Robert Feldman of Morgan Stanley: Oil and Water, Japan and China

Oil and Water, Japan and China
Robert Feldman (Tokyo)

No, this piece is not about how Japan and China do not get along politically. Rather, it is indeed about oil and water — or more precisely about how the competition for resources will shape the world in which Japan and China interact over the next decades. This piece is inspired by a recent book by Michael Klare entitled Resource Wars (Owl Books, 2001). In the book, Professor Klare makes the important (but also somewhat obvious) point that the combination of geography, economics, and politics will create intense competition for scarce resources, especially oil and water.

How will Japan and China interact in this world? Are they competitors or allies? Will the competition be diplomatic, negotiated, and peaceful, or will it be military?

The answer depends on the specific resource involved, and the geography (and politics) of the resource. However, fortunately, the details suggest that Japan and China (along with the United States) have much more to gain by cooperation than by competition, especially military competition. This conclusion is clearly good news for financial markets. Even better news is the opportunities that joint development will hold for business. Industries of particular interest include plant engineering and suppliers for energy development projects and trading companies or storage facility providers for agricultural trade in the region.

Oil

Most oil analysts are now convinced that the world does face high oil prices for at least a few years, even if speculative excess and weather-related distortions abate. There is virtually no spare capacity to produce more oil, but global demand will continue to increase. So the equilibrium price will be higher. The question for all countries now is how to find new energy sources and to promote conservation.

For Japan and China, the closest potential sources of new energy are oil from the South China Sea, and oil and/or natural gas from Siberia. In light of competing claims to exploitation rights, the South China oil will be the most contentious. China has claimed vast stretches of the South China Sea as an exclusive economic zone, while other countries do the same. So far, military conflict has been limited. The only direct confrontation between Japan and China concerns the Senkaku (Diaoyu) Islands, where nationalistic groups (from both Taiwan and China) have tried to occupy the islands. The incidents so far have been handled deftly, diplomatically, and with little disruption by the Chinese and Japanese governments — which have many more important problems (such as North Korean nuclear weapons) to handle.

The South China Sea issue for Japan involves two separate questions: passthrough access to sealanes bringing energy from the Middle East, and exploitation of resources that are believed to lie under the ocean floor. The passthrough question is both military and economic. Unsure of how China and other nations will resolve the issue of economic rights, Japan is rightly worried that sealanes could be disrupted. Hence, some military presence is needed. However, to the extent that China and Japan can reduce the need for such military protection of the sealanes, both countries will benefit. (The same is true of the US, which will continue to have a role in defending Japan.) The balance of methodology for dealing with the sealane issue is likely to remain firmly diplomatic and legal, rather than military.

The exploitation issue is harder, because of the many competing claims and lack of clarity in international maritime law on how to resolve the claims. So long as the claims are unresolved, there is very little likelihood that major companies would invest any significant amounts in resource exploitation. Hence, all parties have an interest in creating a stable legal environment for development. The risk is that energy prices climb high enough, and potential users of energy become desperate enough, to occupy territory militarily. I doubt that energy prices could trigger such action, because the economic losses from unilateralism would likely outweigh any benefits. The challenge for countries in the region, therefore, is to work out a rights-sharing arrangement as soon as possible. Oil at $50/bbl is certainly an incentive to cooperate.

Other oil projects are more straightforward. Siberian exploitation will involve negotiation with Russia, and with countries through which pipelines might pass. Ironically, this factor might aid a solution to the problem of nuclear North Korea. A pipeline passing through North Korea could pay access fees to that country in the form of a portion of the energy that passes through, thus providing effective aid to North Korea, and obviating the need for nuclear facilities — the justification for a nuclear program.

Farther afield, China has an interest in building pipelines from Central Asian countries to serve western China, but Japan has little interest in such projects, except as a potential investor or provider of equipment. Such projects would benefit Japan to the extent that they remove pressure on global oil prices.

My reading of the oil situation is that both Japan and China view economic and political stability at home as requiring a cooperative solution to the oil / energy problem. Neither country has either the resources or the military power to pursue a unilateral solution. Hence, there appears to be a bright future for Japan-China cooperation in the energy field.

Water

The other major source of potential conflict that Mr. Klare discusses is water. In particular, he focuses on the scarcity of water, and control over the Nile, Tigris-Euphrates, and Indus river valleys. Obviously, none of these issues has any direct relation to either Japan or China (except to the limited extent that the Indus initially arises in western Tibet). But water is an issue, especially for China. As living standards rise, China will need more fresh water and the products thereof, but sources are limited. Moreover, as my colleague Andy Xie points out, agricultural land in China is under pressure from industrial development projects. How can China raise living standards when water and land are becoming scarcer?

The answer is to import the products that require land and water. Already, China is a huge importer of agricultural products from the US. However, as water becomes scarcer in the US as well, alternatives must be found. Japan is a good candidate. Indeed, water is the one natural resource that Japan has in abundance. Moreover, as Japan's population ages, it will require less food. In addition, the inefficiencies of Japanese agriculture suggest that much improvement in output is possible. Already, Japan supplies limited amounts of high-grade rice to some Chinese cities as a luxury item. The factor endowments suggest that there is more such trade in Japan's and China's futures.

Other Resources

There are many other resources in which Japan and China have common interests in ensuring stable supply. Among these are minerals from Africa, fish from the oceans, and uranium in particular — a source of energy that may well come back into fashion as high oil prices persist. None of these resource issues can be settled in a unilateral way. Rather, China and Japan must cooperate in creating a strong Asian voice for peaceful exploitation. It is in this context that the proposals to re-organize the United Nations’ decision-making structure are key. So are regional initiatives, such as Japan-ASEAN cooperation and regional Free Trade Agreements.

Investment Implications

Investors in Japan will likely be paying more attention to the energy and water issues over the next few years. Japanese companies stand to benefit from new energy projects, not only as suppliers of machinery and materials (e.g., high-grade seamless pipe) but also as designers and implementers of projects. While currently still troubled by balance sheet difficulties and cash flow problems, the Japanese plant engineering companies have much expertise in these areas. Moreover, transportation of energy, particularly natural gas, will require increased fleets of LNG tankers and port facilities. The latter must be constructed some distance from large urban areas, in order to ensure safety, and thus some rather large projects could become necessary.

The implications of the water issue are somewhat different. Japan has no major agribusiness sector, but the imperatives of food supply for the region suggest that such firms could emerge. For this to happen, however, major deregulation would be needed, particularly an expansion of corporate ownership of farmland. In addition, the efficiency of distribution of agricultural products needs work. These inefficiencies are the raw material of business opportunities. Ironically, such a turn of events would reverse the trade flows of the last decade, in which China has become a major supplier of fresh vegetables to Japan. However, as China's needs grow, and as the resources for producing such crops in China dwindle, Japan could help fill the gap, first by replacing China's exports to Japan, and then by exporting to China itself. Trading companies are likely to be major beneficiaries of trade pattern changes, in light of their expertise in project investments and in distribution. Moreover, as agricultural trade grows in the region, the need for storage facilities could help the manufacturers of machinery for this sector.

New York Times: Private Investors Abroad Cut Their Investments in the U.S.

Private Investors Abroad Cut Their Investments in the U.S.
By EDUARDO PORTER
The New York Times

Published: October 19, 2004

The flow of foreign capital contracted in August as private investors lost some of their appetite for American stocks and bonds, underscoring the United States' increasing dependence on financing from central banks in Asia.

The Treasury Department reported yesterday that net monthly capital flows from the rest of the world fell for the sixth time this year, declining to $59 billion from $63 billion in July.

Private investment from abroad fell by nearly half - to $37.4 billion in August from $72.9 billion the month before. Investors appear to be concerned over cooling growth and a rising American trade deficit.

The only reason that the contraction was not more pronounced was that official financing, mainly from Asian central banks, jumped to nearly $23 billion in August from just over $6 billion in July.

Washington has demanded that China end a policy of buying dollars to reduce the value of its currency, the yuan, and make its exports more competitive in American markets. But the new data accentuated how dependent the United States has become on purchases of dollar securities by the Chinese and other Asian governments with links to the dollar.

"Foreign central banks saved the dollar from disaster," said Ashraf Laidi, chief currency analyst of the MG Financial Group. "The stability of the bond market is at the mercy of Asian purchases of U.S. Treasuries."

Net foreign purchases of United States Treasury bonds fell 35 percent, to roughly $14.5 billion, an 11-month low. Foreign governments left a particularly large footprint in this market, stepping up their net purchases to about $19 billion even as private investors sold about $4.5 billion worth.

Holdings of Treasury bonds by Japan, where the central bank has also been intervening to keep the value of its currency from rising, increased by $26 billion in August, to $722 billion. Chinese official holdings rose more than $5 billion, to $172 billion.

The decline in foreign investment seems to have unsettled some investors in the bond and currency markets, who have been on tenterhooks as the American trade deficit has soared to nearly 6 percent of the nation's economic output, requiring foreign investment to finance it.

Through the first quarter of the year, financial flows into the United States exceeded the trade deficit by well over 50 percent. Last month, they barely covered the $54.2 billion deficit.

As private capital flows declined, the American financial balance has been poised precariously. As private financing dwindled, most of this coverage has been provided by foreign government finance.

"If all we have funding our current account imbalance is the good graces of foreign central banks, we are on increasingly thin ice," said Stephen S. Roach, the chief economist at Morgan Stanley. Of Washington's call for China to stop interfering in currency markets, he cautioned, "That could come back and bite us."

Not all economists are that worried about the growing shortfall in the current account, the broadest measure of trade, pointing out that it is sustainable as long as Asians continue on a path of export-led growth that requires cheap currencies against the dollar.

Many economists stress, however, that this symbiotic balance between Asian and American economies will eventually come to an end.

Jeffrey Frankel, an economics professor at Harvard University, said: "The Asians are going to go on buying Treasury securities for a while, preventing the dollar from depreciating and helping keep U.S. interest rates low, which is a good thing. But not forever."

Morris Goldstein of the Institute for International Economics remarked, "This can be a story for one year or two years, not for 10 years."

If the United States were to temper its appetite for foreign money, the Chinese and Japanese could curtail their purchases of American securities without causing financial havoc. The dollar could then drift lower against Asian currencies, benefiting American exporters and manufacturers that compete with Asian imports.

But this would require Americans to increase their rate of savings. Household savings have plummeted to only 1.5 percent of personal income, from 11 percent 20 years ago. With the federal government running a budget deficit of 3.5 percent of the nation's output, the public sector hardly contributes to savings.

A disorderly situation would occur if foreign money dried up suddenly when the United States still needed it. Then, the adjustment in American savings might happen involuntarily. Interest rates would rise sharply, and the dollar could fall abruptly. This could induce a sharp economic contraction, even stagflation.

"The longer we wait," Mr. Goldstein said, "the more likely we'll have the adjustment anyway. But the adjustment will be more chaotic and sharper."

Peter Cooper:Linking gold and oil prices

Linking gold and oil prices

Peter Cooper

Ameinfo.com

What do the price of oil and the price of gold have in common? At the moment, both more and less than you might think.

A crisis in the Middle East, an American president who did not inspire confidence overseas, rising economic powers in Asia and instability in global monetary policies.

In the early 1970s, these destabilizing factors combined to helped to push gold prices steadily upwards towards the peak price of more than $800 per ounce that was reached by the end of the decade.

Today, in a world that seems in many ways to mirror that of three decades earlier, gold prices are hovering in the $400 per ounce range. By some standards that price is quite high; by others, though, the precious metal is a relative bargain - especially compared to oil prices, which are a traditional indicator of the value of gold.

Historically, the ratio of the price of oil to the price of gold has been relatively fixed: the number of ounces of gold required to buy a barrel of oil has averaged .06 ounces. As oil prices soar past the $50 mark, however, gold prices have not kept pace. For gold to reach the historical standard - with oil prices at a more modest price of, say, $42 per barrel - the precious metal would have to trade at $700 per ounce. Put another way, by historical gold-price standards, oil should be selling at just $24 per barrel. By most measures, then, buying gold is currently a smart investment. Which would make Kuwaitis the savviest investors in the Middle East. In terms of value, the emirate saw the greatest surge in gold consumption in the second half of this year, recording growth of 28 percent. Saudi Arabia, the largest market in the Gulf, saw growth of 23 percent, followed by the UAE at 21 percent, Bahrain at 20 percent, Oman at 18 percent and Qatar at five percent.

Overall, second-quarter demand in the region was up by eight percent. Not everyone who buys gold, of course, is concerned with historical standards - or, for that matter, with any standard beyond their latest bank account balance. And the seemingly inexorable rise in oil prices means that, across the Gulf region, those balances are currently looking very, very healthy.

Hedging bets

So will the regional buying trend continue at least for the rest of the year? That seems likely, although the end of the summer tourist season will result in an inevitable short- term decline.

Worldwide, Goldman Sachs argued recently that buying by hedge funds and an expected continued decline in the dollar against the euro means that gold prices will continue to inch up for the rest of 2004. (Investors historically purchase gold as a hedge against declines in US assets when the dollar is falling.)

Its worth recalling that, barely 18 months ago, the outlook for the gold market was extremely bleak, with merchants at Dubais gold souk lamenting a 50 percent drop in sales. Many shops, despite running any promotion they could think of, were reportedly on the brink of going bust.

Our business has shrunk substantially, Joy Alukkas, managing director of Dubai-based Alukka Jewelry, told Arabies TRENDS in March 2003. There is no hiding the fact that the gold jewelry business this time around is very poor. At the time, there was hardly a consensus about the direction gold prices would take.

Some industry analysts argued that prices would inevitably decline, as speculative investment dried up and what they saw as a price bubble finally burst. A rapid sell-off would result in a drop as large as the increase we have seen, said the chairman of one gold trading group in Dubai at the time.

Paradigm shifts

Others analysts strongly disagreed. Leonard Kaplan, a gold analyst with Prospector Asset Management, told Arabies TRENDS more than a year and a half ago that a drop in gold prices was out of the question.

As the US dollar continues to falter, as the equities markets continue their slide, as the paradigm shift from paper assets to hard assets builds a bit of momentum, as the budget deficits of the United States swell - it becomes apparent that gold must rise in response.

At the time, there were fears among some regional bankers of gold hoarding - driven by instability surrounding the war that had just been launched in Iraq - leading to a cash-flow crisis, a proposition that seems laughable today. But in March 2003, despite the fighting in Iraq, oil prices remained well below $30 per barrel, and there was no way to predict the surge that would take prices above the $50 mark.

So what to make of all this? Is the current gold-buying boom in the Gulf a sign of increased or decreased confidence in the future? Are regional shoppers hoarding hard assets based on a fear of future instability, or does the trend simply indicate that so many people have so much money to burn?

The latter is far more likely, of course. But the real test wont come for Gulf consumers until the gold:oil price ratio finally settles to its historical levels. After all, the last time the world looked like it does today, gold prices were on their way to $800 an ounce.

Financial Times: India in plea to investors abroad

Financial Times: India in plea to investors abroad

By Ray Marcelo in New Delhi

Published: October 20 2004 03:00

Last updated: October 20 2004 03:00

Manmohan Singh, India's prime minister, urged foreign investors yesterday to contribute to $150bn worth of planned infrastructure spending, an appeal likely to strain relations further with his government's communist allies.

Mr Singh told a business summit between India and the Association of South East Asian Nations (Asean) that the country's economic growth relied on substantial increases in domestic and foreign investment in physical infrastructure.

"We believe the Indian economy can absorb up to $150bn (£83bn) of foreign investment in infrastructure over the next 10 years. There is therefore a large opportunity for Asean businesses to invest in India," he said. India's ailing airports and railways needed more than $55bn in capital investments, alongside $75bn in power and $25bn in telecommunications, Mr Singh added.

"We will make every effort to promote such investment and to create a climate conducive for investors and entrepreneurs," he said.

Such statements are a further sign of the government's resolve to pursue economic reforms despite opposition from communist parties, which support Mr Singh's multi-party coalition from the outside.

Relations between the government and the communist bloc appear increasingly tense.

Both sides clashed last week over plans to raise the foreign equity ceiling in the telecoms sector from 49 to 74 per cent, part of several industry reforms championed by P. Chidambaram, the finance minister.

Communist parties have opposed raising foreign direct investment (FDI) levels in telecoms, citing concerns over national security. They have argued for a "Chinese strategy", insisting that foreign telecom carriers enter into local joint ventures.

In response, India's pro-reform finance ministry has revealed data showing local telecoms carriers have already exceeded current FDI limits.

Oct 21, 2004 Phisix Crumbles Under the Weight of Local Selling

Philippine Stock Market Daily Review: Oct 21, 2004

Phisix Crumbles Under the Weight of Local Selling

No, I certainly would not ascribe to any particular event solely responsible for the current drag in the Phisix, down 18.33 points or 1.03%, which has broken from an important support level. The 1,770-level served as its platform to establish its most recent record high. The motley reasons that you can expect from mainstream analyst to cite for the recent string of declines would be overnight decline of the US markets, oil (again!! No rotation to oils), local political developments as coup fears arising from corruption crackdown on military hierarchy, economic data, Metro Pacific-driven et. al. and a whole lot of crap.

While these experts presume knowing the mindsets of the market, what we can deduce from the market is what the market internals show. And today’s activities manifest glum outlook by locals responsible for the recent declines.

The Phisix has retraced by more than 23.6% and could probably test the 1,740 level for a 38% correction/retracement from its recent highs before moving higher.

Today’s action was centered on the sell off in the telecoms sector with key heavyweights (PLDT down 2.13% and Globe lower 1.9%) and attendant second liners taking the most damage, Piltel fell 2.41% and Digitel declined 4.34%. The Mining sector was the biggest loser (-1.4%) even as metal prices underpinning the corporate fundamentals such as gold and silver are currently approaching their record highs in dollar terms. The financial sector (-1.33%), weighed by losses from its heavyweights Bank of the Philippine Islands (-2.12%) and Metrobank (-1.8%), came second while the telecom led Commercial Industrial Index (-1.22%) was third. The All Index posted the least decline down by .32% as its heavyweights Sunlife and Manulife were untraded today. The foreign supported property sector (+.4%) defied the market sentiment and posted slight gains for today largely on SM Prime’s advance (+1.38%).

Decliners led advancers by 53 to 15, as foreign money remained bullish on local equity assets particularly on the property sector to register P 111.868 million worth of inflows. Foreign trades accounted for only about 37% of today’s trades, meaning that the psychology of the local investors dictated the tempo of the trading activities in today’s market. ERGO Locals are selling for whatever reasons, Foreign are buying for reasons stated previously in our newsletters.

The September-October period statistically speaking has been one of the weakest period on a month on month basis aside from the July-August and June-July time frame since 1997. Five out of seven months in the past 7 years or a probability of 71.4% showed that the September-October period is predominantly a bear’s lair, although month to date the Phisix is barely up by 5.03 points or .3% which simply means that it is natural to expect the Phisix to head lower because of seasonality factors paving way for strengths in the coming months. Take these indications of weaknesses as opportunity to buy on dips, as I believe that the cyclical shifts, seasonality factors, historical patterns and the technical picture remains tilted in favor of the bulls.

Business Times Asia: Radical Delhi plan to fund infrastructure

Radical Delhi plan to fund infrastructure
Use of US$120b of reserves may have consequences for US budget deficit

By ANTHONY ROWLEYIN TOKYO

INDIA'S plan to use up to US$120 billion of its foreign exchange reserves to help fund domestic infrastructure projects signals a radical departure that could influence the way other developing countries in Asia and beyond finance infrastructure, and could also have an impact on foreign exchange markets.

It comes at a time when the International Monetary Fund and the World Bank are considering fiscal incentives to get developing nations in general to spend more on infrastructure.

The move by the new Congress-led coalition in Delhi is designed to help India overcome serious infrastructure deficiencies in its road, railway and power sectors that could hinder economic growth.

It marks the boldest step so far by any Asian government (which collectively hold nearly US$2 trillion in reserves) to deploy its reserves actively in the domestic economy instead of keeping them invested in US and other foreign government securities.

China has diverted some US$45 billion of its reserves to dealing with its banking sector problems but India's initiative is much bigger.

Analysts say the move could have considerable significance for the funding of the US budget deficit, as well as for the exchange rate of the US dollar, if other countries opt to use their reserves more actively in their domestic economies.

India has not so far been able to attract foreign investment in basic infrastructure on anything like the scale that China has. At the same time, the Indian banking system has proved incapable of providing long-term bank loans for infrastructure on the scale needed, while the domestic bond market is also underdeveloped. Recently the Asian Development Bank issued its own rupee bonds in India to help bridge the infrastructure gap.

According to a report in Saturday's Financial Times, critics of the government plan say it would be an inappropriate use of India's foreign exchange reserves and would add to the already high fiscal deficit.

But Indian officials argue that the country's foreign exchange reserves have tripled in the past three years and are now high enough to cover almost 20 months of imports - far higher than the IMF-recommended minimum ratio.

The fiscal deficit issue may not prove to be a problem for India or other countries that opt to spend more money on infrastructure development. This is because at their annual meetings in Washington this month, the IMF and the World Bank decided to examine the idea of giving developing countries more 'fiscal space' to deal with their infrastructure funding needs.

According to an IMF spokesman, developing countries that invest in infrastructure, and thereby add to a nation's income-generating potential, would be able to deduct such spending from their budget, for the purposes of achieving the 'primary balance' which is regarded as the good housekeeping seal of fiscal management.

Debt services payments on infrastructure loans from multilateral development banks would also be deductible.

This would be a significant concession to emerging market economies at a time when there has been a massive shortfall in hoped for private sector investment in infrastructure, leaving governments bearing around 70 per cent of the total burden.

Those governments that invest most claim they are penalised in terms of the way their primary budget balance is calculated by the IMF.

World Bank president James Wolfensohn estimated in Washington that developing countries need to double infrastructure investment to around 7 per cent of GDP if they are to meet economic growth and poverty reduction targets.

Copyright © 2004 Singapore Press Holdings Ltd. All rights reserved.

New York Times: Insurance Investigation Widens to Include a Look at Costs

Insurance Investigation Widens to Include a Look at Costs
By JOSEPH B. TREASTER
New York Times

An investigation into the insurance business is expanding, investigators said yesterday, as Eliot Spitzer, the New York attorney general, increasingly turns his attention to whether American corporations and their employees are paying more for life, disability and accident insurance than they should be.

In California, John Garamendi, the state insurance commissioner, said last night that he, too, was concerned about extra costs to individuals for life, disability and accident insurance and that he was considering legal action against at least one broker and several insurance companies that sell what are known as employee benefits.

While the current focus of the New York investigation is on bid-rigging and price-fixing among commercial insurance brokers and insurance companies, investigators say Mr. Spitzer is also pursuing reports of payoffs that may increase coverage costs for tens of millions of individuals.

"Eliot Spitzer's interest is in the retail stuff, the effect on regular people,'' said David D. Brown IV, the chief of the state attorney's investment protection bureau.

"Our investigation is broadening and deepening,'' Mr. Brown said. "We are going to look across product lines, across insurers and across brokers, the big and the little."

The insurance controversy became public last week, when Mr. Spitzer sued Marsh & McLennan, the world's biggest commercial insurance broker, accusing the broker of rigging bids from insurance companies and fixing prices for corporate customers in exchange for fees from the insurance companies.

Three insurance companies have entered guilty pleas to rigging bids, and more criminal charges are expected, perhaps as early as this week.

Such bid-rigging schemes, investigators contend, have indirectly increased the costs of everything from houses to toothpaste as corporations pass along the expense. The bid rigging was discovered, Mr. Spitzer said last week, during an investigation into incentive fees insurers pay to insurance brokers.

But there are other potential conflicts of interest in insurance that may have a more direct impact on consumers. Investigators in New York and California are now examining whether brokers and consultants are demanding extra fees for favored treatment in the sale of employee benefits like group life and disability coverage.

Like the investigation into commercial insurance brokers, this inquiry began when Mr. Spitzer's office received a tip. In this case, an industry executive, upset by deals involving brokers and employee benefits insurers, telephoned the attorney general.

In June, subpoenas were issued to Aetna, Cigna and MetLife, some of the biggest sellers of what the industry calls group benefits.

These include life, disability and accident insurance bought for workers by businesses and nonprofits, who often allow employees to add to their coverage if they dip into their own pockets.

"We're very interested in health-related lines and auto insurance,'' one investigator said, "because those are the ones that affect consumers the most.''

In California, Mr. Garamendi said he had been discussing with his staff and other California officials either filing a lawsuit or joining in with others in a lawsuit on employee benefits. He said he planned to announced his decision later this week.
"We are on the verge of taking legal action,'' he said.

The California commissioner said he also planned to draft new regulations that would require insurance brokers to disclose all compensation from insurance companies and explicitly prohibit brokers from steering business to insurers in exchange for payoffs.

The role of insurance brokers is to obtain the best coverage for corporate insurance clients at the best price in exchange for a fee. They are supposed to deal with insurance companies at arms length. Long ago, however, they began collecting fees from the other side of the deal, from the insurance companies, creating a conflict of interest, some industry experts said.

In the field of employment benefits, brokers and consultants often receive two kinds of special payments in their dealings with insurance companies, according to an executive who works in the field.

The most widespread form of payments is a reward to the broker or consultant from an insurance company for a certain volume of business and for business that is expected to have few claims and therefore be especially profitable. This kind of payment, investigators and industry executives said, is the same as the kind widely used in commercial property and casualty insurance; in property casualty insurance, it raises the cost of insurance generally.

These arrangements are known as contingency fees, placement service agreements and market service agreements, just as they are in property casualty insurance.

But an additional form of payment that is absent in property casualty transactions results in higher individual costs for corporate employees who choose to buy life, disability or accident coverage beyond the amount provided by employers.

In those transactions, the executive said, the insurance company tacks on an additional annual fee of perhaps $5 to $15 for every worker who increases coverage.

While the extra money is collected by the insurance companies, the executive said, it is passed on to the brokers. Sometimes, the executives said, employers are aware of the extra charge, sometimes not.

In any case, the executive said, because of the hidden fees on workers, the corporation gets the services of a broker for less in direct costs than otherwise.

The degree to which incentive fees were important to Marsh was illustrated late yesterday, when the company said that it took in $843 million in such fees last year, or about 12 percent of its brokerage revenue of $6.9 billion. The disclosure was the first time the company had outlined the financial impact of the payments.

Marsh said on Friday that it was halting the incentive payments. Yesterday, the company said that the decision would "negatively impact near-term operating income.'' The payments represent 7 percent of its overall revenue. (Marsh's other main businesses are Putnam Investments and Mercer Consulting.)

Mr. Spitzer said on Thursday that the incentive payments could represent more than 50 percent of the parent company's income of $1.5 billion last year.

But Marsh said last night that it could not be sure how much income it earned through the payments because it was unable to determine the expenses associated with them. Marsh said, however, that it paid at least $340 million in expenses in connection with the payments in 2003.

Jeffrey Greenberg, the chief executive of Marsh & McLennan, had previously said that it was company policy not to break out either the revenue or the profits from the payments in its financial statements.

Two rating agencies, Fitch Ratings and Moody's Investors Service, lowered their estimates of Marsh's ability to repay debt and said further downgrades were possible.

Earlier yesterday, shares of Marsh & McLennan fell for a third day. The stock closed down $3.63, at $25.57. Since Mr. Spitzer announced the lawsuit on Thursday, the shares have tumbled 45 percent.

And the investigation is gathering speed. Already, Mr. Spitzer has 20 lawyers investigating the insurance industry, or nearly double the number involved in the investigation into mutual funds.

"This is a much bigger team,'' Mr. Brown said, "and it's much more interdisciplinary. The other cases were largely investor protection. This one involves people from our consumer fraud unit and antitrust as well as from criminal prosecutions."

Referring to Marsh, Mr. Brown said, "The first place we looked, we found massive issues.

"We're going to keep pounding on this,'' he said.

World Bank Commentary: Boost Growth By Reducing the Informal Economy.

Commentary: Boost Growth By Reducing the Informal Economy.

World financial leaders gathered recently in Washington for the annual meetings of the World Bank and International Monetary Fund. But missing from their agenda was one of the biggest and most misunderstood barriers to economic growth: the vast agglomeration of businesses that evade taxes and ignore regulations, often referred to as the "informal economy,” writes Diana Farrell, director of the McKinsey Global Institute, in Monday’s edition of The Asian Wall Street Journal.

The informal economy is not just the unregistered street vendors and tiny businesses that form the backbone of marketplaces in Asia and other emerging markets. It includes many established companies, often employing hundreds of people, in industries as diverse as retail, construction, consumer electronics, software, pharmaceuticals and even steel production. In India, Pakistan, Indonesia and the Philippines, as much as 70 percent of the non-agricultural workforce is employed in informal businesses.

Despite the prevalence of the informal economy, Asian policymakers show surprisingly little concern. Some governments argue that it helps relieve urban employment tensions and will recede naturally as the formal economy develops. Development experts contend that informal companies themselves will grow, modernize, and become law-abiding if given some help. And most policymakers implicitly assume that the informal economy does no harm. But there is little evidence to support these beliefs. Research by the McKinsey Global Institute found that informal economies are not only growing larger in many developing countries, but are also undermining enterprise-level productivity and hindering economic development.

The reasons why informal economies grow -- and keep growing -- are not hard to uncover: high corporate tax rates and the enormous cost of doing business legally. It takes 89 days to register a business in India, compared with eight days in Singapore. It takes 33 days to register a property in the Philippines, compared with 12 in the US. It takes five and a half years to close an insolvent business in Vietnam. All in all, emerging-market businesses face administrative costs three times as high as their counterparts in developed economies. No wonder so many choose to operate in the gray.

Reducing the tax burden on businesses is perhaps the most critical step to reducing informality, since high taxes increase the incentives for companies to operate informally. For many Asian governments, one path to lower taxes is through broadening the tax net: collecting taxes from more companies can enable governments to cut tax rates without reducing tax revenue, while simultaneously breaking the tax-evasion cycle. Another key to reducing the extent of the informal economy is to streamline regulatory procedures. Registering a new business is often an onerous process, Farrell writes.

Martin D. Weiss: The Greatest Scam of All

The Greatest Scam of All

Martin D. Weiss, Ph.D.
Editor, Safe Money Report

Chairman, Weiss Ratings, Inc

Eliot Spitzer has just launched a major frontal attack on the insurance industry. But it's just the first battle in a long and bitter war.

I know. I've fought a similar battle myself for many years, albeit on a much smaller scale.That's why most insurance companies still don't like me very much. Some may even want me dead.

About 12 years ago, soon after I launched my Weiss insurance ratings, I sent out a press release listing the ten largest insurance companies most likely to fail. The media picked it up, and U.S. News & World Report featured it in a major story.

The next day, my phone began to ring off the hook with calls from insurance company lawyers. They yelled at me and threatened me with litigation. They said my ratings were slanderous. They talked about suing me for many times the money my small Florida company made in a lifetime.

One large company on my "most vulnerable" list, First Capital Life of California, went even further: They sent an entourage of top executives to visit our offices and intimidate me.
Insurance company exec:

"Weiss better shut the @!%# up or get a bodyguard."

We welcomed the group into our humble conference room, and they distributed copies of their presentation.

Then for the next two hours, they ranted about their grand plans for the future. They raved about the top ratings they were still getting from S&P, Moody's, and A.M. Best. They even talked about how they could "help" Weiss build its own business.

But I didn't budge from my D- rating. "Look," I responded. "Your own filings with the state insurance commissioners show you're loaded with sinking junk bonds, but you have virtually no capital to cover the losses. Your own books show you've got money from investors that could be pulled out at a moment's notice, but you have virtually no liquid assets to sell to meet their demands for cash." I made it clear that the company was a time bomb that could go off almost any day.

That's when one of First Capital's executives issued the ultimate threat: "Weiss better shut the @!%# up," he whispered to my associate during a break, "or get a bodyguard."I did neither. To the contrary, I intensified my warnings. And within weeks, the company went belly-up — still boasting high ratings from major Wall Street firms on the very day it failed. In fact, the leading insurance rating agency, A.M. Best didn't downgrade First Capital to a warning level until 5 days after it failed. Needless to say, it was too late for policyholders.

It was a grisly sight — not just for policyholders, but for shareholders as well: The company's stock crashed 99%, crucifying millions of unwitting investors. Then the stock died, wiped off the face of the earth. Three of the company's closest competitors — Executive Life of California, Executive Life of New York, and Fidelity Bankers Life — were also biting the dust. Unwitting investors lost over $20 billion.

If you have cash-value policies in failed insurance company YOUR MONEY WILL BE FROZEN

Meanwhile, the regulators stepped in to take over and froze all the money policyholders had paid in for whole life polices and fixed annuities.

The people weren't allowed to cancel their policies. They weren't even allowed to take the money out through a policy loan. And by the time the freeze was finally lifted many months later, they had lost up to 50 cents on the dollar.

All told, over six million policyholders were trapped. Among these, about two million had cash-value policies, such as whole life and fixed annuities, frozen in limbo for months. (For details, see, "Toward a Full Disclosure Environment in the Insurance Industry," my 1992 testimony before the U.S. Senate Committee on Banking, Housing, & Urban Affairs.)

These policyholders asked: "How could this happen? All of these insurance companies got "good" or "excellent" ratings from A.M. Best, S&P, Moody's, and Duff & Phelps (now Fitch). Why is it that Weiss was the only one that gave them bad ratings?"Congress asked the same question. So did the U.S. General Accounting Office (GAO), now called the Government Accountability Office.

Indeed in a special study comparing Weiss to the other rating agencies, the GAO concluded that Weiss was the only rating agency to consistently warn consumers of the failures in advance; all of the other rating agencies typically issued their first warnings only AFTER the companies failed.

According to the GAO, for the six largest insurance companies that failed in the early 1990s, "Best assigned a 'vulnerable' rating before [failure] in only one of six cases and this was only six days before the [failure] occurred. In one case, Best stopped rating the insurer and never assigned a 'vulnerable' rating. In the remaining four cases, it assigned a 'vulnerable' rating only after the [failure]."

Best complained bitterly. They said their "B" ratings, listed as "good," in their own manual, should also have been considered "warnings of failure" in the GAO study. The GAO disagreed. But they added: "If we had placed Best's "B" and "B-" ratings in the "vulnerable" category, Weiss would still have been first overall. Weiss' advantage would have been decreased from about three to one to about two to one."

But still, the GAO still didn't answer the original question: Why? Why did the other rating agencies fail so miserably?

I can assure you it wasn't because we had better access to insurance company management than the other rating agencies. Nor did we have more analysts. Rather, the fundamental difference between us and them was embodied in one four-letter word: BIAS. The ratings of our competitors were biased by serious conflicts of interest. Ours were not.

You see, A.M. Best, Moody's, S&P, and Duff & Phelps were paid substantial sums BY the insurance companies to provide ratings FOR the insurance companies, a blatant and direct conflict of interest.

To make matters worse, if the company didn't like the rating, the rating agencies agreed not to publish it. The leading insurance company rating agency, A.M. Best, even created a special category for ratings that were non-published because the companies "disagreed with their rating."

Ironically, nearly everyone in the industry knew what was going on. They knew that most of the ratings were bought and paid for by the rated companies. They knew the industry's capital had deteriorated over the years. And they knew that too many large companies were loading up with too many high-risk bonds and speculative real estate. They just didn't talk about it in public, and did everything possible to keep it secret.For example, in the January 1990 issue of Best's Review, Harold Skipper, Professor of Risk Management and Insurance at Georgia State University, pointed out: "with increasing competition from all quarters, insurers are seeking ways to operate on thinner margins, to enhance investment performance through the purchase of ... riskier investments."

In the same issue, Earl Pomeroy, President of the National Association of Insurance Commissioners (NAIC), wrote: "State insurance regulators are observing ominous signs of emerging solvency problems in what traditionally has been the most secure line of all-life insurance."

Similarly, in the March 1990 issue of Best's Review, David F. Wood, past president of the National Association of Life Underwriters, under the title "The Insolvency Chill," stated: "It is widely acknowledged that life insurers' profit margins have declined significantly, primarily because of rapidly increasing costs, slower growth, declining interest rates in the face of long-term higher rate guarantees and stiffer competition. All these factors have severely eroded the capital base of many companies...."

Thus, Best itself was publishing this alarming information on the industry. But they did nothing to downgrade their own ratings.

You'd think the industry and its regulators would have learned a lesson from this experience. But today, very little has changed. The insurance industry continues to harbor deep conflicts of interest that everyone in the industry knows about, that routinely result in hardships to millions of Americans, but that persist just the same. Here are just three examples ...

Conflict of interest #1.

The Insurance Industry with The Insurance Company Rating Agencies

To this day, the established rating agencies — A.M. Best, Moody's, S&P, and Fitch — are still paid huge fees for their ratings.

Plus, they typically empower the rated companies to decide when to be rated, how, and by whom. They often give the companies a preview of the rating before it's published and some agencies grant them the right to suppress publication of any rating they don't agree with.

This is no secret. A.M. Best & Co. clearly states in its 1995 Insurance Reports, page xv: "NA-9 Rating (Company Request): Assigned to companies eligible for ratings, but which request that their rating not be published because they disagree with our rating." And beginning with its 1996 Insurance Reports (page xiv), Best changed its "NA-9" category to "NR-4," but the definition is very similar.

With this mechanism, ratings which might otherwise have served as warnings to the public are removed from public view, with disastrous consequences for consumers.

Indeed, in its 1994 report, the GAO states that in four out of 30 cases rated by both Best and Weiss, "Best never actually assigned a 'vulnerable' rating. Instead, Best changed these ratings from 'secure' to one of its 'not assigned' categories." And in a follow-up report using the same methodology as that used by the GAO, I found that, subsequently, there were another 16 companies in Best's NR category that failed.

In each case, Best's standard operating procedure was to cooperate with the companies, remove the bad ratings from circulation, and hide the financial weaknesses from the public. And in each case, the companies failed, causing severe hardships to consumers.

Some of the agencies have since modified some of their worst practices, but they have not altered their basic business model — the ratings are still bought and paid for by the rated companies.

How much exactly do they charge? No one knows for sure. But one of the nation's most stubborn critics of the insurance industry, Joseph Belth, has documented the fees charged by insurance company rating agencies in his widely respected monthly publication, The Insurance Forum.

A few years ago, Belth reported that Standard & Poor's charges from $10,000 to $50,000 per company per year, Moody's charges from $15,000 to $45,000, and Best's fees were similar to those of Standard & Poor's and Moody's. Belth has not reported on this since, but I suspect that the fees are probably significantly higher today.This is uncanny. You wouldn't eat at a restaurant or send your children to a movie if you knew that their ratings were based on this kind of a payola system. Yet millions of Americans have entrusted a good portion of their life savings — and their life's safety net — to companies that are rated precisely in this way.

Conflict of interest #2.

The Insurance Companies with Insurance Agents and Brokers

Last week, Eliot Spitzer accused some of the nation's largest insurance companies and the world's largest insurance brokers of rigging bids for insurance polices and taking millions of dollars in kickbacks as a standard operating procedure in their business model.

Joseph Treaster, in his New York Times article of October 16, provides the specifics:"The lawsuit brought by Mr. Spitzer against the broker, Marsh Inc., a unit of the Marsh & McLennan Companies, contends that Marsh conducted sham bidding to mislead customers into thinking that they were getting the best price for the coverage they needed. ...

"In addition to the lawsuit, two executives of the American International Group, one of the world's largest insurance companies, pleaded guilty to criminal charges of rigging bids with Marsh.

"While Mr. Spitzer's target yesterday was Marsh, he made clear that he was taking aim at a widespread practice in the insurance industry. 'This investigation is broad and deep and it is disappointing,' he said.

"Mr. Spitzer suggested that he had also come across indications of wrongdoing in the sale of many kinds of personal insurance, including coverage on cars, homes, and health insurance. 'Virtually every line of insurance is implicated,' he said."

"The lawsuit names American International, or A.I.G., and three other insurers, as participants in the bid rigging and steering: the Hartford, a unit of Hartford Financial Services; Ace Ltd., which is based in Bermuda but is a major player in the American insurance market; and Munich American Risk Partners, a unit of Munich Re with offices in Princeton, N.J."

My view: Mr. Spitzer has barely begun.

Reason: The entire system of selling insurance in America — through agents that are ostensively working in the best interests of the consumer but who are actually driven by commissions determined by the insurers — is, itself, a massive and fundamental conflict of interest.

Look. If you want to buy insurance — for health, life, or an annuity ... or for your auto, home, or business — you almost invariably MUST go through an agent. You rarely have the option of buying directly from the insurance company. And it is the insurance company that effectively sets the goals and agenda for most agents.

To get a better idea of how this works, our company once ran an analysis of the ads in an insurance industry magazine for insurance agents.

Most of the ads were placed by insurance companies offering agents all kinds of special commissions to direct business their way. In addition to cash bonuses, they touted special premiums like two-week vacations at Club Med or free cruises in the Mediterranean. The ads appealed to agents selling annuities, life insurance policies, and more.

So I called the publisher to ask if he thought these special commissions deals wouldn't push the agents to sell policies to consumers that might not be in their best interest.The publisher was indignant: "Are you a registered insurance agent? No? Then how did you get a hold of our publication? Our publication is not for you. It's strictly for insurance agents!"

Apparently, I wasn't supposed to know. Nor were millions of American consumers.

My main point: Insurance agents are routinely driven to sell the policies that make them the most money — not the policies that are best for you. Some agents bend over backwards to do what's best for their customers. But to do so, they must often sacrifice their own livelihood.

That's a system that's rotten to the core, and Mr. Spitzer's opening salvo barely scratches the surface.

Insurance Newspeak

Long ago, insurance agents discovered that their customers didn't want to talk about their death, let alone buy insurance for it. So taking a chapter out of Orwell's 1984, they called it "life insurance" instead.

It didn't seem to help much, though. Life insurance was still a very hard sell, and agents who pushed it too hard got a bad reputation for bringing up unpleasant subjects. "Want a row of seats all to yourself on your next flight to Chicago?" went a popular joke. "Then just tell your fellow passengers that you sell life insurance."

Prudential, the Rock-of-Gibraltar, largest insurance company in the world, came up with another very "creative" solution. They figured out a way to disguise the life insurance as an annuity, trained their agents to obfuscate the real nature of the product, and sold it to millions of investors from 1982 through 1995. All annuity policies sold by insurance companies do have a small life insurance component. But that's a far cry from being an actual life insurance policy.

It took many years of litigation before the regulators caught up with them. Prudential execs said they were sorry. The regulators said that wasn't quite enough to make amends. After much heated debate and negotiation, the company belatedly agreed to pay $2.7 billion in restitution to more than 1 million maligned customers, many times more than the largest previous settlement in insurance history. They sold insurance as a "retirement plan," failing to disclose the risks and using policy illustrations, which projected fabulous dividend accumulations as foregone conclusions.So did agents at New York Life and Allstate. Meanwhile, Equitable Life Assurance Society was fined $2 million for selling more than $100 million of improper life insurance policies. If the larger companies can do it, just imagine what the smaller, fly-by-nights are getting away with!

The Prudential, Metropolitan, Allstate, and Equitable messes were finally cleaned up. However, the fundamental problem inherent in the insurance agency system remains.Conflict of interest #3

The Insurance Industry with The Insurance Regulators and Legislators
You know about the long-disputed "revolving door" between private industry and government: Key officials in an industry are appointed as officials to write laws or regulate the same industry ... and then go back again to become lobbyists or executives for top corporations.

This is an inevitable aspect of our democratic, capitalist society. But it is especially egregious in the insurance industry.

For example, in an analysis released over a year ago, the Consumer Federation of America (CFA) found that "at least 40 percent of the leadership of the National Conference of Insurance Legislators (NCOIL), an organization that offers model bills and resolutions on how to regulate insurance, have worked for or with the insurance industry."Furthermore, most of these NCOIL members have current business ties to the insurance industry. NCOIL, which says its primary mission is to 'help legislators make informed decisions on insurance issues,' has taken a series of recent positions on high-profile insurance issues that are favorable, if not identical, to insurance interests and have frequently undermined consumer protections."

"Too often, NCOIL's advocacy is virtually indistinguishable from those of insurance interests," said J. Robert Hunter, CFA's Director of Insurance and former Texas Insurance Commissioner.

Bottom Line

When you buy insurance, watch out! Shop around aggressively, and get quotes from more than one agent and from as many insurers as possible. Despite all the problems in the industry, there are still good companies and good policies worthy of your money. Just make sure the insurer is safe and won't die before you do. I recommend companies that have earned my rating of B+ or better, but I can't vouch for all their policies.

And if you own shares in an insurance company or insurance brokerage firm, take advantage of any rally to get out. Yes, they've already fallen sharply in the past few days. But given the enormity of the scams and conflicts still to be revealed, the share price declines you've seen so far are small in comparison to what's likely still ahead.

Mineweb's Gareth Tredway: Twenty-year bull market

Twenty-year bull market
By: Gareth Tredway
Posted: '14-OCT-04 16:00' GMT

© Mineweb 1997-2004

JOHANNESBURG (Mineweb.com) -- China’s entry into global markets, which has been pushing commodity prices ferociously higher on the back of high demand, could last longer than the historical five-year cycles experienced in the past when other powers have entered the global arena.

This is according to Michael Power, a strategist at South Africa’s Investec Asset Management, who dubs China’s entry onto the world scene as “the most important geo-economic event of our lives.”

“Basically there were two periods when we did see this, and that was when continental Europe in the late-1950s joined global markets, and then when Japan basically joined global markets in the late sixties,” Power told Mineweb Radio Wednesday evening, “And then you basically ended up with a mean reversion trend after they had joined the market.”

“But for a five-year period in both instances, you saw this rising saw-tooth shape in the markets. I think in the case of China, it is going to be longer, and the reason why is that: China is bigger, but it is not just China. What is happening actually is an Asian phenomenon that is centered on China. And standing waiting in the wings is India. And India is another billion people. In fact the Indian sub-continent if you throw in Pakistan, Bangladesh, and Sri Lanka, is actually a larger population than China. So I think we could see something here that could last 20 years. That is going to make life very difficult for investors, because you have to have nerves of steel to play a saw-tooth formation.”

Power says that, on a recent visit to China, he was told by a trading company that the Chinese are now getting wise on how to manage the high prices that are coming from the forecasts of high Chinese demand.

“The rest of the world thinks they are a one-way trade and you can basically sell anything in terms of agricultural and mineral sources to them, and they basically had to take the price that you are selling them at. The Chinese have learned that if they accumulate a little bit of stock, more than they absolutely need in the immediate sense, they can pop bubbles as they arise and basically give particularly speculators a bloody nose. I suspect they may well have been behind the base metals wipe out that we saw today, and I think it did start in Shanghai.”

On Wednesday commodities and resource shares took a knock worldwide, for quite a few reasons, depending where you ask. Robin Bahr, a base metals analyst at Standard Bank in London says the drop was driven by commodity trading advisors and unnerved weak and speculative longs. “Macro funds were happy sitting on their long positions, as there is good potential in base metals,” says Bahr. Bahr says the market does not give the Chinese enough credit, and says they knew that, if they start buying, prices would move against them.

On Wednesday the copper price dropped 10.8 percent from Tuesday’s price, nickel 16.56 percent and aluminium 6.07 percent. Precious metals and resource shares also felt the bite. Bahr calls it a “healthy correction” as prices had been on an unabated rise for over a month. Prices did show small gains by Thursday afternoon, adding meat to Power’s “saw-tooth” theory. Bahr says prices would have to fall another 10 to 20 percent for “what they call” a bull market to become a bear market.

In any event company’s like BHP Billiton, Kumba Resources and Anglo American that have already gained from the China factor, are still tipped as good investments by David Shapiro, a trader from BJM. “I am going Billiton, and Kumba, and I am not sure on my third, I should stay with Anglo American,” Shapiro told Mineweb Radio on Wednesday evening.

Power himself agrees on the diversified players, but also mentioned South African Breweries as a player and Anglo Platinum, the world’s largest platinum producer, as an interesting one. “I think if you have a ten-year horizon I think SA Breweries is going to make an absolute killing in China. I think Amplats (Anglo Platinum) is an interesting one because platinum is something that the Chinese understand extraordinarily well. In 1994 China did not feature in the top 20 platinum consumers in the world, today it takes 21 percent of the world’s platinum.”

As a third choice, Power chose De Beers, the world’s largest producer of rough diamonds and which is owned 45 percent by Anglo American. “The dark horse would be De Beers, there is early signs that they are catching on in terms of their diamond consumption,” says Power, “If you see what De Beers did to Japan in 1945. The diamond giving habit did not exist in Japan, and today over 90 percent of couples getting married use diamonds to seal their fates. You see it when you walk around the streets of Shanghai now, the combination of platinum and diamonds is the gift.” From a South African perspective, Trans Hex, a Johannesburg-listed diamond producer was also pointed out.

China Daily: 15% income tax in Shanghai from expatriates

15% income tax in Shanghai from expatriates (China Daily)Updated: 2004-10-13 00:16
Some 30,000 expatriates in Shanghai were responsible for 15 per cent of the income tax collected during the first half of this year.

Expatriates from 102 countries and regions living and working in Shanghai paid 1.6 billion yuan (US$190 million) in income tax revenue in the first six months of 2004, recent statistics show.

Since the city officially started issuing expatriate work permits on May 1, 1996, some 59,384 people have found employment here.

"We have seen a 30 per cent annual increase, on average, on the work permits," said an official surnamed Sun from the Shanghai Labour and Social Security Bureau.

By the end of September, the bureau had issued 11,106 expatriate work permits.

One out of three were given to Japanese people.

"Japanese investment always makes up the largest proportion among all foreign capital," said Sun.

Americans came in second place, taking some 11 per cent, and South Koreans, about 9 per cent.

The statistics showed that 90 per cent of these expatriates have a university degree or above.

Approximately 70 per cent work in management positions, and another 15 per cent are engineers or senior engineers.

"The city now has at least 3,600 foreign general managers," said Sun.

Most work in foreign invested companies or representative agencies of foreign companies.

"Only about 13 per cent of them are in non-foreign invested companies," said Sun.

"Like any big city in the world, expatriates and immigrants play a vital role in Shanghai's economic and social development," said Zhang Ziliang, researcher from the Shanghai Institute of Public Administration and Human Resources of the Shanghai Personnel Bureau.

"But there are negative impacts too, like their influence on local employment," said Zhang. "The government has realized this and taken measures to tackle it."

The city is becoming more strict in handing out work permits and residence cards to foreigners.

"The government will evaluate the qualifications of every foreigner who applies for residence or a job here, and give them a score," said Zhang.

DR Barton: How to Trade Like a Nobel Prize Winner - Or Not

How to Trade Like a Nobel Prize Winner - Or Not
by D.R. Barton, Jr.
President, Trader’s U

Imagine my surprise. I was reading an article about an important trading concept. Nothing strange about that. What was unusual was that this was an academic article of a recent Nobel Prize winner.

The concept that caught my eye was this: People don't make tough decisions based on statistics. They make them based on emotions and past experiences.

So another economic myth is busted...

Busted because modern economics is based on the assumption that people make "rational" (or thoughtful) decisions in a way that will always give them the biggest reward.But the guys who wrote this dandy article on behavioral finance have exploded that myth. Daniel Kahneman won the 2002 Nobel Prize in Economics for this work, so I'm sure he's a pretty smart guy. In short, he and his co-author proved one important fact:Decision-making changes for most people when they are faced with the combination of:
Losing money, and
Uncertain results

This combination changes people from logical decision-makers to emotional decision-makers. Using emotionally charged shortcuts, or so-called "rule of thumb" guidelines, makes us pretty lousy at deciding things.

I'd have to guess that anyone who has traded stocks or commodities knows what these Nobel laureates were writing about. Because the "trading psychology" of it goes something like this:

Traders and investors love making profits. But they hate losses even more - and will go to great lengths to avoid them. Traders rationalize it in this way: "It's not a loss until I close out the position." So they hang onto little losing positions and let them turn into big losing positions.

On the other hand, traders love to make a winning trade. So they tend to take their winners very quickly instead of giving that winning position the time to turn into an even bigger winner. These are the same findings that Dr. Kahneman wrote about in his groundbreaking article.

You can avoid the decision-making mistakes that made a Nobel Prize winner famous if you follow a few simple rules.

Think Like a Trader, Not Like a Gambler
The Noble prizewinners identified three distinct decision-making problems. This week we'll look at the psychology behind these problems and how you can avoid them in your trading. Next week we'll look at some hard numbers that will give concrete examples of how you can apply these simple concepts to your trading and investing.

Adopt an attitude of indifference to losses. Think of losses as a business expense. Better yet, frame your losses as the necessary "raw materials" for your business. Framing losses in this ways has several clear benefits. You understand that losses are a required part of trading. Since losses are like any other business expense, you no longer avoid them. You just want to minimize their cost like you would the cost of raw materials. (If you never bought any raw materials, you could never make any products.)

Accept uncertainty as a part of trading. The 2002 Nobel winner found that people pay too much to avoid uncertainty. There are many areas in life where people accept uncertainty: relationships are almost always uncertain; so are fishing trips and cheering for the Boston Red Sox. In any of these endeavors, we don't know how they will end (well, except maybe with the Red Sox). It's the same with our trading. Accept that any single trade could be a win or a loss. Get out if you're wrong, and hang on if you're right. Over a large number of trades, good traders and good trading strategies will win. But for one trade, anything can happen. So don't get emotionally attached to a trade. Execute your plan and move on to the next opportunity.

Understand the Law of Small Numbers. Traders, like golfers, seem to be eternal optimists. A golfer can take 100 bad swings and still be excited to go out and play tomorrow because of one good shot. In a similar way, traders often draw broad conclusions from a ridiculously small number of data points. I wish I had a buck for every time I've heard, "That system (or newsletter or strategy) stinks - it lost three times in a row!" After tossing out the latest strategy, the optimist thought process kicks in, "There has to be something better out there!" Realize that it is impossible to draw a meaningful conclusion from a small number of data points. Three, four or even 10 occurrences are not enough to draw a conclusion in the trading world (or in any complex environment). Take the time to understand why your trading or investing strategy works and don't throw it away after a few losses. In terms of statistics, 30 trials is usually a minimum number that is needed to make any meaningful decisions.

As a trader or investor, keep your emotions in check and don't take psychological shortcuts. Let your knowledge of your investing strategy guide your decision making and you'll be on your way to beating a Nobel-sized problem that plagues traders both new and old.

October 13 Philippine Stock Market Daily Review: Star of the Day: Metro Pacific

October 13 Philippine Stock Market Daily Review:

Star of the Day: Metro Pacific


So what drove up the market this time…lower oil prices (still above $50’s), lower Peso, declining inflation perhaps?

Nah. Bargain hunting or technical bounce would be the most probable causes cited by your mainstream stock analysts. Yeah right. When the market goes down a slew of fundamentals are attached to it, when the market rises its all about charts. Such hokum. By the way, speaking of charts which is the more dominant trend, the recent 5 session decline or the 1-year and four months uptrend? So which should dictate the tempo of the market? Go figure.

Today’s market simply reflected the fickleness of our local investors. Haven’t you noticed the market was practically influenced by the movements of Metro Pacific? The Manny Pangilinan real estate-shipping holding company, a trader’s favorite, was initially sold down by its owner First Pacific, as earlier disclosed, that sent shockwaves throughout the market. By the early goings as MPC plumbed to its lows at 35 cents the Phisix and the general market was likewise down. As First Pacific ended its sales, the stock zoomed and recouped its losses to even closed higher (+2.17%)! In the same manner the Phisix closed higher by 5.82 points or .33%. Metro Pacific’s share of the day’s market activities was at an astounding 52.7%. Another noteworthy detail of today’s MPC-led market was that in spite of the selling of First Pacific, MPC recorded the largest foreign inflow of P 286 million!!! Puzzling is it? With deteriorating fundamentals MPC has managed to generate excitement from foreigner/s for a possible turnaround. As technical analyst Ron Nathan of the Philippine Daily Inquirer says “MPC has a checkered history and its book value is only P0.01 because it had to dispose of nearly all its assets to pay off its debts.” And to consider that primary reason behind the First Pacific sales was that the proceeds were meant for the “general corporate requirements” of Metro Pacific. For a company dependent on selling its equity to finance its operations does not indicate or augur for a turnaround stock. Well, as Mr. Nathan tersely explains the market is “PINNING THEIR HOPES (emphasis mine) that Manny Pangilinan will resuscitate the company as he did with PLTL.” Could it be that the foreign buying came from MVP’s group…Buy at 40’s and dump at 50’s?

Now of course, the market has paused from the recent selloffs? Could this be a ‘dead cat’s bounce’ or a recovery at work? Chart indicators show of more room for declines and could indicate that today’s action was a mere reprieve. Although your prudent investor-analyst, being a trendist, will stick to the latter view of a recovery.

What I am looking at is Thursday’s US current account data. With oil averaging $45 for the month of August I expect the unexpected, a record blowout deficit in the $60+ billion levels, as written in my latest newsletter. The consensus estimates is at the record $55 billion. If the macro data proves our forecast right, that the deficit swells to a new record level, then you would most likely see the US dollar fall hard. And if this happens you may expect accelerated buying from foreign money on our local stocks. This means that foreigners may provide the stimulus to buy up local stocks on Friday. Watch for it.

321gold: When Currency Empires Fall by Professor Avinash Persaud

When Currency Empires Fall
Professor Avinash Persaud
12 October, 2004

The United States today, as Britain before, has benefited greatly from having the world's reserve currency as its local currency. This has allowed America to spend 22% more than its income over the past five years. No other country could do that but having the reserve currency means you can write checks and nobody cashes them.

But reserve currencies come and go. Over the past two and a half thousand years there have been over a dozen reserve currencies that no longer exist. Sterling lost its status in the first half of the 20th century, the dollar will lose its status in the first half of this century. The beginning of the end for the dollar will be triggered by an inevitable decision by the Chinese to switch from a dollar peg to a free float - sometime in the next decade.

Losing reserve currency status will lead to a series of economic and political crises in the United States. The world's new reserve currency is an unlikely fellow. It is not the euro and today it is not even convertible. You guess it.

One of the nice things about being a currency forecaster is that expectations of you are very low. Moderate success is greeted with great surprise. But there are a few things which are more certain than others.

For example, at any one time, there tends to be a single dominant currency in the financial world, not two or more, just one. Some people believe that while the euro may not topple the dollar, it will at least share the spoils of financial hegemony. History suggests not. In the currency markets the spoils go to the victor, alone, they are not shared. Either the euro succeeds internationally, or it does not. (Which, least I anger my Europhile friends, does not make it a failure, just not an international currency widely accepted outside the euro-area. Many countries have credible, stable, currencies that are not international currencies, such as Canada, the UK, Japan and Sweden.)

The spoils of reserve currency status

In the past, it was worth asking what the spoils were to being an international or reserve currency. Some countries deliberately tried to avoid their currency becoming internationalized, such as post-war Germany. The Bundesbank felt that the more deutschemarks were held outside of Germany, the less control they would have over money supply and monetary conditions. European aspirations for the euro to become the world's reserve currency are more French than German.

Today, the spoils of reserve currency status are more clearly visible than ever before. If your currency is a reserve currency, you can pay for things by writing checks, which nobody cashes. You can spend more than you earn to a far greater extent than anyone else. This is exactly what the US has done in recent years. In the last five years alone, US national expenditure has exceeded national income by over 22% of GDP.

When that excess spending was due to investment in technology in the late 1990s, it was not clear whether the US was exploiting its status of having a reserve currency or just enjoying an investment boom. But today that excess spending is on unproductive consumption: tanks, bullets and pills. Few countries in the past have ever been able to sustain a deficit on external accounts as large as that in the United States today. And when other countries have run sizeable deficits, they have had to pay significant premiums to borrow the money, not as in the case of the US today, receive a discount. These are some of the immediate advantages of being a reserve currency.

International and reserve currency status also lends the host country even greater influence than otherwise. One of the interesting passages of dollar diplomacy in recent years in early 1998 when Japan and Singapore were both generously putting up the cash to support the east-Asian economies amid the Asian financial crisis, the US Treasury was dictating the terms.

The network power of computer operating systems and global currencies There are good reasons why there is seldom more than one dominant currency. Reserve currencies have the attributes of a natural monopoly or in more modern parlance, a network. If it costs extra to trade with some one who uses a different currency than you, it makes sense for you to use the currency that most other people use, this makes that currency yet bigger and cheaper to use. There is a good analogy with computers. Windows is the dollar of operating systems.

This networking power is why Central banks store dollars in their reserves in a far greater proportion than the proportion of trade with the US. While trade with the US represents around 30% of all trade, central banks on average hold 70% of their reserves in dollars. It is why most commodities, like oil, copper and coffee are priced in dollars wherever they are found and whoever they are sold to.

Something else we can be more certain of is that reserve currencies come and go. They don't last forever. International currencies in the past have included the Chinese Liang and Greek drachma, coined in the fifth century B.C., the silver punch-marked coins of fourth century India, the Roman denari, the Byzantine solidus and Islamic dinar of the middle-ages, the Venetian ducato of the Renaissance, the seventeenth century Dutch guilder and of course, more recently, sterling and the dollar. Size does matter

A necessary condition of a currency becoming a reserve currency appears to be its breadth of use, and cost and ease of transaction, not, as some might think, the ability to hold its value. Clearly hyperinflation would not serve a reserve currency well, and there are currencies that have become reserve currencies by virtue of economic size, that have ended their reign through inflation. Though cause and effect is not altogether clear in these cases, this appears to have been the fate of the denari and the solidus in the 12th century AD. But within the normal bands of inflation, it is size as a trader that matters. In the long-term, the Swiss franc and yen have been better stores of value than the dollar. Since 1980, they have appreciated by more than 21% and 54% versus the dollar respectively. Yet for much of this time, combined, they have represented no more than 10% of central bank reserves.

In the 18th century Britain was the largest economy of the western world, London was the center of international trade and finance, the currency was convertible and so sterling became the world's reserve currency. By the late 19th century, the US had become the world's largest economy, a position solidified by Europe's repeated attempt at self-annihilation from the 1880s to the 1940s. By the 1960s, the dollar had usurped sterling and was the world's new reserve currency with 60% of total central bank reserves being held in dollars, twice the level of sterling reserves.

The future is not rosy for the dollar

But time doesn't stop. By the mid-21st century, the US will no longer be the world's largest economy. By then, China and India will have overtaken the US, western Europe and Japan, on purchasing power parity terms at least, which should represent where exchange rates are likely to be in the long-run. Indeed optimistic measures of sustainable growth in China and India suggest this will be the case in twenty years time. Ladies and gentlemen, within my life time, the dollar will start to lose its reserve currency status, not to the euro, but to the renimbi.

The process is likely to be long and drawn out, rather like sterling's slip, slide away. Although the UK had lost its position of the world's largest economy in the late 19th century, by 1928, it was still the world's major reserve currency with twice as many central bank reserves being held in sterling than in dollars. In part this slow process was a result of the authorities trying to delay it. Gaining reserve currency status is heaven as you write checks and no one cashes them. Losing reserve currency status is hell as everyone starts to cash all the checks you ever wrote back in time. Britain's economic history and politics for the first three quarters of the last century was dominated by the over hang of sterling balances and the pressure on sterling and the economy as these were liquidated.

The principal way in which Britain tried to slow the process was through the use of imperial power and influence. By the 1930s, sterling's reserve currency status was largely a result of sterling balances held by the British colonies. The majority of sterling reserves were in fact held by Ireland, India, Pakistan and Australia, not the major economies of the time, the US, France, Germany or Japan. In the post-war period, the British authorities formalized the sterling area within which there were few restrictions to trade but strict rules controlling the movement of goods and capital into and out of the bloc. One could argue that sterling was no longer an international currency in the sense of third parties voluntarily choosing to use it as a vehicle currency. However, there is no reason to suppose that the US would not follow a new imperialism by exerting similar pressure on countries to stick to the dollar-bloc.

Hope for the euro?

There are three further implications of this thinking. First, those Europeans who want the euro to become the major international currency must consider an aggressive enlargement eastwards. A European Union which by 2025 included the former Soviet-bloc, Turkey and North Africa could rival the dollar and remnimbi.

Second, the loss of reserve currency status for the US will bring economic and political crisis. If it was economically and politically painful for the UK, even though its international reserve position was not in heavy deficit, what will it be for the US which has become the world's largest debtor. There will be an avalanche of checks coming home to be paid when the dollar begins to lose its status. Of course excessive debt in your own currency is spelt, inflation. That is the most likely outcome. This links to my reference earlier of not knowing the cause and effect of the denari's demise, I suspect the loss of reserve currency status itself leads to inflation as a country tries to inflate its way out of the sudden demand by creditors to be paid back.

The renminbi's path

Third, if the renminbi is to become a major reserve currency it first has to leave the dollar-bloc. This will happen later rather than sooner. One of the other certainties in foreign exchange, what I call the Second Rule of Foreign Exchange, is that the smaller, more open an economy is, the more the authorities manage the exchange rate and similarly, the larger, moiré closed an economy is, the less the authorities care about the exchange rate.

Policy makers perceive a trade-off, at least over the course of the political cycle between the economic flexibility afforded by a floating exchange rate that can respond to new and varying circumstances and the economic disruption that a volatile exchange rate, sensitive to external factors, factors often beyond the control of the country, can cause. This potential disruption is greatest the more open an economy is to international trade, small open economies opt for inflexible exchange rates. Large closed economies prefer to keep the flexibility of a floating rate.

A dollar peg today, a float tomorrow

We think of China as a vast country with a growing economy, but in many ways it has the characteristics of a small open economy today with the market sectors of the economy being led, driven and dependent on international trade. Although I am not altogether comfortable about the meaning of some of the national statistics in a command economy, for what they are worth, they suggest that in terms of trade as a percent of GDP, China is far more open than the United States or Euroland, countries which pursue exchange rate flexibility and is more akin to France, Spain and Korea, countries which choose exchange rate management. The current arrangement therefore is likely to persist for a while longer.

That does not mean that there will not be a revaluation of the renmimbi shortly, it could even happen around the end of this year, but that the Chinese will revalue the renmimbi and stick to a pegged system, though the limits may widen a little from the current 1.0%. But a dollar peg is not China's destiny. It may have an open economy today, but longer-term, China will be a large economy, driven by domestic rather than the external sector. Then it will prefer a more flexible exchange rate. The decision to move from a peg to a float will mark the beginning of the end of the dollar's reserve currency status.

Conclusion
To conclude the United States today, as Britain before, has benefited greatly from having the world's reserve currency as its local currency. This has allowed America to spend 22% more than its income over the past five years. No other country could do that but having the reserve currency means you can write cheques and nobody cashes them.

But reserve currencies come and go. They are determined largely by whoever is the biggest economic power of the day. Over the past two and a half thousand years there have been over a dozen reserve currencies that no longer exist. Sterling lost its status in the first half of the 20th century, the dollar will lose its status in the first half of this century. The beginning of the end for the dollar will be triggered by an inevitable decision by the Chinese to switch from a dollar peg to a free float - sometime in the next decade.

Losing reserve currency status will lead to a series of economic and political crises in the United States. The world's new reserve currency is an unlikely fellow. It is not the euro and today it is not even convertible.

Avinash Persaud
7 October 2004

Timesonline: Eventual lunch bill may spell end to dollar's dominance

Eventual lunch bill may spell end to dollar's dominance

By Gary Duncan

IMAGINE a place where you could spend far more than you earned for years without consequence. Imagine a place where you could pay your way by writing cheques that nobody would bother to cash. Welcome to America, today.

Over the past decade or more, the United States has been living far beyond even the vast means commanded by the world’s largest economy. America’s households have spent far more than they earn, borrowing extravagantly against the rising value of their homes and other assets. The US Government has been no less profligate, dramatically increasing spending while making hefty cuts in taxes.

The consequences have been predictable. Over the past five years, America’s national spending has outstripped its income by more than a fifth, leading to a rising tide of red ink. In little more than a decade, the US has become the world’s biggest debtor. America now runs an annual current account deficit approaching 6 per cent of GDP, or more than $660 billion (£370 billion), while its Government’s borrowing this financial year is heading for a record $422 billion.

All of this has been made possible by confidence in the continuing outperformance of the US economy and its financial assets, and the unprecedented willingness of foreigners to accept vast piles of American IOUs in the form of dollar holdings and US Treasury bonds — effectively, cheques that go uncashed. And the keystone supporting the weight of this system has been the dollar’s dominant status as the world’s international reserve currency — a status now seen as being under threat.

Over a decade, the proportion of US government debt held overseas has more than doubled from 20 per cent to about 45 per cent. Underpinning this massive expansion of overseas borrowing has been an inadvertent and undeclared currency pact between America and Asian economies.

Desperate to prevent their currencies rising against the dollar and undercutting their booming exports to the US, Asian nations have bought up billions of dollars and US Treasury bonds to shore up America’s greenback and keep their exchange rates pegged against it. The accidental quid pro quo has been that Asia has been able to continue to keep selling its goods to Americans at highly competitive exchange rates, while America has been able to run up ever-increasing debts to pay for them — helpfully financed by the Asian central banks.

Asia’s huge appetite for American assets to maintain its currency parities with the dollar has sustained heavy demand for US Treasury bonds. In turn, this has kept US market interest rates remarkably low, at levels of 5 per cent or less, even as America’s debts have ballooned.

As Niall Ferguson, the economic historian, has remarked, this looks like “the biggest free lunch in modern economic history”. He and others have compared this Asian-American dollar area to a reincarnation of the post-war Bretton Woods system of largely fixed exchange rates. Taking in China, Japan, and other Asian states, this dollar-dependent zone accounts for more than half of the world’s GDP.

The trillion-dollar question is, of course, can America continue to dine out at the expense of its Asian neighbours. For optimists, the answer remains a resounding yes. This confidence is based on the belief that the US economy will continue to outstrip its rivals, preserving the attractiveness of its assets, while Asia’s central banks will continue to snap up dollars and Treasury bonds, backed by the unlimited finance of their own printing presses.

But just as Bretton Woods I collapsed in the early 1970s, a growing number of commentators believe that the present “Bretton Woods II” will ultimately collapse under the weight of the burgeoning imbalances it has institutionalised. As ever, what looked like a economic free lunch will emerge as a mirage.

No one can predict with certainty if or when the edifice will crumble, but it seems more and more inevitable that, sooner or later, it will. Already, a reviving Japan has abandoned efforts to restrain a rise in the yen, removing one key prop for the system. Perversely, Washington seems intent on kicking away another, persisting in its efforts to persuade Beijing to scrap its currency’s dollar peg and revalue the yuan.

Only last week, President Bush was on the telephone to Beijing, pressing his Chinese counterpart on the yuan issue. Yet, as Avinash Persaud, the leading currency economist, suggested in a speech last Thursday, a yuan revaluation, or even the first steps towards one, could prove the catalyst for collapse of “Bretton Woods II”, and a period of economic trauma for America.

There can be little question of the intensely painful implications for the US should the present Asian-American equilibrium unravel rapidly. A sharp fall in the dollar and the US bond market would simultaneously stoke inflation and drive up market interest rates. And as Professors Persaud and Ferguson, as well as others, have argued, such as scenario could well spell the beginning of the end for the dollar as the world’s reserve currency. Without that status, America could face an avalanche of uncashed Asian IOUs, and US interest rates could be pushed much higher, with horrible repercussions for America’s heavily indebted Treasury and households.

This frightening prospect raises a fascinating and fundamental question: which rival might take the dollar’s place as the world’s dominant currency? For Ferguson, the euro is the strongest candidate, not least since more international bonds are already issued in euros than in dollars. However, the euro’s claim could be hindered by the eurozone’s persistent failure to foster strong growth.

Instead, Persaud argues provocatively that the dollar will be displaced by the yuan as China’s economy overtakes America’s in coming decades.

It is a tantalising prospect, although one that will depend on China’s ability to preserve political stability as its prosperity grows. However, it is not impossible that, in our lifetimes, markets will hang, not on the words of Alan Greenspan or his successor, but on those of the chairman of China’s central bank.

The implications of such a shift would be truly seismic

Timesonline: Saudi Arabia bitter over global taste for sweet and not sour oil

Saudi Arabia bitter over global taste for sweet and not sour oil

By Carl Mortished, International Business Editor

SAUDI ARABIA’s oil minister said his country was ready to pump more oil but it could not find buyers as the Kingdom’s high-sulphur crude was being rejected by Western refineries.

In a bid to quell the surging price of crude, Ali al-Naimi said Saudi Arabia was ready to pump more crude but gave warning to consuming nations that they needed to invest in new refineries to process Saudi Arabia’s “sour” crude.

“We have 500,000 barrels a day extra capacity and we are ready to produce now but there are no buyers. Consumer nations need to build sufficiently sophisticated refineries to be able to handle sour crude,” said Mr Al-Naimi, speaking at an oil conference yesterday in the Gulf.

The Saudi minister’s comments highlight emerging problem of high-sulphur oil reserves. “There’s a difference between sour and sweet crude and what’s on offer now is the light sour crude,” Mr Al-Naimi said.

Tightening emission controls over motor vehicles have increased demand from refiners for low-sulphur (“sweet”) crudes, such as North Sea Brent or Nigeria’s Bonny Light, which are easily refined into high-quality petrol or ultra-low sulphur diesel fuel.

However, supplies from Nigeria are likely to be under threat today from a general strike in the troubled West African state where the main labour union is protesting high petrol prices.

A shortage of sweet crudes, such as Brent and America’s West Texas Intermediate, has driven their prices to extraordinary levels. On Friday, Brent set a new record closing just shy of $50 a barrel.

A chasm is growing between the premium price of sweet crudes and the discounted price at which the bulk of the world’s oil is sold. The surplus of sour crude is hitting the price of Arab Light, a higher-sulphur crude that accounts for most of the Saudi exports, and the Kingdom has been forced to double the discount at which it is priced against Brent.

Russian oil, too, is being shunned for its sulphur content. Urals, the main blend of Russian export crude is now trading at more than $7 below the price of US Light crude, compared with just $2 a year ago.

According to oil industry experts, about 40 per cent of the world’s current crude output is “sweet”, but rough estimates of the proven reserves in the ground show more than 75 per cent is higher-sulphur “sour” crude. A shortage of refineries capable of converting sour crude into low-emission fuels suggests continuing price pressure on sweet blends and high prices for consumers.

“The world is going sour,” said Rafiq Latta of Petroleum Argus, a publication that monitors crude prices. “The only regions where there is room for expanding sweet production is West Africa and Algeria.”

North Sea and Texas oilfields have been the largest, easily accessible sources of low-sulphur crude but these are now in accelerating decline. For future oil supply, the world will increasingly look to the sour crudes of the Gulf and Russia.