Asia must prepare for dollar collapse

East Asian economies need to prepare for a possible collapse of the US dollar, the Asian Development Bank says.

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The warning comes as the US trade deficit reaches a record high and global interest rates continue to rise.

Masahiro Kawai, the ADB's head of regional economic integration, said on Tuesday: "Any shock hitting the US economy or the global market may change investors' perceptions given the existing global current account imbalance.

"Our suggestion to Asian countries is: Don't take this continuous financing of the US current account deficit as given. If something happens then East Asian economies have to be prepared."

He said because of the highly interdependent nature of East Asian economies, if countries worked together to allow their currencies to collectively appreciate against a tumbling dollar then the cost of adjustment would be spread.

"The possibility of a US dollar collapse or sharp decline may be small at this point but it would generate very significant turmoil so East Asian economies ... ought to be ready for that."

The Manila-based ADB is working on several indices of Asian currencies that could be helpful to monitor exchange rate movements in the case of a sharp dollar decline, although its main intention is to help develop regional bond markets.

However, the ADB is still trying to decide which currencies to include in this Asian Currency Unit (ACU) amid political sensitivities about the inclusion of the Taiwan dollar given China's claim over the island.

The ADB had apparently been aiming to launch the ACU - a weighted basket of Asian currencies - before the bank's annual meeting in May, but Kawai said this would not be possible.

He said there was no specific launch date yet but hopefully it would be unveiled "in the next few months".

But Kawai played down suggestions that the ACU could foreshadow a single Asian currency like the European Currency Unit (ECU), which existed for two decades before the creation of the euro in 1999.

He said: "The ECU had an official status but the ACU has no such official status. We are not in the position to decide whether this should become a real currency or not."

[The bottom line to this story is—no matter how the US tries to spin it—that sanctions against Iran are still going nowhere and probably won’t. – MCR]

Secretary of State Condoleezza Rice warned Iran on Thursday the "international community is united" in the dispute over its nuclear program, but a Tehran envoy defiantly rejected a U.N. call to reimpose a freeze on uranium enrichment.

Rice spoke after a meeting in Berlin among diplomats from the five veto-wielding members of the U.N. Security Council plus Germany over ways to press Iran to stop enriching uranium, which can be used for weapons. Iran says its program is peaceful.

The meeting follows agreement Wednesday by the 15-member Security Council to ask the U.N. nuclear watchdog, the International Atomic Energy Agency, to report back in 30 days on Iran's compliance with demands to stop enriching uranium.

In Vienna, Iran's chief representative to the IAEA, Ali Asghar Soltanieh, told The Associated Press that "it is impossible to go back to suspension." "This enrichment matter is not reversible," Soltanieh said.

Rice said the Berlin meeting sends "a very strong signal to Iran that the international community is united." She hinted at escalating Security Council action should Iran disregard the council's demand that it freeze enrichment, although remarks from Russian and Chinese representatives suggested strains in the alliance facing down Tehran.

Russian Foreign Minister Sergey Lavrov said the issue of sanctions was not discussed at the meeting and were not supported by Moscow. "Russia on principle doesn't think sanctions can achieve a settlement, especially in the Middle East where there's so much going on," he said.

Lavrov's remarks were echoed by China's Vice Foreign Minister Dai Bingguo, who called for a "peaceful solution" and added there was "too much turmoil" in the region. "This issue is among the most difficult and complicated in today's world, it requires time, persistence and wisdom, and it can only be resolved through peaceful means," Dai said, adding his country would "work together with the other sides."

The United States and Britain used tougher rhetoric. British Foreign Minister Jack Straw said Iran had "miscalculated." "The onus is on Iran to show the international community that its program is entirely for civil purposes and for no other," Straw said. "We have shown very great patience with Iran. They in turn have miscalculated. "They thought the international community would be divided on this issue but in fact they have become more and more united," he added.

German Foreign Minister Frank-Walter Steinmeier said that his country and the five permanent members remained intent on a "diplomatic solution" to the dispute. He held out hope Tehran might reconsider, telling reporters: "We hope that the declaration by the Iranian ambassador is not the last word offered on this." Steinmeier said the 30-day window agreed on by the Security Council declaration gives Iran time to "make a choice between isolation ... or a return to the negotiating table. "We all very much hope that Iran will seize the offer to resume negotiations and we use this opportunity to once again call on Iran to suspend all enrichment activities and to open up once again the path leading to negotiations," he said.

Wednesday's statement from the Security Council took into account the Russian and Chinese reservations about too much toughness, while meeting U.S., French and British calls for keeping the pressure on Tehran. The modest statement did not go as far as the United States had wanted. It is not legally binding and carries no explicit penalties for Iran if it does not comply, but Rice said it is an important first step. The Security Council could eventually impose economic sanctions, though Russia and China say they oppose such tough measures. The statement also calls on Iran to ratify the IAEA's additional protocol, which allows unannounced inspections.

The Security Council could eventually impose economic sanctions, though Russia and China say they oppose such tough measures. The Europeans initially proposed a much stronger statement but accepted a milder one to secure the support of Russia and China. Western countries agreed to drop language that proliferation "constitutes a threat to international peace and security." Also gone is a mention that the council is specifically charged under the U.N. charter with addressing such threats.

Russia and China had opposed that language because they wanted nothing in the statement that could automatically trigger council action after 30 days. The West has refused to rule out sanctions, and U.S. officials have said the threat of military action must also remain on the table.

In Geneva, Iranian Foreign Minister Manouchehr Mottaki condemned "unjustified propaganda" about its program. "Iran's nuclear program is peaceful and has never diverted towards prohibited activities," Mottaki told the 65-nation Conference on Disarmament. But, he added, Iran is willing to continue talks with the IAEA. "We are willing to continue with negotiations and also continue with our sincere and constructive cooperation with the agency," Mottaki told reporters. "Our cooperation with the agency will continue."

Negotiations between Iran and France, Germany and Britain collapsed in August after Tehran rejected a package of incentives offered in return for a permanent end to uranium enrichment. Its moves to develop full-blown enrichment capabilities led the IAEA's board to ask for Security Council involvement.

Crude climbs past $67 after Iran says it will not comply with U.N. Security Council request.

Oil prices closed Thursday at their highest level in nearly two months, breaking $67 a barrel on worries over gasoline supplies ahead of the summer driving season.

Oil dealers closely watched a simmering dispute between OPEC member Iran and the West after Tehran rejected a U.N. demand that it halt uranium enrichment.

U.S. crude closed up 70 cents at $67.15 a barrel, tracking a surge in gasoline futures to a five-month high around $2 a gallon. In intraday trade, prices reached $67.30, their highest level since Feb. 1.

Concerns over gasoline inventories in the United States were reignited on Wednesday when a government report showed the biggest weekly decline in stockpiles since 2003.

The U.S. oil industry is in the process of switching from the water-polluting gasoline additive MTBE to ethanol, which analysts say could trigger price spikes and regional supply disruptions.

"The market is reacting to worries over supplies during the coming driving season," said Addison Armstrong, manager for exchange traded markets at TFS Energy in Stamford, Connecticut.

Rising tensions with Iran, the world's fourth largest oil exporter, added support to prices, dealers said.

The U.N. Security Council unanimously adopted a "presidential statement" late on Wednesday calling on Iran to freeze its uranium enrichment work.

But as the five permanent Security Council members and Germany met in Berlin to discuss their next step on Thursday, Iran's ambassador to the U.N. atomic agency ruled out complying.

Oil traders are worried the dispute could result in a disruption of crude shipments from Iran.

Oil prices closed $3.70 below the record $70.85 hit last year after hurricanes knocked out a quarter of U.S. energy production. They have climbed from below $20 in a four-year rally driven partly by fast-growing Chinese demand.

Supply disruptions in Nigeria and Iraq this year have helped to keep prices buoyed above $60.

Nigerian oil output has been cut by a quarter due to violence in the Niger Delta, though some of the lost production struggled back on Thursday when Italy's Agip lifted a force majeure on exports from its Brass terminal.

So far, the supply outages have been covered by other producers, relieving the International Energy Agency of the need to order an emergency oil release.

"It might be a supply disruption for Nigeria, but it has been offset by other producers ... and the IEA will certainly not intervene," IEA chief Claude Mandil told Reuters on Thursday. "Strategic stocks are not for combating high oil prices. It is important for markets to deal with supply disruptions."

Analysts at Goldman Sachs stuck to their forecast that U.S. WTI crude would average $69.50 a barrel over the rest of 2006. They noted world economic growth was on a firm footing.

"Although Goldman Sachs economists expect a slowdown in the U.S. economy in the second half of 2006, the continuing recoveries in Europe and Japan, combined with strong growth in China, should make global growth more balanced, and more sustainable into 2007," they wrote in a research note.

[Tom Whipple of the Falls Church News Press remains one of the most incisive analysts of Peak Oil around. He’s on the same page that most of us are. We know that Peak will take its first big bites this year. What none of us can foresee is which one (or ones) of the hundred possible things that could go wrong, will go wrong. A revolution in Nigeria, another big hurricane, a breakdown at a couple of ethanol plants, a breakdown at an oil refinery, Ghawar collapsing, ad infinitum; any of these could be the trigger event. When it happens, don’t confuse the trigger event with the real crisis underneath. While the most of the world will try to fix the symptom, the ones who move into a higher gear to address the problem in their personal lives will have a much better chance of making it. – MCR]

It seems like a good time to revisit everybody's least favorite topic— gasoline prices. Since mid-February, unleaded regular has increased more than 40 cents per gallon, 15 cents in the last two weeks, and commentators are saying $3 by summer is a sure thing— even without a hurricane going through oil country.

There are so many forces affecting the oil market today that balancing them out over the short term is becoming difficult. Somebody will issue a report on something or other and the oil speculators will rush to sell, driving the price down several dollars a barrel. After thinking about it overnight, and reading each other's comments, enough will decide that they misunderstood the report and the price of oil will go flying back up. As we approach peak oil, the old rules and maxims seem to become less relevant.

The major force behind oil prices right now is lack of much cushion between supply and demand. While it is too early to declare world oil production has peaked, several observers have noted there has been little or no increase in worldwide production for many months. All the evidence that has come to light recently suggests that if production has not yet peaked, the fateful year is getting mighty close.

The Nigerian and Iraqi situations continue to get worse. Unless there is some remarkable turn around, it seems increasingly doubtful their oil production will be at present levels by the end of the year. The recent leak of secret reports from inside the Kuwaiti and Mexican oil companies suggests their production will be significantly lower within a few years. Finally, we are still waiting for someone to leak the secret Saudi depletion study that will administer the coup de grace to the oil age.

On the demand side, the US and Chinese economies are still doing well. Demand for gasoline in the US is up 1.6 percent over last year. The Chinese say they are on track to grow their economy by 8 or 9 percent, put millions of new cars on the road, and fill their newly created strategic oil reserve depots. Beijing recently reported that oil imports in February were up 4.4 percent over last year and India 's imports were up 27 percent. Every major purchaser of oil in the world recognizes prices will be going up and there are numerous imminent threats of supply interruptions. Thus, the large purchasers of crude —refiners, wholesalers, governments— that can afford to hold large inventories at $60-$65 barrel, are filling every available tank in anticipation of higher prices to come.

The returns aren't in yet, but it seems apparent that with little or no increase in world production, and only modest increases in world prices, the gap is being filled by demand destruction in the world's poorer nations who simply can't afford their normal purchases of $60+ oil. Barring some major catastrophe over the rest of the year, Americans will continue to drive their SUVs, China and India will continue to grow, and world's poor countries will slowly drop out of the oil age. At some point the poor will have foregone as much oil consumption as they can, so bidding for oil will be fought out amongst the OECD countries, and the fast developers such as China and India.

All this seems to say that for the short run, and unless we get hit by yet another damaging hurricane or some major oil exporter quits exporting (don't rule this out), the world's supply/demand balance does not seem poised to run US gas prices up or down all that much in the near future. The catalyst for more expensive gasoline this year may be closer to home.

First, let me remind you the US is currently producing about 6.7 million barrels a day of oil and natural gas liquids, and using about 20.5 barrels a day. As a matter of interest, about 1 million of the 14 million barrels a day difference appears at the refineries through a phenomenon know as "processing gain," but the rest is being sold to us by our friends, and even a foe or two who likes money, from around the world.

A number of oil companies have announced plans to drop the pollution-reducing additive known as MTBE from their gasoline this summer and replace it with ethanol made from corn. This is great for the farmers, but a debate is raging in the oil industry as to whether there is going to be enough ethanol to replace all the MTBE we have been using. There are 33 new ethanol production plants under construction in the US , but summer is getting close. Even the staid old Department of Energy has warned that "the rapid switch from MTBE to ethanol could . . . . serve to increase the potential for supply dislocations and subsequent price volatility on a local basis." Translation: "This summer your local station may run out of gas (or raise the price so high that you can't afford to fill up) because there may not be enough ethanol to put in everybody's gas."

Already industry leaders are calling on the EPA to suspend the clean air rules requiring the ethanol. The oil companies can't stay with MTBE because several states have banned it and, as MTBE is yet another cancer-causer, they are afraid of being sued out of their ample bottom lines. After all what is clean air in comparison to lots of cheap gasoline?

President Hugo Chavez, long critical of big transnational companies, is promoting free open-source software as an alternative to market- dominating Microsoft Corp.

Venezuela's science and technology ministry recently held the Latin American Free Software Installation Fair, an event promoting the use of the open-source Linux operating system and other nonproprietary programs over Microsoft's Windows.

Groups of Linux users have been organizing similar events in other Latin American countries, including Argentina and Colombia, and the Venezuelan government has signed on as a promoter.

The technology ministry said the fair is part Venezuela's move toward "technological sovereignty, and taking advantage of knowledge for building national scientific independence."

Chavez, a vehement critic of the capitalist system, issued a decree in 2004 ordering all the country's public institutions to actively move toward open-source alternatives, hoping to save millions of dollars.

Chavez says previous governments spent more on licensing fees for proprietary software than social programs to fight poverty.

The Venezuelan government hasn't focused direct criticism on Microsoft, but Chavez has regularly condemned "the hegemony of the multinationals" - saying many big companies are to blame for putting profits above the needs of poor people across Latin America.

China death threat for oil theft

China is currently covered by 30,000km of oil pipeline
Chinese police have vowed to clamp down on pipeline oil theft, even threatening to impose the death penalty.

According to police oil theft cost the industry more than 1bn yuan ($124.6m, £71.8m) and led to 2,877 arrests.

Many cases were so serious they had "wrecked" production facilities, senior police officials told reporters.

"Criminal punishments will be meted out, including the death penalty," said Ma Weiya, vice director of the police social security management department.

While increased police surveillance had almost halved the number of thefts, he added a significant number of thefts were also going unnoticed, particularly in the Chinese countryside.

China is currently battling with spiralling demand for fuel and soaring prices - a factor which has made the risk of oil theft a more attractive proposition.

The majority of crude oil thieves are farmer peasants in the impoverished and remote regions, who earn a third as much as their city dwelling counterparts, Mr Ma said.

One popular method used to steal oil involves thieves building a hut and then drilling into oil pipes beneath the building.

"Oil issues in a large, developing country like ours with relatively few of its own reserves, impact upon national security, social stability and the economy's sustainable, fast and healthy development," Mr Ma said.

China already has almost 30,000 kilometres of pipelines, which will be extended in the near future.