To Be Like America …

To drive down the open road in an SUV or giant pickup truck, aircon freezing, stereo blasting the latest thug rapper or mindless xenophobe hillbilly crooner, gorged with toxin- laden Big Macs and ‘Shakes’ … heading toward big- screen paradise with beer in the fridge … even Americans can’t afford to do this anymore!

You have to figure this is why the Iranians are so eager to ditch the Revolutionary Guards and the puritanical mullahs. Iran is rich, no? Lots of (expensive) oil with a government wasting cash on nuclear bombs and quasi- military adventures here and there. Why not get rid of the mullahs, and live like Americans?

In with the big, flashy cars, AC, wet tee shirts, rappers, gay porn, McDonald’s … out with the Basij flogging women in the streets for exposing an ankle.

This transformation is impossible:

Iran produced 6 million bbl/d of crude oil in 1974, but has been unable to produce at that level since the 1979 revolution due to a combination of war, limited investment, sanctions, and a high rate of natural decline in Iran’s mature oil fields. Iran’s fields have a natural annual decline rate estimated at 8 percent onshore and 11 percent offshore, while current Iranian recovery rates are 20-25 percent. It is estimated that 400,000-700,000 bbl/d of crude production is lost annually due to declines in the mature oil fields. A 2007 National Academy of Sciences study reports that if decline rates are allowed to continue, Iran’s exports, which in 2007 averaged 2.4 million bbl/d could decrease to zero by 2015. To offset natural decline rates, Iran’s oil fields require structural upgrades including enhanced oil recovery (EOR) efforts such as natural gas injection.

Increasing production reduces available reserves. At the same time, increasing domestic consumption – the red line above – reduces the amount of oil available to sell; what makes Iran rich- ish. Much of what Iran produces is heavy, sour crude that is difficult to refine and does not command the high price as does sweet Saudi or West Texas crudes.

Here’s more from the EIA:

Consumption

Iran’s oil consumption was approximately 1.7 million bbl/d. Domestic demand for other oil products is declining as natural gas is further integrated into Iran’s energy consumption makeup. The Iranian government heavily subsidizes the price of refined oil products, increasing domestic demand. However, Iran is an overall net petroleum products exporter due to large exports of residual fuel oil.

Refining

Iran’s total refinery capacity in 2008 was about 1.5 million bbl/d, with its nine refineries operated by the National Iranian Oil Refining and Distribution Company (NIORDC), a NIOC subsidiary. Iranian refineries are unable to keep pace with domestic demand, but Iran plans to increase refining capacity to around 3 million bbl/d by 2012. This increase, through expansions at existing refineries as well as planned grass-root refinery construction, could eliminate the need for imports by 2012. In addition, Iran has discussed joint ventures in Asia, including China, Indonesia, Malaysia, and Singapore to expand refining capacity.

Iran Crude Refining Capacity, 2008

Gasoline

In 2007, Iran consumed around 400,000 bbl/d of gasoline, roughly the same amount as 2006. Iran does not currently have sufficient refining capacity to meets its domestic gasoline and other light fuel needs. However, according to FACTS Global Energy, government targets for domestic gasoline refinery projects combined with the elimination of gasoline subsidies by the official goal of 2011 could make Iran a gasoline exporter by 2012. The International Energy Agency predicts 5.3 percent demand growth in 2009.

The Rationing System

Currently, the majority of motorists are permitted a monthly ration of approximately 32 gallons of gasoline (120 liters), at approximately 37 cents per gallon (10 cents/liter; 1,000 rials/liter). Part-time taxis, commercial vehicles, and government vehicles have special allowances. The current rations are expected to be maintained through the June 2009 Iranian election.

Gasoline Imports

Iran spent approximately $6 billion on gasoline imports in 2007. Under the rationing system, implemented in June 2007, Iran’s gasoline imports declined from an estimated 204,000 bbl/d in May 2007, to an estimated average of 94,000 bbl/d for the remainder of 2007. Large, multinational wholesalers such as BP, Reliance, Total, Trafigura, and Vitol provide Iran with gasoline.

All of this puts Iran in a difficult position. The politicians and ‘Idealists’ can cry freedom all they like but the reality is this is likely what Iranians will be stuck with … provide they succeed at changing the government. If they fail they will be stuck with more tyranny and perhaps military action against their nuclear infrastructure … with gas subsidies.

Meanwhile the Chinese are busy trying to be like Americans as well:

Fear the Dark Side of China’s Lending Surge

06-19 14:24 Caijing


Banks loans designed to spark economic recovery have been channeled into asset speculation, doing more harm than good.


By Andy Xie

(Caijing.com.cn) China’s credit boom has increased bank lending by more than 6 trillion yuan since December. Many analysts think an economic boom will follow in the second half 2009. They will be disappointed. Much of this lending has not been used to support tangible projects but, instead, has been channeled into asset markets.

Many boom forecasters think asset market speculation will lead to spending growth through the wealth effect. But creating a bubble to support an economy brings, at best, a few short-term benefits along with a lot of long-term pain. Moreover, some of this speculation is actually hurting China’s economy by driving asset prices higher.

Caijing News is the best source for economic and business news from China. What is interesting here is the Chinese investors are so much like American investors, chasing after illusory financial gains … and doing so in an industrialized context!

Could it be that industrialization is failing now in China?

There are many unknowns and false assumptions about China. One is that the Chinese can pull the rest of the world out of its slump. Obviously, if the cause of the slump is over consumption of a required input, then ratcheting up consumption in more countries like Iran and China will only make matters worse.

Since the Chinese government seems hell- bent on driving demand regardless of overall cost to the country as a whole, it is pumping liquidity for all it is worth. Two sets of questions arise:

– Will this liquidity generate inflation in China? Will it devalue the Chinese peoples’ savings and force them to start spending? What will these new spenders buy?

– How many Yuan are really in circulation? How much debt relative to GDP is there in China? What is the real value of the Chinese currency and what is the real value of the Chinese current account surplus?

I previously glanced a look @ China hyperinflation in a previous article. I still believe that the PBOC has a better chance to spark high levels of inflation – based on both Chinese savings and the large dollar surplus – than does his Fed counterpart. Both are desperately trying to stave off deflation … PBOC has more leverage and fewer liquidity traps.

Michael Pettis examines the second set of questions in a new article:

Can the RMB be more undervalued today than it was last year?

June 23rd, 2009 by Michael Pettis

William Cline and John Williamson published on Vox an interesting piece earlier this month June 18), titled “Equilibrium Exchange Rates,” in which they try to “estimate a set of medium-run fundamental equilibrium exchange rates compatible with moderating external imbalances” for the 30 largest economies. They assume that a sustainable equilibrium trade balance for the US implies a current account deficit of 3% of GDP (this is conservative – I would have thought “equilibrium” would have been lower), and try to estimate the amount of currency change needed to get there. They also assume that in general not just the US but all “countries should strive to keep imbalances (surpluses and deficits) under 3% of GDP.”

Using early June 2009 exchange rates, they find that six countries – most of whom are primarily commodity exporters, not coincidentally – have overvalued exchange rates relative to the dollar (Australia, New Zealand, South Africa, Brazil, Colombia, Mexico), and twelve, mostly in Europe, have currencies that are marginally undervalued. Of the 30 countries, eleven have currencies that are at least 15% undervalued relative to the US dollar. For convenience sake I include their 2008 GDP and rank them by size. These are:

Country

Billions

Undervaluation

Japan

$4,908

18.1%

China

$4,221

40.3%

Switzerland

$491

19.8%

Sweden

$479

15.3%

Taiwan

$392

29.4%

Argentina

$330

18.4%

Thailand

$273

16.7%

Malaysia

$222

33.2%

Hong Kong

$215

27.9%

Singapore

$182

26.3%

Philippines

$169


i enjoy completely disagreeing with professional economists who have been educated and then educated some more and are perhaps smarter than I am …

First of all, the dollar/yuan relative valuation is set by fiat; the real difference between China and the US isn’t currency differences but wages for equivalent labor. Even if the two currencies were @ ‘equilibrium’ … China would still earn a surplus from America because its labor is so much cheaper and America is sourcing – or did source – its goods from China because of the difference in wage rates.

The Chinese current account surplus is simply the US savings exported to China. If we had kept manufacturing jobs in the US – all else being equal – that surplus would be in US banks being invested in US alternative energy projects … or something else.

Labor is the dog, currency is the tail.

The currency ‘peg’ adhered to by BOTH the US and China – for the interests of both – is arbitrary even as its utility to both countries is deteriorating. Basing relative valuations off the peg is a waste of time, so it trade weighting or any other non- currency- market valuation. What really determines a currency’s worth is its trade in the currency markets – not in the goods and services markets. In these latter markets, any currency will do, comparative advantages transcend currencies. At the same time, the yuan has an abstract value simply because it doesn’t trade: it has acquired a ‘scarcity’ value that it does not deserve!

If the Chinese government wanted the yuan to trade it would have to print even more of them than it already has. The yuan would decline in value … precipitously so. It would shed its scarcity premium and its inflation value – measured against the commodities the yuan are used to buy, for instance – would substitute. Valued in oil, iron ore or copper, yuan are cheap.

It would seem the Chinese have made a choice; to trade their currency and risk currency revaluation- inflation or not trade their currency and buy commodities/assets instead and risk domestic monetary inflation.

This leads to the set of questions orbiting around how many yuan are in circulation. Nobody knows! Chances are … with all that stimulus and all those loans and much liquidity sloshing around – enough to push up Chinese and Hang Seng stocks up 50% in the past few months – there is a lot. If the Chinese are leveraging against their stash of foreign reserves – there is a lot. If the ratio of debt to GDP is near to 70% the Chinese are in as soggy a shape as we are!

Viewed this way … and in the light of the Caijing article above … the yuan is simply another credit- bloated Chinese financial asset.

One measure of a currency’s worth is simple; supply and demand. If there is an oversupply of yuan relative to demand, then that currency cannot be undervalued. This simple paradigm addressed itself during the US real estate bubble; there was an oversupply of houses. House ‘asset values’ increased even as more and more houses were built. It appears the same conditions exist for the yuan. Because economists don’t know or cannot see all the yuan, that doesn’t mean they aren’t there.

What it means is the Chinese are teetering at the edge of the same abyss as we are.

Welcome to America, fools!

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