TPT September 2008

From the Americas

The US economy Ominous signs become present realities, and the pain is being exported Testifying before Congress on 15 July, Federal Reserve Chairman Ben S Bernanke depicted a beleaguered US economy. He cited “numerous difficulties” facing the central bank and indeed all Americans: “ongoing strains in financial markets; declining house prices; a softening labour market; and rising prices of oil, food, and some other commodities.” The Fed chairman saw a few – a very few – bright spots, among them a free-spending populace that is not tightening the purse- strings even now, in the face of falling property values, rising unemployment, and a possible recession. Projections released on the day of Mr Bernanke’s visit to Capitol Hill showed that the 17 top leaders of the Federal Reserve were slightly more optimistic about the outlook for growth this year than they had been in April. They were, however, markedly more pessimistic about inflation. The chairman, too, expressed continued deep worries about rising prices, saying that higher gasoline prices mean inflation “seems likely to move temporarily higher in the near term” and that businesses may to try to pass along higher energy costs to consumers “more aggressively than they have so far” . Mounting global fears of contagion were reported by Washington Post staff writers Anthony Faiola and Neil Irwin, who noted the extent to which the US financial crisis increasingly is infecting the rest of the world. The reason: foreign financial institutions are heavily exposed to US lending giants, and an estimated 50 per cent of US mortgage-backed securities are held by foreign investors ( ‘An economy thrown into turmoil,’ 16 July). They wrote, “While Citibank and Merrill Lynch have been forced to take massive write-downs on bad US loans, so, too, have the Swiss banking giant UBS and Germany’s IKB Deutsche Industriebank. In Norway, eight towns have reported losing at least $125 million on their investments in US mortgages. In Japan, several pension funds have significant portions of their investments in debt issued by Fannie Mae and Freddie Mac” [the two largest US mortgage finance companies, which may be placed in government conservatorship if their problems worsen]. Messrs Faiola and Irwin also observed that American woes have fostered a global credit crunch, claiming overseas victims such as Britain’s Northern Rock, whose lack of liquidity led to its nationalization by the British government in February. • Also on 15 July, the dollar fell to a new low against the euro. There was one piece of good news, however: oil prices fell sharply, holding the drop in the US stock market to only 1.1 per cent. Thus encouraged, President George W Bush assured shaky markets and frightened consumers that the US economy is fundamentally sound and downplayed predictions that a large number of banks may be on the verge of failure. Mr Bush, the Washington Post reported, “explained at length about the federal insurance system that guarantees deposits up to $100,000.”

Oil and gas The Exxon Valdez case is decided, to less than universal satisfaction

The US Supreme Court on 25 June reduced the punitive damages award of a lower court against Exxon Mobil Corp (Irving, Texas) for the 1989 Exxon Valdez oil spill, from $2.5 billion to roughly $500 million. The tanker ran aground on a reef, dumping Alaska North Slope crude oil into Prince William Sound and affecting some 1,300 miles of Alaska coastline. Justice David Souter wrote for the majority that punitive damages may not exceed what the company has already paid to compensate victims for economic losses: $507.5 million. A penalty, he said, should be “reasonably predictable” in its severity. The decision by a 5-3 vote (one of the nine justices, an owner of Exxon stock, abstaining) was welcomed by business interests for setting limits on penalties in such cases. But it was sharply criticized by Alaskans, environmentalists, and others on grounds that there is no precedent in maritime law limiting punitive damages to the amount of compensatory ( “actual” ) damages a defendant must pay. Another point of contention is whether the high court decision does not subvert the established principle of punitive damages, which are meant to punish and deter. A $500 million award in the case of the nation’s worst oil spill, against a company that earned more than $40 billion in 2007, would seem unlikely to produce that effect. Hurricane season 2008: production outages in the Gulf of Mexico – but no Katrina or Rita According to the Energy Information Administration (EIA) unit of the Department of Energy, there is likely to be above-normal hurricane activity in the Gulf this year, but no disruption on the scale of 2005. Even so, hurricane season in the United States is six months long: 1 June through 30 November. The current edition isn’t over yet. And the Gulf region is an important source for US crude oil and natural gas production – never more so than in this period of tight and uncertain supply. In 2007, crude oil production from the federally administered offshore Gulf fields accounted for more than 25 per cent of total US oil production, and the marketed production of Gulf of Mexico natural gas was about 14 per cent of the US total. In addition to production from federal leases, Texas, Louisiana, Alabama, and Mississippi also contribute significant onshore and state-administered offshore production. When severe weather threatens, offshore platform operators must evacuate personnel and temporarily shut in production to protect facilities. As recapped by the Department of Energy, in addition to the upstream impacts to Gulf production, the memorable hurricanes of 2005 had significant impact on midstream and downstream infrastructure. They damaged 457 underwater pipelines, and the Louisiana Offshore Oil Port had to temporarily stop accepting shipments. A number of onshore crude oil refineries and natural gas processing facilities also suffered heavy damage.

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S eptember 2008

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