Will the World enter in to a global financial crisis like it did in 2008, due to another Oil upsurge?

Why is oil so important to the global economy? Has its importance gotten greater or lessened over time?

Undoubtedly, there has been huge progress in lessening the world’s dependence on oil as a commodity, from energy-saving innovations to the fracking revolutions. But the fact is that global demand for energy keeps on rising at a greater pace as the populations achieve higher standards of living. For example how many Chinese drove cars a decade ago? Now it’s the world’s biggest auto market.

In Libya the ongoing skirmishes between the government and rebel group have reduced the daily production of crude oil dramatically from 1.6 million bpd to an estimated below 200,000 bpd. In Iraq there has been an upsurge in conflicts between various militias which has interrupted production. In Nigeria, production has fallen due to leaks caused by the trouble makers. Moreover, Syria is in chaos and Egypt is still unstable.

The Oil price has a record of plunging the globe into recession. Kirk Spano, the founder of Bluemound Asset Management, assessed that the spiking oil prices in 1973, 1980, 1991, 2001 and 2007 contributed to a greater or lesser degree to the economic recessions of 1973-74, 1980-81, 1991-92, 2001-03 and 2007-08 that were painful for all equity investors. The global financial crisis of 2008 was no different with a sudden spike in oil prices to $147 a barrel that broke the back of several economies.

It’s a problem when a country like Japan which is technically advanced has to shut down its nuclear stations post the earthquake or when a country which does not fall in the fault line, Germany, has to do the same post the public vote on the matter. Oil is abundant, safe and easily consumed at a price.

Are we not sensing a déjà vu this summer?

Iraq plays an important role for market stability. With current production of 3.3 mbpd Iraq is the second largest producer in the OPEC cartel and it has the potential to become larger player. Current predictions by the International Energy Agency (IEA) show Iraqi production growing to 4.4mbpd in 2015 and to nearly 6mbpd by 2020.

An eventual decline in Iraqi exports would mount pressure on energy hungry economies of China and India to increase their imports of Iranian oil. Russian oil exports would become crucial for global markets, potentially further strengthening the former Soviet Union’s position in Ukraine. Finally, a major spike in oil prices would help regimes like Venezuela too. If Iraq falls, oil prices would shoot up breaking previous highs and spread unrest in the region.

Ukraine Crisis: Time for Europe to give (clean) coal a bigger share

Did anyone of us ever think that switching from coal to imported gas could pose a major risk to the security of energy supplies in Europe?

At least six European countries rely exclusively on one country for natural gas supply – Russia. During a recent press conference Donald Tusk, the Polish prime minister called for changes in the EU energy policy and added that “Germany’s dependence on Russian gas may effectively decrease Europe’s sovereignty”.

EU relies on Russia for 30% of its natural gas imports, with 80% of that delivered through Ukrainian pipelines. Ukraine is a major gas transit nation for supplies from Russia to EU. Earlier this month Russia warned it could stop distributing gas to Ukraine over unpaid bills and any such move can have dramatic consequences for the EU.  With Europe’s main natural gas supply route at risk this provides the policy makers in the EU re-think and direct more attention to Europe’s indigenous coal resources as well as secured and reliable coal imports.

Source: BBC News

Coal accounts for 90% of the EU’s fossil fuel energy and natural gas accounts for only 7%. Hence, it is not surprising at all that Europe imports almost 70% of its natural gas and as per a report from European Commission it will have to import close to 80% by 2030.

Coal continues to remain integral to EU, as it creates jobs, keeps the domestic producers in business and more importantly reinforces the continent’s energy security. Imported coal has been a reliable source of energy for Europe. Unlike natural gas coal imports are not dependent upon transport infrastructure such as LNG terminals or pipelines so any drop in supply from one country can be easily filled by another supplier. Currently, 60% of EU’s coal imports come from the USA, South Africa, Australia & Colombia & 25% is sourced from Russia.

There is a strong security argument against over-reliance on natural gas imports from Russia and this should be given more attention in the EU’s 2030 framework for climate and energy policies. None of the targets, measures & policies proposed as part of this package should force Europe into a position where it is slowly abandoning the most abundant, affordable and secure energy fuel it is endowed with to the benefit of imported natural gas.

Ukraine - China to the Rescue ?

Ukraine prior to the crisis:

• Aging industrial sector, eastern Ukraine, primarily engaged in manufacturing of steel for Russia
• Elephant size debt of USD 35 billion
• A politically and ethnically divided population
• The private sector mainly or fully controlled by oligarchs
• Endemic Corruption
• Massive Inequality (the rich are too rich and the poor too poor)
• Energy Crisis
• Low foreign reserves mainly due to poor export figures

The US and IMF has offered billions of dollars, contingent on energy subsidies & opening up the economy. Ending energy subsidies is to ensure that the loan amount facilitated by the West does not end up in Russian banks as Ukraine is reliant on Russia for its energy needs. However, ending energy subsidies also means close to double increase in price of energy, which means many Ukrainians would freeze next winter and the aging industries would go out of business. The EU bloc will not do a favor buying not so competitive goods.

Ukraine was the fourth largest corn exporter in 2012-2013, behind Brazil, the US and Argentina. It is also the sixth biggest supplier of wheat and exported 7.1 million tons in 2012-2013. The financial crisis may affect the production of crops with farmers having trouble to pay for fertilizer, after the Ukraine’s currency decline against the dollar.

In the current scenario, the survival for Ukrainians lies in the production and export of grains. The country which has expressed interest in Ukraine’s grains is China. Ukraine is expected to become China’s largest overseas farmer in 3 million hectare land (i.e. 7% of Ukraine’s land). China cannot grow enough grain to feed its billion+ population. The good thing about the Chinese is that they don’t mingle with the internal affairs of the countries where they develop infrastructure. Their funding and support is not contingent on beneficiary countries engaging in the sort of austerity that the IMF, Europe and the US prefer to impose on any country who goes them for financial support. For China, food security for the future generations is critical and it will be ready to pay a premium for the same.

Ukraine has got two core issues; one is debt and the other is inequality. The West will not allow a massive restructuring on default of debt & yet rain dollars. Ukraine cannot even afford to cut its ties with the Russians as it is heavily reliant upon Russia for its energy needs. Ukraine will have to maintain friendly ties with Russia to secure gas supplies at discounted rates. Ukraine will have to turn to China and improve its productivity and head to become the biggest exporter of grains.

Let me summarize the above in a manner where it becomes easier to understand the dynamics surrounding Ukraine post Crimea annexation. Ukraine’s western back government will soon have to put more focus in diplomacy with Russia and furthering ties with China than relying on Europe and the IMF who have no history of pulling out ordinary men from unemployment and poverty.

Fear Universities producing more "Professional Photographers" than Professionals

Surprisingly, owning a DSLR (Digital Single Lens Reflex Camera) is kind of like having the best fountain pen in 8^th grade, and the latest smartphone in high school.

A trend which continues to spread like wildfire in universities and colleges, almost everyone throwing their Cybershots & Olympus (such good cameras) away for the expensive DSLRs to capture the very same moments but in high resolution.

My personal assessment is that three out of four or perhaps more own a DSLR because their peer got one, who recently uploaded a random picture on facebook which got a dozen likes and if he/she can then why not me. Ouch! Did I hurt anyone? I am not sorry for that! This is the same lot which would wear an expensive wrist watch observing you wearing one or buy an expensive parker pen because you used a US$5 pen. Don’t worry! You were smart because that pen consumed less ink and earned you max marks. Expensive pens consume more.

Once I had approached an institute to know about photography and I was told that I need a digital camera (cybershot then) and would require to take some beginner classes for three months and this would all cost me close to US$ 200 (excl. the camera). Unfortunately, these professional institutions are filing for bankruptcy as many of us believe that owning a DSLR officially makes one a professional, so who needs to go to a learning institute.

Youth creating official groups with a copyright sign on facebook (as they fear their professional photography might be the Da Vinci’s code) naturally run around everywhere with their cameras – leaping into random spots and not only fiddling with the buttons of the cameras but with the joints & limbs of individuals being photographed. (You got to read more)

The empowering part of the DSLR: It really doesn’t matter you take a picture of your friends posing awkwardly with someone picking nose in the background or capture stray dogs as part of your ‘Wildlife’ album, they will fetch some very encouraging comments.

Comments like:

“You are such a talent, I shall hire you for my wedding”

“The picture is beautiful bro, dogs are my best friends”

Add a few likes in the range of 70 – 100 which is equivalent to a GPA of 3+. – Is that what you live for? Cheap Huh!

A parents point: Each picture their son or daughter clicks is heavy on their pockets. Prior to joining the university many planned to become doctors, engineers & chartered accountants but these guys are busy clicking, sharing & liking and by now they have included it on their facebook description that Photography is an area of interest to them. Imagine a kid saying: Dad, I went to the top business school, punctured your pocket, gave you sleepless nights, and look what I have learned - the art (photography) because that’s what I did most of the time. I have got all girls in it and have made mom’s work simple.

Very few of us will take the pain to go through the hassle of learning techniques & improving skills to convert a hobby into a profession. But for the majority, their expensive DSLRs are the loves of their lives – until University ends.

Hence, owning a professional camera & creating a page on social websites with watermarked snaps is not enough to be termed as a pro.

To ensure I stick to the purpose of the blog: Smartphones are increasingly substituting professional cameras and 2013 witnessed close to 10% decline in camera shipments compared to 2012. Smartphones continue to enhance capability to produce images with minimum input requirements.

An expensive lunch for Pakistan's Youth

A letter to Maryam Nawaz Sharif (http://youth.pmo.gov.pk)

Dear Maryam Nawaz Sharif and team,

Firstly, I want to appreciate the efforts you and your team have undertaken for the youth and the simple majority of the motherland. The prime minister's youth loan scheme is for the age group 21-45, with CNICs and are well connected to a high net worth individual or a govt employee. The govt has lots of issues which need to be tackled at priority. There are several risks which can cost our govt and our coming generations such as: indebted youth in an indebted nation funded by an indebted govt hence creating a vicious cycle. Refinancing the debt can become a huge task for the future govt and generation as it will be repaid after 8 years when possibly a different govt might be in power. Moreover, such usury driven funding will not be welcomed by many in our society and the cost of monitoring funds to the tune of billions of rupees will be an expensive task for the govt.

I do not restrict my argument to criticizing your plan but I want to add a suggestion which could be a win-win stunt for all.

1 - The govt must establish a SME fund which must be overlooked by the Finance Ministry and the judiciary or any other independent agency which will ensure transparency for the investors

2 - A board must be set up which comprises of individuals from different circles and backgrounds.

3 - Any individual/team interested in a venture must present a business plan with a 5 years projection before the board

4 - Post review the board/jury must acknowledge the review and within 30 days it must come up with the result, whether the fund is willing to provide seed funding or not. If not, then why.

5 - If yes, then certain covenants must be placed and the amount (ranging from 50% to 70%) must be put in the form of equity.

6 - A (put/call) option must be included in the covenant which will allow the fund to liquidate its stake in the venture (post 5 years at a premium)

7 - Don't benchmark your plan with what has been done in the US, but compare it what has been done in the UAE (Khalifa Fund) and many other countries in Africa (Rwanda, Tanzania & etc) are doing it too to create self-employment. Let’s be realistic we cannot print money like US.

8 - After 5 years, the govt must allow these businesses (based on their financial performance and business scalability) to get listed on a secondary listing (like AIM in the UK) and let the locals become multinationals for tomorrow.

Sister - kindly read, reflect and act!

US default 'extremely unlikely'

Before we go deep into the mess, it is important to highlight the difference between a shutdown and debt crisis. In simple terms, in a shutdown, the government lacks the legal authority to spend money on non-essential services. In a debt crisis, the government is mandated to spend money — but doesn't have the legal authority to borrow the money to spend it.

What happens if the debt crisis occur (post 17th October) ? - A Default!

U.S. will certainly default if it does not pay its bills on time or the debt ceiling is not raised. Ahan - then the debt ceiling should be our discussion as it is the only temporary, please note, -TEMPORARY life line. If the US does not raise its USD 16.7 trillion debt ceiling "temporarily" by October 17, the country will default on its debt.

What US could potentially do:

The most extraordinary measure the government could take and that is to exhaust its cash. It is expected that the U.S. will have about $30 billion in cash, which will be short of expenditures that can reach as high as $60 billion in subsequent days. This is dangerously low level of cash in the bag.

The US government could use all their tax revenues to meet their interest payments on debt and roll-over the existing debt. They will have to take extreme measures such as cuts in public spending (healthcare programs) and defense spending. This will attract a lot of repercussion from the public, but it has to happen one day, then why not today!

President Obama is left with no option but to kill the fly

Even if the Congress decides to raise the debt limit, the republicans will be looking  for some very critical areas, prior to the approval, such as cuts in government spending, reducing the impact of Obamacare and no new taxes. They will keep their focus limited to the spending. An ice-break could prevent:

- Sliding US Dollar

- China catching the cold; biggest buyer of US debt

- America gets downgraded again!

- Banking industry getting banged
- Army pull-out

You are broke because you have overspent, and a correction is required not delay. Again, in simple words - Open the government and pay your bills.

Forgive me for using the word "Temporary" temporarily and wish not to use this again in near future.

An evening with Paul Donovan, Global Economist

I recently had the privilege to meet Mr. Paul Donovan, Global Economist, Managing Director UBS Investment Bank on September 23, 2013 in Dubai. Paul co-authors the Global Economic Perspectives publication with other members of the Global Economic team. Paul regularly appears on CNN, Bloomberg TV, and CNBC.
Paul, very comprehensively, covered various developments in the global economy ranging from the selection of US FED chair to the Japanese issuing bonds, devaluation of currencies and region-wise economic outlook.
There was a Q/A session which allowed me to put forward questions/opinions to Paul and I am glad he answered those questions to my satisfaction. The following were the communications exchanged

1 - Creation of Fake Capital

“I own apples and Paul owns oranges and we both agree to exchange each fruit worth millions. Paul sells me the oranges and I sell Paul apples. Next morning, we are no more fruit vendors but banks with assets worth millions. How this creation of fake capital is preventing organizations and economies to bounce back?" I related this to what happened in Iceland (shift from fish to investment banking) and other European economies.

Paul’s response: As this was the very first question to Paul that evening, he smiled to me and said that this is quite unfortunate and many bankers in the hall will not like us for discussing this. He added that banks have realized this and regulations are being brainstormed and developed to overcome these issues. Banks are becoming more systematic than before. He added that a bad situation in Euro will result in good outcomes. Many banks have recently either ceased or limited their operations in the Middle East and other regions. Banks like BNP Paribas have ceased operations in most of the gulf countries and Barclays has limited its operations too. These banks have been influenced by their respective countries’ governments to return and invest in their local economies. The increase in lending within the Euro bloc will improve the economic conditions over the medium term.

2 - Volatile Commodity Prices

“Theoretically prices decline when demand falls. Prices of coal, gold and several other commodities have either declined or remained volatile amid increasing demand trends year over year. What is to be blamed for low commodity prices? Am I right in saying that high capex is to be blamed for low commodity prices ?”

Paul’s response: “Yes, it is true that excessive capex in certain regions has resulted in volatile commodity prices. Expanding upon your statement mis-allocation of capex and resources is to be blamed for volatile commodity prices.”

3 - Asset Nationalization

“Asset rationalization, by Jan 2014, in countries like Indonesia can create serious issues in the global economy as China imports more than 80% of its bauxite requirements from Indonesia. What implications will this carry for the Global economy ?”

Paul’s response: “As a global economist I am more concerned whether the world’s global resource requirements will be fulfilled. China has invested in countries in Africa and has acquired mines, which it cannot fully rely upon because in the past sudden shifts in the governments in Africa has also caused disruptions in the mining activities and complicated ownership structure. As a global economist Indonesia must continue to supply raw material to China as China processes resources primarily for its local economy. Indonesia’s move is politically correct but not on economic terms because it has energy crisis and processing industries need adequate and cheap energy supplies. This move will worry the Chinese and will have a global impact.” 

And, the intellectual evening came to an end.