Friday, May 29, 2009

OPEC Decides Against Cutting Oil Production

OPEC oil ministers on Thursday avoided the temptation to cut crude production and trample on the seedlings of economic recovery. Instead, they bet on prices floating higher as the recession eases and demand for oil picks up.

With the world oversupplied with oil, Thursday's meeting of the 12-nation oil producing cartel — held in Vienna — could have ended with a move to tighten the spigots — an option OPEC has often exercised to raise prices in past times of anemic demand.

An OPEC statement announcing the decision to keep production quotas at present levels noted that worldwide oil inventories at the end of last month were at a 20-year high.

But with the world still in the grip of recession, cutting back production could have backfired by spiking prices and prolonging any economic uptick. That, in turn, could have directly hurt OPEC by further reducing the world's capacity to pay for costly crude and leading to an even greater overhang in supplies.

The oil ministers instead opted to sit back and wait, in a decision driven by the belief that the U.S. — the world's largest oil consumer — is gradually emerging from a severe recession and that demand there will support oil prices.

"We think that the economy, especially the American economy, is going to pick up," said Shokri Ghanem, Libya's top oil official, while OPEC Secretary General Abdalla Salem El Badri spoke of "a light in the end of the tunnel."

"We don't want to give a wrong signal to the market," El Badri said, when asked why the Organization of the Petroleum Exporting Countries decided against cutting production despite their concerns about significant oversupply and weak demand from the U.S. and other major consumers hobbled by the recession.

OPEC President Jose Maria Bothelo de Vasconcelos — who is also oil minister of Angola — voiced the same message. He said the decision to maintain targets "sends a signal of the optimism that all members of the organization are currently feeling" about the chances of an approaching economic upturn.

A barrel of crude already fetches more than $60 compared to levels near $30 just four months ago. And that spike has come despite continued weak world appetite for crude.

Market reaction appeared to support Thursday's decision.

Benchmark crude for July delivery was up 26 cents to $63.71 a barrel by early afternoon in Europe in electronic trading on the New York Mercantile Exchange. Prices have not been at that high level since early November.

An OPEC statement said the that members "decided to maintain current production levels unchanged for the time being," while restating their "firm commitment" to their existing quotas, in an effort to trim oversupply.

Most organization members are supposed to honor individual production targets. But the Organization of the Petroleum Exporting Countries is still pumping more than 800,000 barrels a day above its overall target level of just under 25 million barrels.

While 100 percent compliance with quotas is unlikely, even an additional 10 percent compliance would take more than 400,000 barrels a day off markets, slicing into stocks in storage while reducing the price shock that an outright cut in production could cause.

Still, Thursday's decision did not signal that OPEC was happy with present prices. Oil ministers have repeatedly said they would like to see crude rise to around $80 a barrel, even while being content to let economic factors do their work for them.

"OPEC is trying to get the world more conformable with the idea of $75-80 oil," said Jonathan Kornafel, Asia director for market maker Hudson Capital Energy in Singapore.

Some investors have been pushing up the price of oil by buying it as a hedge against a weaker U.S. dollar, and Kornafel said that "as long as money is being printed left and right you're going to see it flow into the commodity markets and crude keep going higher."

But recent oil price hikes have been tied even more to rising international stock markets, taken as a signal of recovery.

About 74 percent of the forecasters in a survey by the National Association for Business Economics in the U.S. expect the recession, which started in December 2007, to end in the third quarter. Another 19 percent predict the turning point will come in the final three months of this year and the remaining 7 percent believe the recession will end in the first quarter of 2010.

Weighing China's Role In The Global Recession

Treasury Secretary Timothy Geithner heads for China for talks with officials there early next week. In January, Geithner angered the Chinese government by accusing China of manipulating its currency and undermining free trade. China shot back, blaming the U.S. for sparking the financial crisis.

Certainly, the U.S. bears a large share of the blame for the meltdown, but many economists believe China's currency policy paved the way for the worldwide crisis.

Here's the short argument that China is partly to blame for the crisis: In its rush to industrialize, China ran up huge trade surpluses. It saved too much of the money it made selling its products. Then, it lent too much of that money to America, says Peter Morici, an economics professor at the University of Maryland.

"They accumulated dollars and they invested those dollars in the New York bond market," he says. "That made it inexpensive for banks to lend us money through our homes on mortgages and second mortgages and to loan us money on credit cards and to buy cars."

China, along with some other Asian nations and oil producers, flooded the U.S. financial markets with so much excess cash that it drove interest rates down, providing an irresistible temptation for Americans to take on more debt, Morici says.

"And it meant that the Federal Reserve couldn't pull in the mortgage frenzy when it wanted to," he says. "There was not much the Fed could do. It raised short-term rates, but long-term rates didn't go up with them. Mortgage rates didn't go up. And the terms got easier and easier and people borrowed more and more."

Economist and China expert Nicholas Lardy agrees that Chinese money provided the fuel for the financial crisis.

"The Chinese gave us the rope, but we didn't have to hang ourselves," he says. "If we had had tougher regulation, the inflow of capital from China would not have led to the crisis that emerged over the last year or so."

Lardy says the lack of regulation allowed U.S. investment firms to develop riskier financial products. And they did so with abandon as they tried to boost profits in the low interest rate environment created by the flood of cash from China.

So why did China build up such large and destabilizing surpluses? Lardy and Morici disagree on China's motives. Morici thinks China made a deliberate decision to build its economy and its global power through exports.

"Quite simply, China wants to have a very large trade surplus with the United States as a development tool to employ [people from rural China] in the cities making things to sell here," Morici says. "So what it does is, it keeps its currency cheap."

But Lardy, a fellow at the Peterson Institute for International Economics, says China sort of stumbled into the situation.

Back in the 1990s, China decided to peg its currency to the dollar, a move that was viewed as positive back then. For a while it worked fine. The dollar appreciated and so did China's currency, the yuan. That meant Chinese exports were more expensive. So, despite its increasing productivity, China's trade surplus was manageable.

But early in this decade, the dollar began to fall, and with its currency still pegged to the dollar, China's exports became cheaper. China sold mountains of goods, and its trade surplus soared, Lardy says.

"Their goods became massively more competitive on international markets and they developed large trade surpluses without any precedent in recorded history," he says.

Lardy says some Chinese leaders want a more balanced economy. But he says others, with economic interests in export production, have gotten addicted to the huge profits that exports generate. They're resisting the calls from the U.S. government and others to allow the value of the yuan to rise.

Geithner will raise the issue during his talks next week, but Lardy says that with China holding $1.5 trillion in U.S. debt, the U.S. doesn't have a lot of leverage. Just last month, the Treasury blinked when it declined to officially call out China for manipulating its currency.

"Certainly one of the reasons they probably didn't raise it to that threshold is the very commonsense idea that maybe you shouldn't pick a fight with your banker," Lardy says. "If you need to borrow a lot of money from somebody, you have to treat them, perhaps, with greater deference than you would if you didn't have that dependency."

Morici argues it's the other way around. The fact that China has lent the U.S. so much money actually gives the U.S. leverage. That's because China needs a strong U.S. economy if it wants to be paid back in full.

And, of course, China is still dependent on the U.S. consumer. A Treasury official says Geithner will urge China to seek more balanced growth by boosting domestic consumption and depending less on exports.

Pizza Man Alerts Police To Kidnap Victim

An alert deliveryman spotted a woman tied up inside a remote cabin in Tennessee's Smoky Mountains while dropping off a pizza, and police said his call to police helped rescue the kidnapping and rape victim.

Sevier County deputies freed the 24-year-old woman Tuesday evening after getting an emergency call from deliveryman Chris Turner. They arrested David J. Jansen, 46, of Snellville, Ga., on charges of aggravated kidnapping and rape, Sheriff Ron Seals said.

The woman told authorities she was jogging near her home about 11:50 a.m. Tuesday when Jansen, whom she knew, asked her to see his new car. She got into the vehicle, which turned out to be a rental.

She told police she was tied up, driven more than 200 miles to the cabin in Tennessee and raped. Later, the suspect ordered takeout. The Associated Press does not identify alleged victims of sexual assault.

Turner said he pulled up to the cabin with the pizza around 8 p.m.

"When I knocked on the door and handed the guy my credit card slip to get him to sign it, there happened to be a young lady [who] popped over the back of the couch and showed me that her hands were bound together," Turner told WBIR-TV. "[She] was mouthing to me, 'Please call 911.' "

The deliveryman returned to his van, wrote down the suspect's tag number and called police from a neighbor's house.

Deputies arrived, found the victim tied up on the couch and arrested Jansen. They took the woman to a hospital.

"We feel like she was in very imminent danger based on what investigators saw and evidence found at the scene," Capt. Jeff McCarter told The Mountain Press newspaper. McCarter didn't immediately return calls from The Associated Press.

Jansen was being held on $800,000 bond. Phone calls to a listing for a 46-year-old David J. Jansen in Snellville were not returned Friday.

Turner said the victim and her husband came by the pizza shop the day after the abduction. "She just wanted me to know she was OK and everything," he said. "And that they were thankful for what I did and all that."

Law Firms Search For Creative Ways To Downsize

As the economic decline continues, major law firms across the country have been struggling with a decreased demand for lawyers. Some firms are realizing they may have offered jobs to more lawyers then they can pay. Some are trying new ways to shave their payroll costs.

Major law firms benefited from strong business growth this past decade, and many increased hiring each year to keep up with demand amid soaring profits. But when the economy crashed and demand for legal services declined drastically in the fall, some firms with already bloated staff sizes were hit hard.

The scenario was "too many lawyers chasing too little business," says Dan DiPietro, an analyst for Citigroup. He says many firms now are looking for ways to decrease their employee expenses. Some of the most profitable law firms are addressing the problem through job cuts. "I would say it's the minority of firms that have not laid off associates and staff," DiPietro says.

Several firms have announced salary cuts. But some are nervous about losing valuable employees.

"Every law firm strives to find the best and the brightest who they want to bring in and develop as associates at their firms," says Owen Pell, a partner at the Manhattan office of the law firm White & Case.

Temporary Financial Fixes

Some firms have implemented creative ways to lessen the burden on their payrolls temporarily. Many have pushed back the start dates for their incoming first-year associates. Laura Garr, who is finishing her law degree at Fordham University in New York, planned to start with White & Case this fall. Then she received an e-mail concerning her start date.

"In an economy such as this one, we have determined that it is within your and our best interest to defer a portion of the entering class from our New York, Los Angeles, Washington, D.C., and Palo Alto offices to start with us in the fall of 2010," it reads.

White & Case — and a few other firms — are giving their deferred hires a stipend that ranges from $10,000 to $75,000 for taking three months to a little over a year off. But with entry-level corporate lawyer salaries starting around $160,000, even many of those deferred with stipends have not been thrilled with the situation.

"For those that always had their heart set on [a] corporate law firm when they graduated, I know this is a really difficult time, and there are a lot of very unhappy, upset people," Garr says.

Deferral Concerns

Looming student loan bills are a big concern. But Garr says many of her colleagues are also nervous about losing valuable face time at their firms. They also worry about having a blank year on their resumes right after law school, instead of the on-the-job training and experience they expected. It seems some firms have this same concern in mind. White & Case is one of a handful of firms to offer deferred associates more money if they do legal work for a nonprofit organization during their deferment period.

"The idea is to put the year to some use, a positive use, not only for society in general because pro bono organizations need help, but also in terms of training and developing these young people as lawyers," says Pell, the partner at White & Case.

Garr has signed up to spend a year working for an international environmental and human rights group on a class-action lawsuit in Ecuador.

GDP's Plunge Shallower Than Previous Estimate

The U.S. economy contracted at an annual rate of 5.7 percent in the first three months of 2009, slightly less than previously estimated, the Commerce Department said Friday. An earlier report said gross domestic product fell at a 6.1 percent pace in the first quarter.

The new reading was a bit worse than the 5.5 percent annualized drop economists were forecasting.

Weakness in the first quarter mostly reflected massive cuts in spending by businesses on homebuilding, equipment and many other things. U.S. exports plunged, so did spending on commercial construction and inventories. But those cuts — while huge — were a bit less than first estimated, contributing to the tiny upgrade in overall first quarter GDP.

All of those reductions — as well cutbacks in government spending — more than swamped a rebound in consumer spending. However, consumers weren't nearly as energetic as the government first estimated. They boosted spending at a 1.5 percent pace, according to the revised figures. That was less than the 2.2 percent growth rate estimated a month ago.

The government makes three estimates of the economy's performance for any given quarter. Each estimate of gross domestic product is based on more complete information. The third one will be released in late June. GDP, which measures the value of all goods and services produced in the United States, is the best gauge of the nation's economic health.

Economists are hopeful that the economy isn't shrinking nearly as much in the April-to-June quarter as the recession eases its grip. Forecasters at the National Association for Business Economics, or NABE, predict the economy will contract at a 1.8 percent pace.

Other analysts say the economy will decline at a pace of between 1 percent and 3 percent.

Less dramatic cuts by businesses factor into the expected improvement. Consumers, however, are likely to be cautious. There's been encouraging signs recently with gains in orders for big-ticket manufactured goods, some firming in home sales and a slowing in the pace of layoffs.

Federal Reserve Chairman Ben Bernanke and NABE forecasters say the recession will end later this year, barring any fresh shocks to the economy. NABE forecasters predict the economy could start growing again in the third or fourth quarter.