Morris R. Beschloss 2016-10-07 00:49:05
Gulf oil nations make their move While Saudi Arabia is developing its first-ever sovereign wealth equity fund (indicated to become the world’s largest with a market value of $1 trillion), other members of the Gulf Cooperation Council are preparing to follow suit. This includes the leading oil and natural gas producers of the United Arab Emirates, Bahrain, Kuwait, Qatar and Oman, as well as Saudi Arabia. So far in 2016, these energy-dependent Arab nations already have raised $18 billion, partially easing the pain of stinging deficits incurred by incomes that have been cut in half or more, primarily due to the debilitating world oil price disasters impacting both oil and natural gas. Saudi Arabia is expecting to raise $15 billion more before the year’s end with the other Gulf nations expecting a $35 billion total, more than doubling previous highs set in 2009. These issuers are offering slightly higher prices for their bonds than other emerging countries with similar credit analysts’ ratings. This reflects uncertainty over how successful the underlying Gulf nations expect to be in opening up their economies in the future. Also playing a major role in achieving their offerings’ success will depend on the questionable outlook of future oil prices and the ongoing geopolitical instability of that region. So far there seems to be positive receptivity to the Gulf nations’ offerings. This is driven by strong demand from indigenous investors and banks, as well as a hopeful market sentiment of energy price improvement for both oil and natural gas. The latter seems to particularly stir greater interests due to the expansion of natural gas and its converted derivatives as coal is increasingly fading out of the picture. Also adding to greater demand are the persistent decline of global interest rates, which is prompting greater demand for securities, abetted by such solid backing and revenue returns that energy is increasingly providing at this time. Even if major energy reserves’ pricing remains on the comeback trail, the Gulf Cooperation Council nations are committed to broadening their economic bases both in modernizing their economies as well as abandoning the previous dependence on oil and gas revenues. Although there still are questions as to how effective this long-term increasing energy independence will be, current results and commitments seem to be impressive as to their long-term solidity. COAL CONTINUES ITS DOWNFALL While once dominant coal-generated power embraced utility operations almost exclusively, natural gas is enjoying an unprecedented growth surge, although it still is in its early stages. Crumbling under the unprecedented crunch of the climatological improvement sector in most of the developed world, coal, which as late as the turn of the century controlled two-thirds of the developed world’s utility power generation, is expected to see that number reduced to 20% by 2018. In the U.S., it will remain a leftover in utility unit facilities that have not been updated. It still will primarily be used in underdeveloped economies due to its cost efficiency. While the impact of this disappearing coal power generation already has bankrupted Peabody Energy, once among America’s leading coal producers, it is causing B&W (Babcock & Wilcox) to drastically reduce its operations that once were overwhelmingly dominated by coal. This unexpectedly rapid drop in coal utilization is indicated by a reduction in U.S. coal-fired equipment from its current $800 million to less than $100 million by the end of this decade, indicated B&W CEO E. James Ferland during a conference call with analysts. In those interviews, he dropped his previous estimate of 30% coal by 2018 to as low as 25% or less. Ferland shocked investors and employees alike with the massive cuts that are in store for B&W in the foreseeable future. Simultaneously, the outlook for natural gas has never looked brighter. Not only is this once flared-off byproduct from oil fracking in surging demand for utility power generation, but the conversion of natural gas to liquids and as input to chemical manufacturing is just beginning to flex its muscles. With prices already double what they were at the end of last year, the natural gas sector is busy developing LNG conversion facilities and shipping ports, primarily in the Gulf of Mexico area. It already is in the early process of export development that is highly competitive with natural gas that is currently available from certain parts of the Mideast and through Russian pipelines to central and Eastern Europe. It now is estimated that where natural gas was in heavy surplus not too long ago, it is due to double in demand within the next three years, both domestically and export-wise. Price-wise, the U.S. is still the cheapest in the world. WHAT DO LOW INTEREST RATES INDICATE? While most of last century’s second half was beset by inflationary upshots, the current low interest rate dormancy has surprised and even dumbfounded most professional observers. Most affected seems to be the nation’s Federal Reserve Board, which has provided a sole quarter-point interest rate increase since the end of the great financial 2008-10 recession. Despite the FRB previously projecting a minimum of two to three interest rate increases this year, no increase seems in sight prior to the presidential and congressional elections. In fact, a late June global interest rate drop took the U.S. along as “deflation interest rates” hit unexpected new lows, reminiscent of past deflationary economic periods. The critical 10-year U.S. Treasury note actually touched a record low of 1.385% in the late 2016 first half, not seen since the depth of the great financial recession. This note, on which most commercial, residential and industrial borrowing is based, set the tone of activity across the treasury’s six-month to 30-year credit line. This was engendered by a surging of U.S. Treasury debt borrowings worldwide. It’s safe to say this rash of record interest rate dips in Japan, with a negative 10-year interest rate note, as well as the United Kingdom, Italy and Spain below that of the U.S., is a reflection of an overall worldwide economic slowdown recognized by central banks in most of the developed world. This second-half economic pessimism further indicates no signs of a significant pickup during the rest of 2016. Unlike earlier periods, the previous world-leading major growth spans from China, Germany, Japan and India are conspicuous by their absence. With professional traders providing much of the world’s currency action, these hedge-fund operators appear to be focused on the 10-year note as the exemplar of a global economy that is expected to be dormant for the rest of 2016. What also has come into play is the belief by professionals that the worldwide glut of industrial commodities, as well as agricultural products, may not show significant liquidation throughout the rest of the year. Although oil and natural gas prices are expected to increase over the dismal lows of the past two years, the adequacy and even surplus of base products will keep most prices tethered to current low levels. In the case of the U.S. Federal Reserve Board, it’s highly doubtful another interest rate hike is in the cards before the elections. HOW WILL THE ECONOMY FARE AFTER INAUGURATION? Although gleaning economic direction from presidential aspirants’ statements may seem a futile exercise, their previous disparate records provide a reasonable insight into their economic intentions. The following comprise the major economic positions Hillary Clinton and Donald Trump likely will take: Key to former Secretary of State Clinton’s economic positions will likely focus on bringing about a national minimum wage rate (probably equating a stair-step to $15 per hour) similar to California’s new policy, while broadening job creation through long-delayed infrastructure development of roads and highways, bridges, dams, railroad tracks and pipelines. In this, she will be following President Franklin D. Roosevelt’s example after he took office in March 1933. While focusing on low consumer prices, she will encourage depressed prices of commodities, such as energy and agricultural products. This will mean acceptance of low oil and natural gas costs, and backing greater farm-state production. Coal will become extinct in production, which will end domestic usage and exports. Taxes for the upper income sector will remain high, while lower middle-class income participants will receive greater fringe benefits. A Trump presidency will begin with a return facilitation of much of the approximately $1.5 trillion amassed by U.S. conglomerates, whose production is maintained in low-cost manufacturing sites around the world. The Trump administration will begin the dismantling of Obamacare and many of the Environmental Protection Agency directives that have made U. S. manufacturing costlier and harder to come by. While also concentrating on infrastructure, a Trump presidency will focus on the free-enterprise independent businesses that make up a major sector of America’ s overall business revenues today. While threatening existing trade pacts, and even the North American Free Trade Authority, he will not reinstate Smoot-Hawley, which killed world trade and ushered in the Great Depression of the 1930s. However, the strong-willed Trump will attempt to reinstate “Glass- Steagall,” which maintained the separation of commercial banks from free-wheeling financial institutions. These undermined the role of the new commercial bank positions by involvement with riskier investments, as dramatized by the current U.S. government suit against financial wizard Jan Corzine, CEO of MF Global Holdings. While these projections are subjective highlights, they present an indication of what each presidential candidate likely stands for economically. MORRIS BESCHLOSS is a global economic analyst, award-winning long-term top business executive, and avid blogger for all aspects of worldwide fi nancial, geo-political, and economic happenings.
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