Monday, February 28, 2011

Oil, bailouts and inflation

I don't even pretend to play an oil analyst on TV. The oil industry is a vast, complex business with too many moving parts for the casual observer to add much value.

However, I do remember one my first lessons on the oil industry where I learned there were over 130 different varieties of crude. Ranging from the "light, sweet" (ie, low sulfur content) oil put out by countries like Libya and pulled from the North Sea to the "heavy, sour" (high sulfur content) pumped by other countries including Saudi Arabia.

What I found very interesting yesterday was that while the world learned of Libya's production issues and Saudi Arabia stepped up to fill that demand no one questioned if the products where the same or if there was adequate capacity to refine the heavy sour crude from Saudi.

Oil slid a bit today despite more turmoil as Saudi Arabia offered to offset any market losses, but this will remain a story as long as gas in the US is over $3.30/gal.

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Okay, so here's a story that is certain to get everyone's blood boiling regardless of your political leanings.

Time for another bank bailout -- this time in Afghanistan!

"Afghanistan is rated by Transparency International as the third most corrupt country in the world. But that does not seem to be affecting U.S. aid to Afghanistan, which continues to grow.

The white whale of graft is Kabul Bank, which needs a bailout that may top $900 million because of bad loans made to friends and relatives of high-ranking Afghan government officials.

Soon after, stories about who had received the loans trickled out — some of them in U.S. Embassy cables released by WikiLeaks. Shareholders — including the brother of Afghan Vice President Mohammad Fahim and President Hamid Karzai's own brother Mahmood — appear to have lent themselves huge amounts.

The question is how to get them to pay it back. A number of corruption probes are under way, including a grand jury investigation in the United States of Karzai's brother.

Analysts in Kabul doubt Karzai will allow any of his few remaining political allies to be taken down, but they also wonder whether the U.S. Congress can stomach a billion-dollar bailout for Karzai's friends and relatives.

It may have little choice if it wants to save the Afghan state, says Mustafa Kazem, a Kabul businessman.

"As an Afghan-American and a U.S. taxpayer, my immediate response is: 'Where are my taxpayer dollars going to?' " he says. "But just as we did, I think, with the banking or the financial sector in America, I think decisions were made on who you bail out and how you intervene, to make sure something greater doesn't happen."

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Watch for fireworks tomorrow as the global markets are shaken by events in the Middle East, but it's also the first of the month when the last 34 humans trading in the market put their money to work (remember about 80% of the returns of the market last year occurred on the first day of the month).

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