TPT September 2008

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September 2008 130 ›
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.