and International Studies, the New York Times noted that Saudi Arabian production today is only 8 million b/d, 20 percent below the Saudi estimate of current production capacity. Add to the uncertainty the fact that both the International Energy Agency (IEA) and America's Energy Information Agency (EIA) have been subject to questions about their data systems, and their predictive track records have been awful. Until February 24, the best estimates of Saudi and other OPEC crude output came from tanker traffic consultants. While Saudi production reports are welcomed, I for one would like a second-party confirmation. I'll address the issue of transparency in the Arabian petroleum scene later in this article.

Yet even if we accept Aramco's production capacity of 10 million b/d as entirely accurate, the issue of future production cannot be a foregone conclusion. Two questions will occur to those, such as I, who worry. First, can the Saudis really open the tap and produce up to 5 million b/d more? Jeff Gerth, the New York Times writer, quoted several credible sources to the contrary. One of those was Edward O. Price, Jr., a former executive with Aramco and Chevron, who said Saudi could pump 12 million b/d for "a few years, but the world should not expect more from the Saudis." Faith Birol, chief economist for the IEA, told Gerth that no Saudi increase in production would be possible without large-scale foreign investment, which would be politically difficult for the Saudi monarchy, particularly in view of current East-West tensions. Aramco's Dr. Saleri disputes this contention, having stated to Petroleum Intelligence Weekly last December that Aramco's own finances would be sufficient to boost production to 10 million b/d.

Second, if world conditions demand an additional 5 million b/d and Aramco delivers, how long can this higher output last, and will it end up damaging the key reservoirs already struggling with high water cuts? Mr. Price's pessimistic opinion notwithstanding, the Saudis maintain they can do it for 50 years. I must admit that even to a worrier, the Saudis' answers had a degree of comfort, especially to the extent that they were based on past history.

Saudi Arabia's Principles of Reliability

In Saudi Aramco's February presentation, in the pages of this magazine over the past six years and in many other venues across the world, representatives of the Saudi energy industry have consistently stressed their desire and commitment to be good stewards of the world's most precious treasure. The principles they point to are:

• Sustainable performance

• Maximum hydrocarbon recovery

• Life-cycle economics

• Prudent reserves management

• Excellence in safety and environmental practices

I would say that all these are worthy of following, although investor-owned companies may not have the luxury of spending as much time and resources on maximizing recovery and sustaining performance of specific assets as a company that does not have to answer to stockholders or regulatory authority.

In the field practices section of their presentation on February 24, the Aramco executives based their hopes for maximizing recovery on leading-edge technologies, advanced diagnostics and careful reservoir monitoring. And they supported their abilities with a report of depletion rates from 1 percent for their best efforts to 4.1 percent at the worst, compared to 4.2 percent at Prudhoe Bay, 4.5 percent in East Texas and 9.6 percent for Brent.

Indeed, sustainability of existing reserves always comes down to managing the depletion rate. Moreover, when massive water injection keeps reservoir pressures high, this puts off normal decline rates until this miracle ends. These declines can be gigantic. Yet finding increasing depletion rates in oil and gas reserves the world over has continued to alarm me, and a trip to Saudi Arabia last year to better understand the situation raised more questions than it answered. Chief among them were the location of the "shut-in capacity" that could come to the world's rescue, why Saudi Arabia has such a high concentration of old fields, and why Aramco is making such extensive use of technology, particularly water injection.

Enhanced Recovery, Peaking and Rapid Decline

My search for answers led me to a 1961 article in the Journal of Petroleum Technology on evaluating water-oil displacement efficiency. Subsequently, I turned to the archives of the Society of Petroleum Engineers, reviewing some 200 papers relating to Saudi Arabian oil challenges from 1961 to 2003. As I progressed to reading and analyzing more recent papers, the problems associated with water injection grew both in volume and in intensity.

The water issue directly relates to the sustainability of the five giant Saudi fields because all five use water drive to create their fabulous wellhead oil flows. For example, the Saudis have been using water injection in Ghawar since 1965. I have questioned whether the extensive use of water injection may threaten the viability of the Saudi fields, and Aramco has responded that it does not. Certainly, the fact that Ghawar continues to pump 5 million b/d supports the Saudi position. However, I believe this issue needs more independent scientific investigation. Indeed, my research has shown that water injection and other enhanced recovery techniques may very well increase depletion rates, accelerate production peaks and hasten a steady decline thereafter.

A good example is the Yibal field in Oman, which was Oman's sole giant oilfield. This field was heavily water-injected, and as vertical wells were becoming obsolete in the early 1990s, horizontal drilling began. By 1997, Yibal production hit a new record at 250,000 b/d and the field capacity was expanded. However, four years later, production had fallen to under 90,000 b/d, and today it's barely half of that. Most observers were caught by surprise, but my studies show that Yibal's peak and rapid decline were typical of many other major fields. The East Texas oil field is a classic case, but there are many more (Fig. 1).

The Samotlor Field in Russia hit its peak production of 3 million b/d in 1979 and maintained that flow until 1983. Its decline started in 1984 with a 200,000 b/d drop, where it stayed until mid-1986. But four years later, it had lost a million b/d, and by 1994, it was producing barely 500,000 b/d. Prudhoe Bay, Alaska took three years to reach 1.5 million b/d in 1979, a level it maintained for 10 years. But then the decline rate began to increase. By 1999, production was no more than 600,000 b/d. Brent lost its peak even more rapidly, holding at 425,000 b/d for only a year in 1984, then plummeting to less than 100,000 b/d by 1990.

The Production/Exploration Equation

http://www.telegraph.co.uk/news/worldnews/southamerica/falklandislands/7223381/British-oil-dispute-with-Argentina-escalates.html

To this point, I have focused on Saudi reserves that have been identified. In round numbers, Aramco believes it can safely say that its country was endowed with nearly 700 billion barrels of oil (termed OIIP, or oil initially in place), of which 99 billion barrels have already been produced, 260 billion are proved, another 103 billion are probable or possible and a final 238 billion are contingent (Fig. 2). Further, Aramco believes that current and future exploration will expand the estimate of total Saudi OIIP barrels to 900 billion by 2025. Current Saudi reserves, by most accounts, equal about one-fourth of total world crude reserves.

Obviously, if Saudi Arabia just stays at its current production rate of 8 million b/d, or about 3 billion barrels/year, it would only have produced one-third of the 900 billion barrels, if they actually exist, 100 years from now. Isn't that enough to calm the fears of the most nervous of energy worriers? Yet Ghawar, which is producing 5 million b/d, is not a 50-year prospect to many observers. I found a 1975 report from Aramco that estimated Ghawar's total recoverable reserves at 60 billion barrels. At that time, over 400 wells had tapped the field, oil/water contact had been carefully mapped and geoscientists from Exxon, Mobil, Chevron and Texaco all agreed on the estimate.

Aramco reported Ghawar has been producing at just under the 5 million b/d level since 1993 and has now produced 55 billion barrels of cumulative oil. If the 1975 ultimate proven recoverable reserve estimate was correct, Ghawar is about done. However, Aramco says Ghawar is only 48 percent depleted, meaning the pie got much bigger. Maybe it did, and if Saudi production stays as steady and dependable as it has, I suppose I'll go down in energy history as the industry's biggest alarmist. But history has already shown that maintaining crude oil flows is by no means easy, and often impossible, regardless of the size of the estimated reserves.

Included in the Aramco presentation was the fact that it has average production costs somewhere around 50 cents a barrel, while the rest of the industry is looking at $3-5 a barrel (Fig. 3). That's very good news, but is it reasonable to anticipate the Aramco lifting costs can stay that low when the rest of the world's producers are seeing costs go up every day? Are some of these very low prices simply driven by heavily subsidized water and elecricity fees? Let's face it, technology costs money.

Beyond the costs for maintaining the status quo is the issue of finding new oil beneath the desert sands. In fact, there has already been a great deal of exploration for new giant fields in Saudi Arabia, and considerable development work remains in 85 oil and gas fields that have been found but not tested. Yet the rest of Saudi Arabia has been intensely explored, with few significant fields having been found. The "newest" oil in the Middle East is the 1989 discovery of the Hawtah Trend in Central Arabia, which came after 120 drilling or seismic penetrations. The Hawtah and several adjacent fields combine to produce 200,000 b/d of condensate, but bacteria and corrosive aquifer water have damaged the wells and reservoirs, and the newest Middle East oil is getting old.

Worse, the next generation of Saudi oil will undoubtedly be harder to extract, coming from bypassed oil pockets and reservoirs above and below the prime producers that will require more complex and more expensive production techniques. Three oilfields with complex production histories are next in line: Qatif, Abu Sa'fah and Khurais. The EIA reported Aramco will spend $3 billion on just one project at Khurais that should produce new capacity of 800,000 b/d. Enhancements at Qatif and Abu Sa'fah are expected to add another 800,000 b/d, by Aramco estimates.

Global Energy Transparency

The information that flowed from Aramco earlier this year was a welcome improvement, and absolutely necessary for global energy management. It appears that we can expect the trend to continue and, hopefully, accelerate. Aramco is opening the door to more joint exploration with foreigners, meaning more international money, and more scrutiny, will be arriving in Saudi Arabia. The world's continued economic development is at stake.

Current global crude oil consumption of 81 million b/d is expected to climb to 120 million b/d by 2030. Most observers see Saudi Arabia contributing most of that extra 40 million b/d. We do have a quarter of a century to get there, but it won't be easy, and it won't be cheap. To do the best job, the global energy industry needs true energy transparency.

At a minimum, from the International Energy Agency, we need far better demand and cost data and much more accurate information on the decline rate of non-OPEC production. From OPEC, we need timely field-by-field production and well-by-well data, budget details and third-party engineering reports. And all of us need to be committed to financial reforms that will bring the wild price volatility of oil and gas under control, with a realistic economic model for how oil and gas need to be priced. OPEC's range of $23-$28/barrel already seems to be defunct, and besides, the OPEC producers shouldn't be left to grapple with price continuity on their own. We must all be involved.

There are glimmerings that alternative energy sources may become large enough to be realistic substitutions for oil and gas, but most people don't see that happening for another two decades. Hydrogen is another possibility, although right now, the most realistic sources of hydrogen seem to be from hydrocarbons.

In the various Aramco responses made in Washington during late February, Dr. Saleri was quoted as saying, "Mr. Simmons is a banker pretending to be a scientist." He then said he could read 200 studies on neurology, but I still wouldn't want him wielding the knife if I needed brain surgery. I agree. But if he were contemplating surgery himself, I bet he would like to know the success ratio for the type of procedure recommended, not to mention the track record of the surgeon he picked to operate. I want the Aramco projections to be correct and Saudia Arabia to continue as the friendly giant that keeps the wheels of progress energized. But I can never accept the simple "trust me" solution, and I believe it will be dangerous for the world to continue to fly blind on the issue of adequate energy supplies. The time to begin a new era of energy transparency is now.

Matthew R. Simmons is chairman and CEO of Simmons & Company International, a specialized energy investment banking firm. The firm has guided its broad client base to complete nearly 500 investment banking projects at a combined dollar value of approximately $58 billion.

Mr. Simmons was raised in Kaysville, Utah. He graduated cum laude from the University of Utah and received an M.B.A. with distinction from Harvard Business School. He served on the faculty of Harvard Business School as a research associate for two years and was a doctoral candidate.

Mr. Simmons founded Simmons & Company International in 1974. Over the past 28 years, the firm has played a leading role in assisting its energy client companies in executing a wide range of financial transactions from mergers and acquisitions to private and public funding. Today the firm has approximately 130 employees and enjoys a leading role as one of the largest energy investment banking groups in the world. Its offices are in Houston, Texas and Aberdeen, Scotland.

DEFICIT TERRORISM COULD KILL THE EURO

DEFICIT TERRORISM COULD KILL THE EURO[ii]

By Marshall Auerback

On more than a few occasions, we have discussed the insanity of self-imposed political constraints which limit the range of fiscal policy. As well as imparting a deflationary bias to an economy (and thereby preventing full employment), these kinds of constraints preclude the adoption of prompt counter-cyclical policy, which would otherwise cushion an economy when confronted with a genuine financial crisis, as we are experiencing today.

The constraints under which the US operates are more apparent than real. As we have discussed before, these constraints are largely based on 19^th century gold standard concepts, which have no applicability in a fiat currency world. Tomorrow, if the US wanted to run a budget deficit equivalent to 20 per cent of GDP, it could do so, politics and demagoguery aside.

Such is clearly not the case in the euro zone, where countries, such as Spain, that have 20 per cent unemployment are being forced into further belt tightening. And the news just keeps getting worse: Expansion in Europe’s service and manufacturing industries unexpectedly slowed in January, adding to signs the pace of the economy’s recovery may weaken.

A composite index based on a survey of purchasing managers in both industries in the 16-nation euro region fell to 53.6 from 54.2 in December, London-based Markit Economics said today in an initial estimate. Economists expected an increase to 54.4, according to the median of 15 estimates in a Bloomberg survey. A reading above 50 indicates expansion.

The euro-region economy may lose momentum as the effect of government stimulus measures tapers off and rising unemployment erodes consumers’ willingness to spend. More significantly, the very viability of the currency is now being called into question even within the councils of the European Monetary Union (EMU), where fears of a euro breakup have reached the point where the European Central Bank (ECB) itself feels compelled to issue a legal analysis of what would happen if a country tried to leave monetary union (http://www.telegraph.co.uk ).

A currency vaporizing before our very eyes! All for what? Some misguided anti-inflation fear? A desire to maintain the euro as a “store of value”? What’s the point of having a “store of value” in your pocket when you don’t have enough of it to buy anything because you’re unemployed?

We have long viewed the principles underlying Europe’s monetary union as profoundly misconceived. In particular, the so-called Stability and Growth Pact is economically flawed and politically illegitimate, given the power of unelected bureaucrats within the euro zone to ride roughshod over the clearly expressed preferences of national electorates. A law that governs economic decisions yet is economically illiterate cannot stand for long. It merely invites non-compliance and worse, as we are witnessing today. And the problem is not restricted to the so-called “PIIGS” countries (Portugal, Ireland, Italy, Greece and Spain). The larger – and wealthier – European economies however have never reduced their unemployment rates below 6 per cent and the average for the EMU since inception is 8.5 per cent (as at July 2009) and rising since. The average for the EMU nations from July 1990 to December 1998 (earliest MEI data for the EMU block available) was 9.7 per cent but that included the very drawn out 1991 recession. Underemployment throughout the EMU area is also rising (http://bilbo.economicoutlook.net), reaching 20% in Spain and double digits in Portugal, Italy, Ireland, and Greece.

Until now, the Eurocrats have either remained in denial about the mounting stress fractures within the system, or forced weaker countries to impose even greater fiscal austerity on their suffering populations, which has exacerbated the problems further. And there has been a complete lack of consistency of principle. When larger countries such as Germany and France routinely violated spending limits a few years ago, this was conveniently ignored (or papered over), in contrast to the vituperative criticism now being hurled at Greece. The EU’s repeated tendency to make ad hoc improvisations of EMU’s treaty provisions, rather than engaging in the hard job of reforming its flawed arrangements, are a function of a silly ideology which is neither grounded in political reality, nor economic logic. As a result, a political firestorm, which completely undermines the euro’s credibility, is potentially in the offing.

So what are the alternatives? Exit from the currency union would be the most logical, but also potentially the most economically and politically disruptive. As Professor Bill Mitchell notes, to exit the EMU a nation and regain currency sovereignty, the following changes would occur:

• The nation would have to introduce a new/old currency unit under monopoly issue. Within this currency the national government could purchase anything that was for sale in that currency including domestic unemployed labour.
• The central bank of the nation would receive a refund of the capital it contributed to the ECB.
• The central bank would also get all the foreign currency reserves that it moved over into the EMU system.
• The nation’s central bank would then regain control of monetary policy which means it could set the interest rates along the yield curve and also add to bank reserves if needed.

(http://bilbo.economicoutlook.net )

There is clearly the additional problem of debt which is now denominated in euros, because, as Mitchell notes, the problem because the nation that wanted to exit would have to deal with a foreign currency debt burden, and might find itself involved in a painful adjustment process in which the departing nation is forced to experience a punitive negotiated settlement (unless of course it was able to engineer payment in the new local currency).

Personally, we think the whole euro zone system is an abomination and would prefer to see all euro zone states go back to national currencies and thereby get their respective economies back on track with renewed fiscal capacity. But there is also a short term expedient which might prove minimally disruptive to the European Monetary Union’s current political and institutional arrangements, but could well succeed in restoring growth and employment in the euro zone.

Within the euro zone, short of leaving, the most elegant adjustment mechanism is for the ECB to distribute 1 trillion euro to the national governments on a per capita basis. This proposal would operate along the lines of the revenue sharing proposals we recently advocated for the American states. The nation states of the euro zone would the instructions from European Council of Finance Minister (ECOFIN) and the ECB would then change the balances in all of the national member bank accounts, in effect increasing their assets, and thereby reducing debt as a percentage of GDP.

Within the euro zone, this sort of a proposal would likely give the respective EMU nations more bang for their respective euros, given the more elaborate social welfare programs in the EU. There would be less pressure to "reform" them (i.e., cut them back) if the EU nation states debt ratios are correspondingly lower and "compliant" within the bounds of the SGP.

The per capita criteria deployed here means that we are neither discussing a bailout per se of one individual country, and nor a 'reward for bad behavior.' All countries would receive funds from the ECB on a per capita basis, which means that Germany would in fact become the biggest beneficiary. The fact that all countries are in the euro zone means there's no possibility of Germany losing competitive ground to Spain or other low wage countries. It would immediately adjust national govt. debt ratios substantially downward and ease credit fears.

If there is no undesired effect on aggregate demand/inflation/etc., which there should not be given the prevailing high levels of unemployment in the euro zone, it can be repeated as desired until national government finances are enhanced to the point where they can all take local action to support aggregate demand as desired.

The proposal advanced is the most institutionally elegant solution because it maintains the current arrangements, as flawed as they are, and preserves the euro. Yes, a weaker euro would almost certainly result from this action. However, as "national solvency" is an issue for the euro countries (in a way that it is not for the US or Japan or the UK, given that the euro zone nation states are functionally more like American states than independent countries with their own freely floating non-convertible currencies), the resultant higher export growth that comes from a weaker euro is actually benign for everybody, as it minimizes the markets' solvency concerns.

The formation of the European Union has been largely driven by the extremism of inter-European conflicts that caused millions of people to be slaughtered during two disastrous world wars. Ironically, the political and economic arrangements that have arisen in response to these horrors are creating a different kind of social devastation which is both wholly self-inflicted and profoundly misconceived. Europe’s very currency could well blow up. The US might well preserve its currency, but the EU’s current situation provides a salutary warning of what can happen in a system that prevents individual member’s from using fiscal policy to improve the circumstances of their citizens.

---

[i] see Marshall Auerback: “How a Financial Balances Approach Can Keep Wall Street Honest”, published October 19, 2009 under:

http://neweconomicperspectives.blogspot.com

Stiglitz pinpoints 'moral' core of crisis

The British economics publications have reported for years now that a mysterious 'buyer' from the Caymans seems to rescue the U.S. economy every time purchasers of treasuries dwindle. CIA drug fund money set up under Bush 1 continued under Clinton and added too with Leo Wanta and the CIA's bankrupting of Russia in the nineties. If you think for one minute that your government is not the largest criminal entity on Earth today you are nuts. Just days before 9/11 it was reported that 1.7 TRILLION dollars was missing from the defense budget. The only people that do not seem to understand or know what is going on are the American people, everyone else in the world is reading real news.

Stiglitz pinpoints 'moral' core of crisis
By Henry CK Liu

http://moneymorning.com/2010/01/27/retirement-plans/

Nobel Laureate economist Joseph Stiglitz, a Roosevelt Institute senior fellow and its chief economist, said on CNBC on January 19 that the US is infested with "ersatz capitalism", a flawed, unfair system that socializes economic losses and privatizes the gains. He decries the "moral depravity" that has led to the current financial crisis.

Stiglitz served in the Bill Clinton administration as chairman of the Council of Economic Advisers (1995-97) before moving to the World Bank as its chief economist, where he developed a Pauline epiphany against the very neo-liberalism he helped promote in the form of "the Third Way", to criticize belatedly but rightly and vocally policies of the International Monetary Fund (IMF). Such outbursts put him in conflict with the Treasury Department under Larry Summers, who reportedly forced Stiglitz to resign (2000), presumably for not being a team player. Notwithstanding his government career setback, Stiglitz was selected as a recipient of the 2001 Nobel Prize for Economics.

Despite heavy pressure from the Treasury to silent him, Stiglitz has been the courageous voice of progressive economics, criticizing the structural defects of central banking, deregulated free-market fundamentalism and predatory globalization. Stiglitz is now a University Professor at Columbia and one of the world's most respected and cited economists as a courageous defender of the defenseless.

As Professor Stiglitz knows, the "moral depravity" he so detests about the current financial crisis began much earlier.

I wrote on this site almost seven years ago (see The Dangers of Derivatives, Asia Times Online, May 23, 2002): "The financial crises faced by newly industrialized economies (NIEs) in the 1990s were significantly different from the foreign debt crises in the developing countries in the previous decade. Different forms of foreign funds flowed to different recipients in developing countries during the two periods. More importantly, derivatives emerged as an integral part of fund flows in the 1990s.

"Derivatives played an unprecedented key role in the Asian financial crisis of 1997, alongside the growth of fund flows to Asian NIEs, as part of financial globalization in unregulated global foreign exchange, capital and debt markets. Derivatives facilitate the growth in private fund flows by unbundling the risks associated with financial vehicles, such as bank loans, stocks, bonds and direct physical investment, and reallocating the risks more efficiently by expanding the distribution and the level of aggregate risk. They also facilitate efforts by many financial entities to raise their risk-to-capital ratios to dodge regulatory safeguards, manipulate accounting rules and evade taxation. Foreign exchange forwards and swaps are used to hedge against floating exchange rates as well as to speculate on fixed exchange rate vulnerability, while total return swaps (TRS) are used to capture 'carry trade' profit from interest rate differentials between pegged currencies.

"Structured notes, also known as hybrid instruments, which are the combination of a credit market instrument, such as a bond or note, with a derivative such as an option or futures-like contract, are used to circumvent accounting rules and prudential regulations in order to offer investors higher, though riskier, returns. Viewed at the macroeconomic level, derivatives first make the economy more susceptible to financial crisis and then quicken and deepen the downturn once the crisis begins. Since investors can only be seduced to higher risk by raising the return on higher risk, the quest for high return raises the aggregate risk in the financial system. But investors always demand a profit above their risk exposure which will leave some residual risk unfunded in the financial system. It is in fact a socialization of unfunded risk with a privatization of the incremental commensurate returns.

"The private global fund flows that led up to the crises of the 1980s were largely in the form of dollar denominated, variable interest rate, syndicated commercial bank loans to sovereign borrowers, recycling petro-dollar deposits from OPEC [Organization of the Petroleum Exporting Countries] trade surpluses. The formation of syndicates to underwrite these loans helped to bind lenders together, and along with cross-default clauses in the loan contracts, it greatly reduced individual banks' credit risks by passing such risk to the banking system. Loan syndication amounted to a lender monopoly with open price-fixing between previously competing banks.

"In order to reduce the banks' collective exposure to market risk, these loans were issued as adjustable interest rate loans (usually priced as a spread above LIBOR [London Interbank Offered Rate] or some short-term interest rate that reflected banks' funding costs), and they were denominated mostly in dollars or otherwise in other G-5 [Group of Five] currencies (which reflected the currency denomination of the lending banks' funding sources). Foreign fund flows in this form shifted most of the market risk to the borrowers, who might not have fully understood that they bore both foreign exchange risk as well as interest rate risk, and the spiraling exacerbating effect of the two risks on each other, ie, rising dollar interest rates would devalue non-dollar local currencies which in turn would push up local interest rates.

"Lending banks in the advanced financial markets of the 1980s, whose liabilities were mostly short-term and denominated in the same currencies as their loans to developing countries, bore little market risk. Their exposure was almost entirely credit risk, and this was substantially mitigated through the syndication of the loans and the inclusion of cross default clauses. Thus a supposedly 'free' debt market transformed itself into a bilateral market between powerless individual borrowers and an all-powerful lending monopoly. It was the height of hypocrisy that in an era of blatant financial monopoly that neo-liberal finance market fundamentalism achieved its unprecedented intellectual ascendancy.

"The change in the distribution of market risk to Third World sovereign borrowers laid the foundation for the crisis that began in August of 1982. The crisis began when the Federal Reserve raised short-term dollar interest rates to fight US run-away stagflation. Higher dollar interest rates, which served as the basis for payments on adjustable rate loans, both increased the dollar payments on loans and increased the cost in non-dollar local currencies for dollars. Debtor countries were forced to drastically increase their foreign borrowing in order to reduce the burden of servicing suddenly higher foreign debt costs, leading to inevitable crisis.

"In August 1982, the Mexican government announced its inability to make scheduled foreign loan payments. In response, the developing economy governments, major money center banks, and the IMF and World Bank began searching desperately for post-crisis recovery policies, initially by rescheduling existing debt, arranging new lending and requiring the developing-economy governments to implement austere fiscal and monetary policies to make possible the eventual repayment of the continuously growing debt burden, but in effect foreclosing developing economies any prospect of growth with which to repay the still mounting foreign loans. The foreign creditors were protected; the debtor developing nations lost what little they had gained in the previous decade and then some, with no prospect of ever escaping from the tyranny of foreign debt in the foreseeable future. Neo-liberal economists cited Shakespeare: 'Better to have loved and lost, then not to have loved at all', while their paying clients laughed all the way to the bank.

"The Asian financial crises that began in 1997 were very different phenomena. They were caused by hot money (short-term foreign credit based on over-valued exchange rates that were defended beyond reason by Third World monetary authorities poisoned by neo-liberal advice). Derivatives trading in over-the-counter (OTC) markets were, and still are, neither registered nor systematically reported to the market. Thus the full risk exposure in the system is not known until the crisis hits. In macroeconomic terms, derivatives have the structural effect of privatizing the incremental efficiency (profits) while socializing the risk (losses) associated with such profits. This is done by extracting value through rising risk/return ratios by siphoning off part of the incremental return to known private parties while passing on the full incremental risk to faceless third parties spread throughout the system. Since the spread was minuscule, profit incentive pushed for massive increases in volume.

"The foreign private fund flows that preceded the 1997 financial crises went to private entities in Asia and not just to sovereign borrowers as in the 1980s. Commercial bank loans in the 1990s, measured as a percentage of total foreign fund flows, were substantially less important than they were in the 1980s. Instead, fund flows to Asia ranged from foreign direct investment (FDI) to portfolio equity investment (meaning less than 10% ownership), corporate and sovereign bonds as well as structured notes, repurchase agreements, on top of traditional bank loans to public and private borrowers. This more-diversified flow of funds generated a different distribution of risks towards global institutional investors, mainly pension funds in the advanced capital and debt markets. Stocks and bonds investments in Asia shifted market risk and credit risk to foreign institution investors who bore the risk of changes in interest rates, securities prices and exchange rates.

"FDI in physical capital and real estate similarly shifted market risk and credit risk to foreign institutional investors. Even dollar denominated bonds issued by Asian governments shifted interest rate risk, as well as credit risk, to foreign institution investors. Socialized finance in the rich economies, what the Wall Street Journal fondly referred to as mass capitalism, was called on to finance old-fashioned compradore capitalism in the NIEs. The effect was to expose the NIEs to the risk of changes in US interest rates or the exchange value of the dollar, not as economic fundamentals, but as technical trends perceived by the herd instincts of fund managers in the advanced markets. Thus the neo-liberal focus on the need to resolve the national banks' domestic non-performing loans (NPL) as a prerequisite for generating growth is, to say the least, misplaced. The NPL problem in Asia is a fiction invented by the Bank of International Settlement to prepare national private banks as ripe targets for predatory acquisition by Western large, complex banking organizations."

Today, in 2010, as predatory capitalism hits its own home base, it is possible that a new world economic order will soon emerge from people power. Unfortunately, all governments are still fixated on "recovery" schemes concocted to turn the crisis back to the very same flawed system of moral depravity that had led the world to its present disastrous state.

Much of the talk now among establishment economists has been focused on technical debate on the government stimulus packages being too small to kick-start the seriously impaired economies around the world, when the problem has been that good public money has been targeted for bailing out undeserving private institutions to enable them to again play the same immoral game of recklessly speculation through "carry trade", risking the people's money for unproductive, obscene private profit, while leaving a dispirited population unemployed and underemployed, with families with young children facing homelessness.

If only a fraction of the people's money is spend directly on the people themselves, the world will emerge with a new economic order of moral justice instead of deprivation.

Ron Paul, the Republican congressman from Texas, told Federal Reserve chairman Ben Bernanke in a hearing that the Federal Reserve is a "predatory lender". But he did not mention that by law, predatory lenders forfeit any right of collection.

In the United States, although predatory lending is not defined by federal law, and various states define abusive lending differently, it usually involves practices that strip equity away from a homeowner, or equity from a company, or condemn the debtor into perpetual indenture.

Predatory or abusive lending practices can include making a loan to a borrower without regard to the borrower's ability to repay, repeatedly refinancing a loan within a short period of time and charging high points and fees with each refinance, charging excessive rates and fees to a borrower who qualifies for lower rates and/or fees offered by the lender, or imposing new unjustifiably harsh terms for rolling over existing debt.

Predation breaks the links between an economy's aggregate resource endowment and aggregate consumption and between the interpersonal distribution of endowments and the interpersonal distribution of consumption.

The choice by some to be predators decreases aggregate consumption, both because the predators' resources are wasted and because producers sacrifice production by allocating resources to guarding against predators. Much of welfare economics is based on the concept of pareto optimum, which asserts that resources are optimally distributed when an individual cannot move into a better position without putting someone else into a worse position. In an unjust global society, the pareto optimum will perpetuate injustice.

Why isn't the legal concept of lender liability applied to stop foreclosure of homes with young children? In the US, lender liability is embodied in common and statutory law covering a broad spectrum of claims surrounding predatory lending. If a lender knowingly lends to a borrower who is obviously unable to make reasonable beneficial gain from the use of the funds, or causes the borrower to assume responsibilities that are obviously beyond the borrower's capacity, the lender not only risks losing the loan without recourse but is also liable for the financial damage to the borrower caused by such loans.

For example, if a bank lends to a trust client who is a minor, or someone who had no business experience, to start a risky business that resulted in the loss not only of the loan but also the client trust account, the bank may well be required by the court to make whole the client.

The argument for home mortgage debt forgiveness contains large measures of concepts of lender liability and predatory lending. Debt securitization allows predatory bankers to pass the risk to global credit markets, socializing the potential damage after skimming off the privatized profits.

The housing bubble has been created largely by predatory lending without any lender liability. The argument for forgiving defaulted home mortgage debt is applicable to low- and moderate-income home mortgage borrowers in the US as well. Progressives should push for proactive commitments from both political parties instead of empty populist moralizing.

Henry CK Liu is chairman of a New York-based private investment group. His website is at http://www.henryckliu.com.

U.S. Desperately Seeking Loans

The $700 Billion U.S. Funding Hole; Desperately Seeking A Very Indiscriminate Treasury Buyer....

http://just-another-inside-job.blogspot.com/2010/03/i-hate-what-america-has-become.html

http://sovereignsociety.com/2010/01/20/escaping-amerika/

"... should the Fed attempt to stimulate an endogenous flight to safety and boost demand for Coupons artificially, we believe, as we have said before, that the FRBNY [Federal Reserve Bank of New York] will certainly implement a stock market crash. The alternatives, an interest rate hike and QE [quantitative easing]. We believe that while the probability of QE 2 is increasing with every day, the likelihood of a rate raise is negligible, leaving the market crash theory as the wildcard. We will not handicap this outcome and instead let every reader decide for themselves. Nonetheless, as this week demonstrated all too well, once the market gains downward momentum, even the much expected daily offer-lifters may be mysteriously elusive. Hedge appropriately." -- Read the whole story at Zero Hedge

The Beginning of the Oil End Game featuring original FTW maps

The Beginning of the Oil End Game
featuring original FTW maps

Major Powers Jockey for Position and Risk All-Out War Before the 2007-8 Oil Cliff

Maps Reveal Rapid Global Realignment/Competition

http://coat.ncf.ca/our_magazine/links/53/rockefeller.html

http://www.simmonsco-intl.com/research.aspx?Type=msspeeches

http://www.foreignpolicy.com/articles/2009/09/04/oil_spin

Michael C. Ruppert

http://www.fromthewilderness.com/free/ww3/012505_ftw_maps.shtml

January 25, 2005, PST 1300 (FTW) - Three key facts are of overriding importance to world events today.

FACT ONE - If the actions - rather than the words - of the oil business' major players provide the best gauge of how they see the future, then ponder the following. Crude oil prices have doubled since 2001, but oil companies have increased their budgets for exploring new oil fields by only a small fraction. Likewise, U.S. refineries are working close to capacity, yet no new refinery has been constructed since 1976. And oil tankers are fully booked, but outdated ships are being decommissioned faster than new ones are being built.

- Mark Williams, Technology Review, February 2005

LONDON -- Major oil companies are replacing dwindling reserves by acquiring other oil companies instead of exploring for new fields, a strategic shift with implications for global oil supplies, investment bank Credit Suisse First Boston said in a report Monday.

Integrated oil companies are spending only 12% of their total capital expenditures on finding new oil fields, down from nearly a third in 1990, the report said. Integrated oil companies like U.S. super-major ExxonMobil Corp (XOM) have upstream oil exploration and pumping and downstream refining and marketing operations.

In addition, with the world's biggest oil companies convinced exploration is too costly and risky, the steady growth of the world's total oil reserves has fallen sharply, the bank said. Global oil reserves are being replaced at a rate of 1.2% a year in the last three years, compared to 2.3% over the last 20 years, even as oil demand growth is hitting new records with China and India becoming industrial powers, the bank said.

-- Dow Jones Newswire, January 17, 2005

FACT TWO - Let's forget about economic growth, how about just offsetting declines. If Mr. Raymond's curve reflects reality we would still have to find about 30 Gb/yr. How are we doing?

From http://www.ems.org/rls/2004/01/28/oil_supply_short.html we find the following:

The rate of major new oil field discoveries has fallen dramatically in recent years. [Global discovery peaked in the 1960s. Per capita energy production peaked in 1979. -Ed] There were 13 discoveries of over 500 million barrels in 2000, six in 2001 and just two in 2002, according to the industry analysts IHS Energy. For 2003, not a single new discovery over 500 million barrels has been reported. Key findings of a recent Petroleum Review report are:

• Between 2003 and early 2007 some 8 million barrels/day of new capacity is expected to come on stream.
  
• In 2005, 18 projects with a potential peak capacity of 3 million barrels a day are due to come on stream, slowing in 2006 with 11 new projects followed by 3 in 2007, and 3 in 2008 adding a cumulative 4 million barrels/day of potential new capacity at their peak.
  
• It appears likely that from 2007, the volumes of new production will fall short of the need to replace lost capacity from depleting older fields.

Further confirming this trend, recent E&D results strongly support the expectation of a near term peak in oil production. The net present value of all discoveries for the 5 oil majors during 2001/2/3 was less than their exploration costs.

-- Murray Duffin, Energy Pulse, November 17, 2004

(These calculations were confirmed by the Oil Depletion Analysis Centre of the UK in November 2004 and by FTW's Dale Allen Pfeiffer's independent calculations in February of 2004. There was not a single discovery of a 500 Mb field in 2003 and - as far as we know (as of this writing) the same holds true for 2004. The world is currently consuming a billion barrels of oil every eleven and one half days.)

Fact Three -- Look at this imbalance: The average American consumes 25 barrels of oil a year. In China, the average is about 1.3 barrels per year; in India, less than one…

The challenge is huge. For China and India to reach just one-quarter of the level of US oil consumption, world output would have to rise by 44 percent. To get to half the US level, world production would need to nearly double. That's impossible. The world's oil reserves are finite. And the view is spreading that global oil output will soon peak.

-- The Christian Science Monitor, January 20, 2005

These three facts alone dictate a global mêlée over oil and that is in fact what is happening. It seems clear now that the world's major oil consuming nations have decided to position themselves to control as much oil as possible before the now certain 2007 cliff event. The first fact underscores a point FTW has been making for years now. Even if Peak Oil was some fabrication (hard to believe at this point), the world is behaving as though it were quite real and imminent. The fact that there is virtually no exploration or refinery construction means that the majors understand clearly that there is no more significant oil to find and their investments would never be paid off.

As the following maps disclose, events in just the last year reveal the building frenzy behind these conflicts which are threatening to escalate to military conflict soon. Sometimes a picture is worth more than a thousand words.

BATTLE LINES BEING DRAWN

China is by far the most aggressive player. It has moved on almost every continent to buy (with US dollars while they still have value) existing oil fields. A recent deal between China and Venezuela must be making Washington and Wall Street wince. The Venezuelan national PdVSA oil company owns more than 10,000 US Citgo gas stations. Could Washington sit idly by if Venezuela started shipping gas meant for Kansas City or Little Rock to Shanghai?

Recently, in two bold moves China made offers to purchase a large interest in Alberta's tar sands and placed an outright offer to buy America's Unocal for $13 billion cash. Unocal holds large leases in the waters off of Southeast Asia. Those leases do not suggest there are large finds to be made. They would have been developed had that been the case. This region has been explored thoroughly. China's interest is in getting even the smaller reserves close by because of its insatiable demand.

However Canada's national government in Ottawa has moved to thwart China's Alberta investment, provoking angry responses from the Alberta government which is concerned about jobs and income. Alberta wants to do a deal with China. China wants to do a deal with Alberta. Even though tar sands recovery is anything but energy efficient or profitable, China could care less about the destruction of Alberta's landscape. In World War II the Nazi government of Adolf Hitler made synthetic crude oil from coal. In war it was damn the costs and forget the inefficiency or insustainability. War machines need oil. Economies need oil.

The Ottawa move could not have occurred without impetus from Washington. So if the US blocks China from Canada's tar sands and Unocal, China's already desperate oil hunt becomes even more urgent and frenzied.

The recent ill-founded and almost comical reports of Chinese suspects linked to al-Qaeda turning up in Boston is another (Karl) Rovian preparation of the American people for future conflict with China. Rove is banking that the same 70% of Americans who believed that 9/11 was perpetrated by Saddam Hussein will buy this one too.

Russia is either already selling or contemplating the sale of air-to-ground and anti-armor missiles to Iran, Syria and Venezuela. Still smarting from its geostrategic loss in Ukraine, it is far from out of the game. As I recently observed of this new wrinkle:

"Remember that arms races become economically self-propelled Frankensteins on their own. It's the way money works. This progression of events is historically characteristic of all previous warfare.

"Homo Sapiens survived the Cold War because (especially on the issue of nukes) both sides were controlled by the same interests and money. MAD was never going to happen anyway. Not then...

"There are no such restraints now.

"But also, the planet is rising up in resistance as Lilliputians or gnats to torment the giant in any way possible. The revolution has begun. It is asymmetric. It is even outside of any previously-described legal definition of 'revolution' that I know of. The world is just saying "No" and it seems to mean it."

AFRICA

But far and away, from FTW's perspective Africa is where we are most likely to see conflict in the short term. Africa's undeveloped reserves are larger and Africa itself is less under US hegemonic control. A clear sign of this was a recent seven-nation tour by Iranian President al-Khatami to the African continent, followed almost immediately by announcement of a pending oil development agreement with Nigeria and a completed one with The Ivory Coast. Bribery is a way of life in the region and the US can play this game better than anyone. It remains to be seen whether West African leadership can withstand the temptation long enough to do a real deal with Iran. Already this year the French government has sent its Mirage fighter-bombers on strafing runs in the Ivory Coast. We should expect a coup there fairly soon.

The signs are clear. With the rest of the world lining up behind Iran, Iran obviously feels confident enough to go head to head with the US in Africa, banking on the fact that much of Africa's people and leadership understand clearly that the US - as one State Department observer quipped - has only one interest in Africa: oil.

How many wars can the US fight? How big is Gulliver's reach? These Lilliputians are not gathering in one convenient place to be swatted. They are spreading Gulliver very thin and showing no fear. How long before shots are fired; first in proxy wars, then in direct superpower confrontations?

That time cannot be far off.

As you look at the following maps bear in mind that all of these developments have taken place within just the last year and most within the last six months. These images show clearly the rate at which the world has begun playing the end game for oil.

Please click on either image to view the full size version.

Venezuela Holds One of the Largest Oil Accumulations

http://www.bloomberg.com/apps/news?pid=20601086&sid=aGPHLlUtpZ50

http://www.fromthewilderness.com/free/ww3/012505_ftw_maps.shtml

http://pubs.usgs.gov/fs/2009/3028/

The Orinoco Oil Belt Assessment Unit of the La Luna−Quercual Total Petroleum System encompasses approximately 50,000 km2 of the East Venezuela Basin Province that is underlain by more than 1 trillion barrels of heavy oil-in-place. As part of a program directed at estimating the technically recoverable oil and gas resources of priority petroleum basins worldwide, the U.S. Geological Survey estimated the recoverable oil resources of the Orinoco Oil Belt Assessment Unit. This estimate relied mainly on published geologic and engineering data for reservoirs (net oil-saturated sandstone thickness and extent), petrophysical properties (porosity, water saturation, and formation volume factors), recovery factors determined by pilot projects, and estimates of volumes of oil-in-place. The U.S. Geological Survey estimated a mean volume of 513 billion barrels of technically recoverable heavy oil in the Orinoco Oil Belt Assessment Unit of the East Venezuela Basin Province; the range is 380 to 652 billion barrels. The Orinoco Oil Belt Assessment Unit thus contains one of the largest recoverable oil accumulations in the world.

http://pubs.usgs.gov/fs/2009/3028/



http://online.wsj.com/article/SB10001424052748703699204575016672711190144.html

An estimated 513 billion barrels of technically recoverable heavy oil are in Venezuela’s Orinoco Oil Belt.http://venezuelanalysis.com/analysis/5855

This area contains one of the world's largest recoverable oil accumulations, and this assessment is the first to identify how much is technically recoverable (producible using currently available technology and industry practices).

Worldwide consumption of petroleum was 85.4 million barrels per day in 2008. The three largest consuming countries were United States with 19.5 million barrels per day, China with 7.9 million barrels per day, and Japan with 4.8 million barrels per day.

“Knowing the potential for extractable resources from this tremendous oil accumulation, and others like it, is critical to our understanding of the global petroleum potential and informing policy and decision makers,” said USGS Energy Resources Program Coordinator Brenda Pierce. “Accumulations like this one were previously very difficult to produce, but advances in technology and new understandings in geology allow us to assess how much is now technically recoverable."

“Heavy oil is a type of oil that is very thick and therefore does not flow very easily,” said USGS scientist Christopher Schenk. “As a result, specialized production and refining processes are needed to generate petroleum products, but it is still oil and can generate many of the same products as other types of oil.”

This is the largest accumulation ever assessed by the USGS. The estimated petroleum resources in the Orinoco Oil Belt range from 380 to 652 billion barrels of oil (at a 95 and 5 percent chance of occurrence, respectively). The Orinoco Oil Belt is located in the East Venezuela Basin Province.

The USGS conducted this assessment as part of a program directed at estimating the technically recoverable oil and gas resources of priority petroleum basins worldwide. To learn more about this assessment, read the fact sheet, "An Estimate of Recoverable Heavy Oil Resources of the Orinoco Oil Belt, Venezuela" and visit the USGS Energy Resources Program web site. http://pubs.usgs.gov/fs/2009/3028/

Economic Black Hole ???

Economic Black Hole: 20 Reasons Why The U.S. Economy Is Dying And Is Simply Not Going To Recover

http://www.mmnews.de/index.php/Englisch-News/No-return.html

Guest post by Michael Snyder, The Economic Collapse Blog

Even though the U.S. financial system nearly experienced a total meltdown in late 2008, the truth is that most Americans simply have no idea what is happening to the U.S. economy. Most people seem to think that the nasty little recession that we have just been through is almost over and that we will be experiencing another time of economic growth and prosperity very shortly. But this time around that is not the case. The reality is that we are being sucked into an economic black hole from which the U.S. economy will never fully recover...

http://www.pbs.org/wgbh/commandingheights/lo/story/index.html

The problem is debt. Collectively, the U.S. government, the state governments, corporate America and American consumers have accumulated the biggest mountain of debt in the history of the world. Our massive debt binge has financed our tremendous growth and prosperity over the last couple of decades, but now the day of reckoning is here.

And it is going to be painful.....http://www.businessinsider.com/we-are-so-screwed-2010-1

The following are 20 reasons why the U.S. economy is dying and is simply not going to recover...

#1) Do you remember that massive wave of subprime mortgages that defaulted in 2007 and 2008 and caused the biggest financial crisis since the Great Depression? Well, the "second wave" of mortgage defaults in on the way and there is simply no way that we are going to be able to avoid it. A huge mountain of mortgages is going to reset starting in 2010, and once those mortgage payments go up there are once again going to be millions of people who simply cannot pay their mortgages. The chart below reveals just how bad the second wave of adjustable rate mortgages is likely to be over the next several years...

#2) The Federal Housing Administration has announced plans to increase the amount of up-front cash paid by new borrowers and to require higher down payments from those with the poorest credit. The Federal Housing Administration currently backs about 30 percent of all new home loans and about 20 percent of all new home refinancing loans. Tighter standards are going to mean that less people will qualify for loans. Less qualifiers means that there will be less buyers for homes. Less buyers means that home prices are going to drop even more.

#3) It is getting really hard to find a job in the United States. A total of 6,130,000 U.S. workers had been unemployed for 27 weeks or more in December 2009. That was the most ever since the U.S. government started keeping track of this statistic in 1948. In fact, it is more than double the 2,612,000 U.S. workers who were unemployed for a similar length of time in December 2008. The reality is that once Americans lose their jobs they are increasingly finding it difficult to find new ones. Just check out the chart below...

#4) In December, there were also 929,000 "discouraged" workers who are not counted as part of the labor force because they have "given up" looking for work. That is the most since the U.S. government first started keeping track of discouraged workers in 1949. Many Americans have simply given up and are now chronically unemployed.

#5) Some areas of the U.S. are already virtually in a state of depression. The mayor of Detroit estimates that the real unemployment rate in his city is now somewhere around 50 percent.

#6) For decades, our leaders in Washington pushed us towards "a global economy" and told us it would be so good for us. But there is a flip side. Now workers in the U.S. must compete with workers all over the world, and our greedy corporations are free to pursue the cheapest labor available anywhere on the globe. Millions of jobs have already been shipped out of the United States, and Princeton University economist Alan S. Blinder estimates that 22% to 29% of all current U.S. jobs will be offshorable within two decades. The days when blue collar workers could live the American Dream are gone and they are not going to come back.

#7) During the 2001 recession, the U.S. economy lost 2% of its jobs and it took four years to get them back. This time around the U.S. economy has lost more than 5% of its jobs and there is no sign that the bleeding of jobs is going to stop any time soon.

#8) All of this unemployment is putting severe stress on state unemployment funds. At this point, 25 state unemployment insurance funds have gone broke and the Department of Labor estimates that 15 more state unemployment funds will likely go broke within two years and will need massive loans from the federal government just to keep going.

#9) 37 million Americans now receive food stamps, and the program is expanding at a pace of about 20,000 people a day. The United States of America is very quickly becoming a socialist welfare state.

#10) The number of Americans who are going broke is staggering. 1.41 million Americans filed for personal bankruptcy in 2009 - a 32 percent increase over 2008.

#11) For decades, the fact that the U.S. dollar was the reserve currency of the world gave the U.S. financial system an unusual degree of stability. But all of that is changing. Foreign countries are increasingly turning away from the dollar to other currencies. For example, Russia’s central bank announced on Wednesday that it had started buying Canadian dollars in a bid to diversify its foreign exchange reserves.

#12) The recent economic downturn has left some localities totally bankrupt. For instance, Jefferson County, Alabama is on the brink of what would be the largest government bankruptcy in the history of the United States - surpassing the 1994 filing by Southern California's Orange County.

#13) The U.S. is facing a pension crisis of unprecedented magnitude. Virtually all pension funds in the United States, both private and public, are massively underfunded. With millions of Baby Boomers getting ready to retire, there is simply no way on earth that all of these obligations can be met. Robert Novy-Marx of the University of Chicago and Joshua D. Rauh of Northwestern's Kellogg School of Management recently calculated the collective unfunded pension liability for all 50 U.S. states for Forbes magazine. So what was the total? 3.2 trillion dollars.

#14) Social Security and Medicare expenses are wildly out of control. Once again, with millions of Baby Boomers now at retirement age there is simply going to be no way to pay all of these retirees what they are owed.

#15) So will the U.S. government come to the rescue? The U.S. has allowed the total federal debt to balloon by 50% since 2006 to $12.3 trillion. The chart below is a bit outdated, but it does show the reckless expansion of U.S. government debt over the past several decades. To get an idea of where we are now, just add at least 3 trillion dollars on to the top of the chart...

#16) So has the U.S. government learned anything from these mistakes? No. In fact, Senate Democrats on Wednesday proposed allowing the federal government to borrow an additional $2 trillion to pay its bills, a record increase that would allow the U.S. national debt to reach approximately $14.3 trillion.

#17) It is going to become even harder for the U.S. government to pay the bills now that tax receipts are falling through the floor. U.S. corporate income tax receipts were down 55% in the year that ended on September 30th, 2009.

#18) So where will the U.S. government get the money? From the Federal Reserve of course. The Federal Reserve bought approximately 80 percent of all U.S. Treasury securities issued in 2009. In other words, the U.S. government is now being financed by a massive Ponzi scheme.

#19) The reckless expansion of the money supply by the U.S. government and the Federal Reserve is going to end up destroying the U.S. dollar and the value of the remaining collective net worth of all Americans. The more dollars there are, the less each individual dollar is worth. In essence, inflation is like a hidden tax on each dollar that you own. When they flood the economy with money, the value of the money you have in your bank accounts goes down. The chart below shows the growth of the U.S. money supply. Pay particular attention to the very end of the chart which shows what has been happening lately. What do you think this is going to do to the value of the U.S. dollar?...

#20) When a nation practices evil, there is no way that it is going to be blessed in the long run. The truth is that we have become a nation that is dripping with corruption and wickedness from the top to the bottom. Unless this fundamentally changes, not even the most perfect economic policies in the world are going to do us any good. In the end, you always reap what you sow. The day of reckoning for the U.S. economy is here and it is not going to be pleasant..... --