The U.S. trade deficit widened in April as the surge in oil prices propelled imports to a record, overshadowing the biggest gain in exports in four years.

http://www.bloomberg.com/apps/news?pid=20601068&sid=axiJsZoKJGJ0&refer=

U.S. Economy: Trade Gap Grew in April on Oil Imports (Update2)

By Shobhana Chandra

June 10 (Bloomberg) — The U.S. trade deficit widened in April as the surge in oil prices propelled imports to a record, overshadowing the biggest gain in exports in four years.

The gap grew 7.8 percent to $60.9 billion, more than forecast and the most since March 2007, the Commerce Department said today in Washington. Excluding petroleum, the shortfall was little changed. March’s deficit was revised lower.

The figures led some economists to estimate that first- quarter growth was greater than previously estimated by the government, even as fuel prices push imports higher. The dollar’s two-year slide, coupled with stronger growth in Europe and Asia, is spurring demand for planes built by Boeing Co. and machinery made by Deere & Co.

“The hyper-competitiveness of the dollar, plus reasonable growth in our export markets, that combination has proven to be very powerful,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. “Trade’s been a buffer; it’s kept GDP in positive territory. It’s clearly a cushion.”

Exports climbed 3.3 percent, the most since February 2004, to a record $155.5 billion, led by sales of commercial aircraft, autos and agricultural machinery.

After adjusting the numbers for inflation, the figure used to calculate gross domestic product, the trade deficit shrank to $46.9 billion, the lowest since August 2003. Combined with the smaller gap now reported for March, the figures may boost forecasts for economic growth.

Morgan Stanley economists predicted that first-quarter economic growth will be revised higher to 1.1 percent, from a previously reported 0.9 percent.

Focus on Exports

“A lot of it is in the value of oil,” Jay Bryson, global economist at Wachovia Corp. in Charlotte, North Carolina, said in an interview with Bloomberg Radio. “Exports did pretty well. This is consistent with strong growth in the rest of the world helping our exports and also a weak dollar.”

Treasuries were lower after the report, pushing yields higher. The benchmark 10-year note yielded 4.10 percent as of 5:14 p.m. in New York, up 10 basis points from yesterday.

The trade gap was forecast to widen to $60 billion, according to the median estimate in a Bloomberg News survey of 70 economists. The March shortfall was revised down to $56.5 billion from a previously reported $58.2 billion.

Oil Impact

Imports grew 4.5 percent in April, the biggest gain since November 2002, to a record $216.4 billion. The average price of imported petroleum, at $96.81 a barrel, and the total amount of the fuel bought, were both the highest ever.

Americans also bought more cars, food, electronics and toys from overseas.

Growing economies in Asia are stoking demand for goods such as aircraft. Boeing, the world’s second-largest commercial planemaker, estimates its growth of as much as 5 percent a year will come mainly from outside the U.S., officials said on May 30.

“Currently, the demand for U.S. exports arising from strong global growth has been an important offset to the factors restraining domestic demand, including housing and tight credit,” Federal Reserve Chairman Ben S. Bernanke said in a speech last week.

Yesterday, Bernanke said the economic outlook has improved from a month ago and pledged that central bankers will combat any increase in inflation expectations.

“The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so,” Bernanke said at a conference in Boston.

Dollar Retreat

U.S. exporters are also getting a boost from the dollar, which was down 9.6 percent against a trade-weighted basket of currencies from major trading partners in the 12 months ended in April.

A narrowing of the trade deficit contributed 0.8 percentage point to growth in the first three months of the year. The gap last quarter was the smallest since 2002.

Deere, the world’s largest maker of tractors and combines, last month forecast industry-wide sales of agricultural equipment would rise 30 percent in South America, more than previously estimated. In Brazil, farmers are buying tractors to feed new sugarcane mills and ethanol demand.

On May 28, Deere said it will spend $35 million to boost manufacturing capacity at the John Deere Harvester Works plant in East Moline, Illinois, to increase production of combine harvesters by 30 percent. Earlier this year, Deere said it would invest another $90 million to expand production at its Waterloo, Iowa, facility to build more high-horsepower tractors.

Shortfall With China

The trade gap with China increased to $20.2 billion from $16.1 billion in the prior month as imports from that country jumped 16 percent while exports fell 11 percent.

U.S. exports to Canada, Mexico, and South and Central America were all records.

The deficit with China, which makes up the largest share of the U.S. trade gap, is a political sticking point. Some U.S. lawmakers accuse China of keeping its currency undervalued to boost exports.

Treasury Secretary Henry Paulson, who has favored diplomacy in place of punitive legislation to urge quicker appreciation of the yuan, last month refrained from calling China a currency manipulator.

China’s exchange rate practices “justifiably remain a focal point for the international community,” Treasury officials said in a report.

To contact the reporters on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

Last Updated: June 10, 2008 17:51 EDT

6/10/08 NYMEX Crude closes at $131.11, after high of $137.98

http://www.marketwatch.com/news/story/oil-futures-close-over-2/story.aspx?guid=%7B5807454A-7CD0-474D-A61F-5D5C6BFC3CB9%7D&dist=MostReadHome

Oil closes lower as reports show weaker demand

IEA, EIA cut figures for demand growth; oil-product prices fall with crude

By Myra P. Saefong & Polya Lesova, MarketWatch

Last update: 5:56 p.m. EDT June 10, 2008

Comments: 79

SAN FRANCISCO (MarketWatch) — Crude-oil futures closed with a loss of more than 2% Tuesday, retreating from a high above $137 a barrel after monthly reports implied that recent record prices as well as weak economies may be causing declines in global and domestic demand growth.

“The familiar divide — higher on supply worries, lower on demand concerns — is setting the tone again,” said Michael Fitzpatrick, an analyst at MF Global, in a note to clients.

Crude oil for July delivery climbed as high as $137.98 a barrel in electronic trading Tuesday on Globex. It fell back to close at $131.31, down $3.04, or 2.3%, on the New York Mercantile Exchange.

Early Tuesday, the International Energy Agency lowered its forecast for average global oil product demand in 2008 to 86.8 million barrels a day, down 80,000 barrels a day from its estimate last month.

The decline followed the reduction of price subsidies in several countries that are not part of the group of industrialized nations called the Organization for Economic Cooperation and Development, the IEA said. Global oil supply rebounded in the May report by 490,000 barrels a day to average 86.6 million barrels a day, boosted by higher OPEC crude supply.

The increase, however, also follows extensive downward revisions to first-quarter non-OPEC production. OECD oil stocks fell 8.1 million barrels in April to 2.562 billion, “in stark contrast to the typical build,” IEA said. Total oil cover remains “above average” at 53.4 days, IEA said.

The IEA, “which cut its demand growth the slowest rate since 2002, also cut expectations for supply growth, as well,” said Fitzpatrick.

OECD stocks fell at a time when they should be building, he said. “So, while market participants are starting to recognize that economic deterioration has begun, supply may be stretched more than producers contend,” he said.

By Tuesday afternoon, the Energy Information Administration, the reporting arm of the Energy Department, said preliminary data showed that world oil consumption grew by about 630,000 barrels per day during the first quarter of 2008. That’s down from the 1 million barrel-per-day of growth expected in a previous outlook report, released in May.

Most of the downward revision occurred in the OECD countries, the EIA said. In the U.S., total consumption of petroleum products averaged 20.7 million barrels per day in 2007. It’s expected to shrink by 290,000 barrels per day in 2008 based on prospects for a weak economy and record-high oil and product prices extending into next year, according to the report. See full story.

The federal government’s assumption is that strong demand and limited supply is causing the spikes in oil prices, said Charles Perry, president of Perry Management, an energy-consulting firm.

“These have some impact, but I also believe the low value of the dollar and speculative traders are causing more of an impact,” he said. “This market is moving entirely too fast to be caused solely by supply and demand. Supply and demand are changing much slower than the price of oil.” See related story.

Saudi talk

The secretary general of the Organization of the Petroleum Exporting Countries, Abdalla Salem el-Badri, told Reuters Tuesday at the Reuters Global Energy Summit that the record-high oil price was “unbearable” and “there is no shortage now and in the future.”

“We are not happy with the current level of price for one reason. It has nothing to do with the fundamentals,” he said at the summit.

Saudi Arabia will host a meeting of oil producers and consumers on June 22 to discuss record high prices, Thomson Reuters reported Tuesday on its Web site, citing el-Badri.

El-Badri also told Dow Jones on Tuesday that OPEC didn’t plan to move against speculators that it blames for the record surge in oil prices.

He said the oil cartel has “very reasonable” spare capacity of 3 million barrels a day, according to a Dow Jones report.

Reports of more violence in oil-rich Nigeria helped support oil prices earlier Tuesday. The BBC reported that Nigerian militants have killed a sailor in the second attack on navy ships patrolling the Niger Delta region. Four people were injured in the attack on a ship protecting a vessel belonging to Canadian company Addax Petroleum, the BBC reported.

“Saudi Arabia and Iraq both saw an increase in output which should at least temporarily counteract some of the reduction in supply out of Nigeria,” said Jeff Pritchard, an analyst at Altavest Worldwide Trading.

“Like it or not, the focus right now is on the dollar,” with the rally in the dollar “putting heavy pressure on the crude-oil market,” he said.

The dollar index (DXY:

“If the dollar continues to build momentum, crude prices are likely to continue downward,” said Pritchard.

On Monday, crude dropped $4.19 to close at $134.35 a barrel on the Nymex after touching a low of $133.95. The decline followed oil’s unprecedented surge of nearly $11 a barrel to record levels on Friday.

Bigger picture

Taking a look at the bigger picture, “it is becoming more clear each day that under current conditions, we are peaking in oil production worldwide,” said Perry.

“The U.S. is essentially shut down on any further oil development, but the world['s] government-owned oil companies are not doing a good job in managing their production so [there's] not much possible for new production,” he said.

Still, there’s “a lot of potential if it is unleashed,” including the potential for the U.S. to open up ANWR, the Arctic National Wildlife Refuge, he said.

In the meantime, prices for petroleum products closed lower along with crude Tuesday. July reformulated gasoline fell 7.07 cents to close at $3.3193 a gallon and July heating oil shed 6.76 cents to end at $3.8124 a gallon.

The average retail prices in the U.S. for a gallon of regular gasoline surpassed $4 on Sunday for the first time ever. See full story. It stood at $4.043 on Tuesday, 31.2% higher than a year ago, according to AAA’s Daily Fuel Gauge Report.

In a weekly report released Monday, the EIA said the average retail price for a gallon of regular gasoline climbed to $4.039 for the week ended June 9. That’s up over 12% from the week ended April 28.

The EIA’s monthly energy outlook report released Tuesday said that the average price for regular gasoline will likely peak at $4.15 in August.

The energy market looked ahead to Wednesday’s data on petroleum supplies from the EIA. Analysts at MF Global expect the data to show that crude supplies fell 600,000 barrels for the week ended June 6. Distillates likely rose by 1.1 million, while motor gasoline inventories likely rose by 300,000 barrels, they said.

Analysts polled by Platts expect to see a decline of 1.4 million barrels in crude supplies as well as increases in distillates of 1.7 million and gasoline of 1.1 million. The survey also showed that the market’s expecting a rise in refinery utilization of 0.6% to 90.3% of capacity for last week.

July natural gas futures fell by 16.5 cents to close at $12.435 per million British thermal units, after trading as high as $12.68.

Total natural-gas consumption is expected to rise by 2.2% in 2008, with year-over-year increases in residential, commercial and electric power sectors largely weather driven, the EIA said in its monthly report Tuesday.

The EIA’s separate update on natural-gas supplies will be released on Thursday.

Rounding out Tuesday’s trading, energy equities closed lower. The Amex Natural Gas Index ($XNG:

Prices for gold futures dropped on the heels of a stronger U.S. dollar. See Metals Stocks.

Corn futures rose for a fifth day after a U.S. report showed lower estimates for corn production in the next season. See Food Futures.

Wholesale spot prices for power in the mid-Atlantic states have nearly tripled this month to a level much higher than retail prices. See full story.

Myra P. Saefong is MarketWatch’s assistant markets editor, based in San Francisco.
Polya Lesova is a MarketWatch reporter based in New York.

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DXY 73.66, +0.78, +1.1%) , which tracks the greenback against a basket of six major currencies, was at 73.637, up from 72.942 in late North American trading Monday. Federal Reserve Chairman Ben Bernanke commented on the need to hold down inflation expectations. See Currencies.

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$XNG 731.10, -13.04, -1.7%) shed 1.8% to end at 731.10. See Energy Stocks.

2 Energy Bills, Including Windfall Tax, Stall in Senate

Look at what this asshat says:

“Senator Mitch McConnell of Kentucky, the Republican minority leader, summed up the argument of most of his party colleagues by asserting that “those who think we can tax our way out of this problem” are wrong.”

Personally I think taxes is one way to lessen the harms of peak oil. Of course not something as politically viable as taxing super rich oil companies(like exxon that made more profits last year than any corporation in history). I personally think that large taxes should be placed on gasoline at the pump to reduce demand, slowing our consumption. I love the idea of providing incentives for alternative/renewable energies, even though it IS corporate welfare, its a step in the right direction. So when this jackass says that the costs of the tax will be passed along to the consumer, that is a good thing. The problem is nobody cares about solving the problem they only care about attaching themselves to emotionally potent oversimplifications that will help them get elected: “grrr i hate taxes” or “grr i hate oil companies”. The thing is everyone is looking to the upcoming election as the panacea to their problems. They think as long as there is not a Bush in the white house that oil prices will drop and stablize. Whoever gets elected in 2008 is going to have a very disappointed populace, and is NOT gonna get re-elected in 2012, they will get blamed for the ever increasing oil prices, and the asshats in congress are never gonna do anything but put band-aids on the gaping hole.

http://www.nytimes.com/2008/06/11/business/11congweb.html?hp

By DAVID STOUT

 

Published: June 11, 2008

WASHINGTON — A Democratic proposal to impose heavier taxes on big oil companies stalled in the Senate on Tuesday as Republicans and Democrats offered different ideas on how to deal with soaring energy costs.

A bill that would have rolled back some $17 billion in tax breaks on Big Oil and pressured the companies to invest in new energy sources by hitting them with a windfall-profits tax if they did not failed to get enough votes to move forward. Fifty-one senators voted to bring the measure up for consideration, but that was nine short of the number needed under Senate rules. Forty-three senators, most of them Republicans, voted “no.”

The oil-tax proposal was one of two energy-related bills that failed to advance. The other was a proposal to amend the Internal Revenue Code by providing “incentives for energy production and conservation, to extend certain expiring provisions, to provide individual income tax relief, and for other purposes,” as the measure to promote new energy sources was officially described. The vote to take up that legislation was 50-44, or 10 “yes” votes fewer than necessary.

The votes were against a backdrop of $4-a-gallon gasoline and oil prices that have gone over $139 a barrel just at the start of the summer vacation season.

“I remember when gas was about a buck, 40 cents,” Senator Jon Tester, a Montana Democrat whose constituents often have to drive long distances, lamented before the votes.

Republican opponents of the oil-tax measure have argued that higher taxes on Big Oil would backfire, driving up gasoline prices and discouraging new domestic oil production and exploration. If the bill were approved, the American people “will get exactly what they don’t want,” said Senator Pete Domenici, Republican of New Mexico, who predicted higher prices and more reliance on imports.

As for the alternative-energy bill that was sidelined, Senator Mitch McConnell of Kentucky, the Republican minority leader, summed up the argument of most of his party colleagues by asserting that “those who think we can tax our way out of this problem” are wrong.

The White House said the United States was “paying a price today for decades of Democratic opposition and regulatory obstacles to increasing domestic oil production,” as President Bush’s spokesman Tony Fratto put it. “Instead of populist votes that would do nothing for gas prices, we need to allow domestic oil production in environmentally sensitive ways,” Mr. Fratto said, in an apparent allusion to the idea of exploring in the Arctic National Wildlife Refuge..

Senate Democratic leaders were reportedly resigned to defeat on the oil-tax bill and did not ask Senators Hillary Rodham Clinton of New York and Barack Obama of Illinois, who just completed their months-long competition for the presidential nomination, to show up for the vote. The other four absentees were John McCain of Arizona, the presumptive Republican nominee for president; Lindsey Graham, Republican of South Carolina, and Edward M. Kennedy of Massachusetts and Robert C. Byrd of West Virginia, Democrats who have been ill.

Six Republicans voted “yes” on the oil-tax bill. They were Norm Coleman of Minnesota, Charles E. Grassley of Iowa, John W. Warner of Virginia, Gordon Smith of Oregon and Susan M. Collins and Olympia J. Snowe, both of Maine. Only two Democrats voted “no,” Mary Landrieu of Louisiana and Harry Reid of Nevada. Mr. Reid, the majority leader, may have voted “no” in a parliamentary move to preserve his right to bring up the proposal again.

In the House, meanwhile, Republicans pushed for consideration of a bill offered by Representative Mac Thornberry of Texas that Representative John A. Boehner of Ohio, the Republican minority leader, said would offer real solutions to the country’s energy problems.

Mr. Boehner said the Thornberry bill “will open new American oil refineries, invest in alternative energy sources and increase environmentally safe exploration of untapped oil resources in the United States.” Mr. Boehner was apparently referring to the Arctic National Wildlife Refuge.

“Where Democrats refuse to lead, Republicans will,” Mr. Boehner said, saying that Republicans would offer a series of petitions to try to force the Democratic House leadership to move on Republican proposals.

 

United beginning layoffs

It is pretty well understood common sense that the first corporations that will fold as a result of incredibly high oil prices are the airlines. Air transport consumes a vastly disproportional amount of fuel for the distance it travels. Air transport may not account for the consumption that the personal automobile does, but per mile and per person, air transport is incredibly energy intensive. The Airline companies will at first attempt to cover their losses in different ways. A few will raise random fees, for checking bags, for soda and peanuts, or raising the price of first class. Then when this does not cover their losses, ticket prices will go up. Ticket prices will eventually become to expensive for the middle class, and the airlines will get another bailout from the federal government to keep them afloat. In my personal opinion the executives at these airline corporations will use the bail out as their final paycheck and fold the business after receiving government largesse. But i could be wrong and this bailout could keep the airline companies afloat for awhile until they ask for another bailout. The only conceivable long term solution to having air transport is to make the airport corporations publicly owned, so they can run at a loss. This loss will be pretty big and only get bigger as the price of oil goes up. But it may cost less money than numerous federal government  bailouts(which are of course bullshit in this “free market”, but i guess you’re only a free marketer if it is helpful to your bottom line). With that the prelude to the fall:

http://www.chicagotribune.com/business/chicago-united-airlines-ual-buyouts-jun06,0,7208283.story

United to offer buyouts to 600 flight attendants

By James P. Miller | Tribune staff reporter

8:52 AM CDT, June 6, 2008

United Airlines said it reached agreement with its unionized flight attendants on a buyout plan that would allow up to 600 attendants to voluntarily leave the Chicago carrier.The UAL Corp. unit, which has disclosed plans to substantially cut its workforce and its fleet of jetliners as a way to cut costs during the industry’s current difficulties, said the “one-time opportunity” will be made available to attendants who are at least 45 years old and have at least 15 years of flight attendant service with United as of Aug. 1.

United didn’t provide details, beyond saying that flight attendants who opt to accept the package “will be entitled to severance payments based on years of service.”

The voluntary plan “will mitigate the impact of our announced capacity reductions,” said an official, adding that United intends to “continue to explore viable alternatives related to capacity reductions willall unions representing its employees.”

jpmiller@tribune.com

 

 

Stock market drops as a result of skyrocketing oil prices

“Meanwhile, the U.S. stock market plunged. The Dow Jones industrial average lost nearly 395 points, closing at 12,209.81. The Nasdaq plummeted 75 points…”

http://www.washingtonpost.com/wp-dyn/content/article/2008/06/06/AR2008060601169.html?hpid=topnews

Price of Crude Oil Up More Than $10 a Barrel

 

By William Branigin

Washington Post Staff Writer
Friday, June 6, 2008; 4:29 PM

 

The price of crude oil soared more than $10 today to a new record high of nearly $139 a barrel, as the prospect of even higher gasoline prices combined with other indicators to send jitters through the U.S. economy.

Light sweet crude for July delivery hit $139.12 a barrel in afternoon trading, up from $127.79 a barrel yesterday, before easing slightly to $138.54. Coupled with a $5.49 gain yesterday, today’s rise produced the biggest two-day gain for crude oil in the history of the New York Mercantile Exchange, news agencies reported.

Some analysts forecast that the price of a barrel of oil could hit $150 by July 4, causing even more pain at the pump for motorists during the peak summer travel months.

The oil price rise came on a day of heightened tensions in the Middle East, more bad news for the U.S. dollar on international markets and a spike in the nation’s unemployment rate.

Meanwhile, the U.S. stock market plunged. The Dow Jones industrial average lost nearly 395 points, closing at 12,209.81. The Nasdaq plummeted 75 points to close at 2,474.56, and the Standard & Poor’s 500-stock index lost 43 points, closing at 1,360.69.

The government reported today that unemployment rose to 5.5 percent in May, up from 5 percent the month before, as employers cut 49,000 jobs. It was the biggest monthly increase in the unemployment rate since 1986, the Associated Press reported, and the fifth straight month that employers have shed jobs.

The two-day surge in oil prices began yesterday after the president of the European Central Bank, Jean-Claude Trichet, suggested that the bank could raise interest rates, further weakening the U.S. dollar against the euro.

Adding to the upward pressure on oil was a statement by Israeli Transport Minister Shaul Mofaz that an Israeli attack on Iranian nuclear sites appears “unavoidable” if Iran continues what Israeli officials believe is a program to develop nuclear weapons. Mofaz, a former army chief and defense minister, is a deputy of Prime Minister Ehud Olmert and one of his main rivals

In addition, Israeli aircraft, tanks and ground troops pounded targets in the Gaza Strip today in retaliation for a mortar attack yesterday by Palestinian militants that killed an Israeli civilian. Olmert warned that he was seriously considering a larger incursion.

In New York, Ole Slorer, an analyst for Morgan Stanley, forecast that strong demand for oil in Asia could help drive crude oil to $150 a barrel by Independence Day, the AP reported. Other analysts echoed that sentiment.

James Cordier, president of a Florida-based trading firm, predicted that gasoline prices could rise to $4.25 a gallon by the end of this month, AP said. Americans now are paying an average of $3.99 a gallon for regular gasoline nationwide.

6/6/08 NYMEX Crude closes at $138.54, hits high of $139.12

“The surge followed a Morgan Stanley shipping analyst’s prediction that would reach $150 a barrel by July 4; a decline in the dollar and fresh tensions in the Middle East added to crude’s advance”

http://ap.google.com/article/ALeqM5gHs5OM3gFG_DytQQZFbWfgPT08MAD914P3M80

Stocks fall sharply on surge in oil, jobs data

By TIM PARADIS – 1 hour ago

NEW YORK (AP) — Wall Street plunged Friday on two troubling economic developments: oil prices that surged more than $10 a barrel to a fresh record and a jump in unemployment that was much larger than the market anticipated. The Dow Jones industrial average fell more than 360 points.

The decline in stocks also helped drive bond prices sharply higher as investors sought a more secure place for their money.

Crude oil has seen a huge rebound this week after falling amid a drop in demand for gasoline. The jump continued Friday; light, sweet crude set a high of $139.12 in after-hours trading on the New York Mercantile Exchange after settling at $138.54, a gain of $10.75 in the regular session. The surge followed a Morgan Stanley shipping analyst’s prediction that would reach $150 a barrel by July 4; a decline in the dollar and fresh tensions in the Middle East added to crude’s advance.

The soaring price of oil has intensified the market’s worries that ever-expensive fuel will lead consumers to curtail their spending on nonessentials. And because more than two-thirds of U.S. economic activity comes from consumer spending, oil is being seen as a threat to an already sluggish economy.

The spike in energy prices came as the Labor Department said the nation’s unemployment rate jumped to 5.5 percent in May from 5.0 percent in April. It was the biggest monthly increase since February 1986 and the rise leaves unemployment at it highest level since October 2004. Wall Street had predicted an uptick to 5.1 percent.

The number of U.S. jobs shrank by a smaller-than-expected 49,000, but that development offered Wall Street little solace given that May marked the fifth straight month of jobs losses. Signs that the U.S. job market is deteriorating more than anticipated could thwart investors’ hopes that the economy is poised for recovery later this year. That notion has helped propel the stock market from its mid-March lows.

The sudden rise in oil prices appeared to weigh most heavily on Wall Street, however, as some investors attributed a portion of the rise in unemployment to a rush of teenagers looking for summer work. The jump in oil also came after an Israeli Cabinet minister hoping to replace Prime Minister Ehud Olmert was quoted as saying Israel would attack Iran if it doesn’t abandon its nuclear program.

“I think the biggest concern right now is oil and it’s potential for a stagflationary environment,” said Bill Knapp, investment strategist for MainStay Investments, a division of New York Life Investment Management. Stagflation occurs when stalling growth accompanies rising prices.

In late afternoon trading, the Dow fell 365.58, or 2.90 percent, to 12,238.87.

Broader stock indicators also declined. The Standard & Poor’s 500 index fell 31.97, or 2.28 percent, to 1,372.08, and the Nasdaq composite index fell 57.43, or 2.25 percent, to 2,492.51.

Friday’s pullback comes a day after the Dow jumped nearly 214 points, its largest daily point gain since April 18 because of better-than-expected sales from retailers and a dip in weekly jobless claims. The welcome economic news helped investors shrug off a more than $5-a-barrel spike in oil prices. But the further advance in oil on Friday was too much for investors to overlook.

Bond prices jumped Friday after the weak jobs data sent investors scurrying for safety. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.92 percent from 4.04 percent late Wednesday.

The dollar declined against other major currencies — a move that makes each barrel of oil more expensive. Gold prices rose.

Knapp said that the stock market’s losses from the jump in oil and the jobs report Friday, while steep, have been somewhat more orderly than they might have been, say, in March when fears of a collapse in the banking system batted investors. He contends at least some investors are remaining cool because they believe some of rise in oil is unreasonable.

“The supply demand dynamics just don’t warrant where we are today. It’s becoming incredibly hackneyed to say it’s all coming from demand in China,” he said. “I think the consensus is that something is going to come along to deflate this commodity bubble and put the stock market back on track.”

And worries about employment and oil may be intertwined.

Ethan Harris, Lehman Brothers’ chief U.S. economist, contends that the employment report helped drive oil prices higher. He said traders are worried that the spike in unemployment would leave the Federal Reserve unwilling to raise interest rates. A notion of a Fed with few options combined with comments from the European Central Bank this week on the possibility of raising rates have hurt the dollar.

“The weaker dollar is pushing up oil prices because oil is denominated in dollars and oil sellers want to be compensated for the weaker dollar,” Harris said, adding that he thinks the market’s moves have been overdone.

“While I’m skeptical of the whole thing in terms of whether it makes sense logically, this is the way the market behaves. It’s like a Pavlovian response. If the Fed looks soft, oil prices go up,” he said.

Still, Harris said that even allowing for some variations from seasonal fluctuations, the findings were grim.

“The employment report was quite bad. You could argue that some of this rise was a big fluke related to teenagers entering the labor market. But that’s only part of the story. Most of it seems to be real. The labor market is very weak,” he said.

Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume came 1.06 billion shares.

The Russell 2000 index of smaller companies fell 15.94, or 2.09 percent, to 747.33.

Wall Street’s pullback weighed on Europe. Britain’s FTSE 100 ended down 1.48 percent, Germany’s DAX index fell 1.99 percent, and France’s CAC-40 lost 2.28 percent on the day. Japan’s Nikkei stock average closed up 1.03 percent; trading there ended before the release of the U.S. jobs report.

On the Net:

• New York Stock Exchange: http://www.nyse.com
• Nasdaq Stock Market: http://www.nasdaq.com

Major Wall Street banks are feeling increased congressional scrutiny as lawmakers seek a convenient villain for skyrocketing oil prices

The search for a scapegoat continues…

http://money.cnn.com/news/newsfeeds/articles/djf500/200806051748DOWJONESDJONLINE000875_FORTUNE5.htm

3rd UPDATE: US Rep Signals Deeper Scrutiny Of Large Oil Traders

June 05, 2008: 05:48 PM EST

Recasts lead, updates throughout.)

By Ian Talley

Of DOW JONES NEWSWIRES

WASHINGTON -(Dow Jones)- Major Wall Street banks are feeling increased congressional scrutiny as lawmakers seek a convenient villain for skyrocketing oil prices.

A top House Democrat, Rep. Bart Stupak, D-Mich., on Thursday complained oil and products markets were being “manipulated” by the biggest trading houses in the futures markets, though he said a probe hasn’t uncovered illegal activity.

In response to a reporter’s question, Stupak identified Goldman Sachs (GS) and Morgan Stanley (MS) as firms whose oil trading activities warranted closer review. The two firms quickly defended their conduct and Stupak later went on CNBC television to say no specific firms were under investigation.

The development comes as lawmakers have sought to show voters in an election year they are trying to act to identify and punish whoever is responsible for rising oil prices. Crude oil futures posted the biggest single-day gain in dollar terms in New York on Thursday, erasing a week of losses in one stroke, settling up $5.49 at $127.79 a barrel.

Though many analysts see considerable fundamental support for high oil prices, regulators and legislators alike are increasingly placing the blame for crude’s scorching run above $100 a barrel on what they perceive may be excessive financial speculation – a charge that’s hard to prove.

Stupak said initial results of his committee’s investigation into oil and product prices had found loopholes in current laws were allowing the biggest traders in the futures market to artificially inflate oil prices. He said the committee would hold a hearing to announce full results of the investigation on June 23.

“As our investigation goes further, we are really starting to unravel quite a web of – I am trying to say collusion, but I wouldn’t quite go that far – but you can certainly see manipulation of the price in places we’ve never seen before,” he said.

Stupak said the biggest traders were the “financial houses.” The congressman said large traders had “learned to game the system and maximize the profits.”

“I find it amazing that even Goldman Sachs said (oil prices) would be $200 a barrel,” said Stupak. “No one’s looking at them, they can drive it up to $200 a barrel.”

In a statement, Morgan Stanley said: “We fundamentally disagree with Congressman Stupak’s allegations that Morgan Stanley is manipulating the oil and products market. We are happy to meet with members of the House Energy and Commerce Committee regarding Morgan Stanley’s commodities business.”

Goldman Sachs spokesman Ed Canaday said the bank conducts its commodities sales and trading businesses “to the highest standards including all applicable regulations and exchange rules. We have rigorous policies and procedures including regular training designed to ensure that our activities comply with the rules that prohibit market manipulation.”

Stupak said he and other congressmen plan to file legislation next week that will target speculation through swap – or privately negotiated – deals, foreign exchanges and over-the-counter trades.

Eye On Swaps

Under scrutiny from lawmakers now are two rules that allow institutional investors to funnel billions of dollars into the crude futures market, far beyond the speculation limits imposed on trading on the New York Mercantile Exchange, owned by Nymex Holdings Inc. (NMX).

Maria Cantwell, D-Wa., Byron Dorgan, D-N.D., and Joseph Lieberman, I-Conn., are authoring legislation very similar to Stupak’s Prevent Unfair Manipulation of Prices, or PUMP, Act. Among the proposals, one would subject Nymex’s main competitor ICE Futures Europe, a unit of IntercontinentalExchange (ICE), to the same oversight as its New York counterpart. ICE offers contracts to trade crude in the U.S. but has been granted exemptions from the same rules governing the Nymex because it’s considered a foreign operator.

The U.S. Commodity Futures Trading Commission, which last week unveiled plans to beef up its own oversight of the markets and disclosed a broad crude-oil investigation, already plans to require more information from dealers of swaps, and obtain details on investment funds using them to track the returns of commodity indexes.

Because swap transactions are lightly regulated, little is known about the size of the market. On the Nymex, traders face position limits on futures contracts equal to three million barrels of crude oil in the last three days before the contract expires. But the Nymex rulebook allows traders who need to hedge their commodity swap exposure to apply for exemptions.

Some say this, coupled with the ICE exemption, creates an opening for investment funds to skirt position limits by placing swaps bets though Wall Street banks that have exemptions.

Stupak said current laws allowed excessive speculation that created artificial prices in energy futures markets.

“It’s not that they are doing anything criminally illegal…they are taking advantage where no one has ever looked before and when someone does take a look, there may be something illegal,” said Stupak.

Unlike stock markets, where trading on information unavailable to the broader market is illegal, commodities markets often turn on proprietary information known to a limited number people. An oil company can take advantage of inside information about its own production outlook when it makes trades. However, if traders intentionally create an artificial price and use it to make money, market manipulation charges may arise.

Goldman Sachs and Morgan Stanley are major players in the world of commodities, which range from trading to hedging and even owning electricity plants and oil barges. In the first quarter, Morgan Stanley calculated that it took more risks in commodities on a daily basis than in stocks.

-By Ian Talley, Dow Jones Newswires; 202 862-9285; ian.talley@dowjones.com

(Gregory Meyer contributed to this article.)

TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at TalkbackAmericas@dowjones.com. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.

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South Dakota Voters Approve What Could Be First New U.S. Oil Refinery in Decades

http://www.foxnews.com/story/0,2933,363121,00.html

ELK POINT, S.D. —  Voters in Union County on Tuesday approved rezoning for what would be the first new U.S. oil refinery in more than 30 years.

With all 13 precincts reporting, 3,932 voters, or 58 percent, endorsed their county commission’s rezoning of almost 3,300 acres north of Elk Point for the $10 billion refinery while 2,855, or 42 percent, opposed it.

The ballot measure garnered solid support in the southern part of the county, with the Dakota Dunes precinct voting in favor 1,017-237 and the one containing North Sioux City approving the ordinance 492-184.

Most rural precincts strongly rejected the rezoning, but they didn’t have the population numbers to overcome support in the county’s largest towns.

Also backing the refinery were voters in the city of Alcester and in the city of Elk Point, which hosted several hours-long, controversial public hearings on the project.

Preston Phillips, a project executive for Texas-based Hyperion Resources, said he was ecstatic with the outcome.

“We’ll continue to work with everyone in the county,” he said. “We want to be a good corporate citizen. We want to be a good corporate neighbor.”

Despite the approval of the rezoning, Phillips said Elk Point still is not the only site being considered and that the site selection process will continue.

“Any big project like this has to have options,” he said.

Hyperion Resources had said it would leave Union County without a fight if voters rejected the rezoning.

Jason Quam of the group Citizens Opposed to Oil Pollution said late Tuesday his group will sit back and evaluate its next steps.

“It’s going to be a long road before anything’s done on it,” he said of the refinery.

The vote was just one stop in a long process and must go through numerous environmental permitting steps, he added.

Quam also said he doubts the company has the financing to get the refinery built.

Mike Curran, who voted against the zoning change, said the company offered few specifics and instead embarked on a public relations pitch to sell the refinery. He said that when a representative called asking for his support, they couldn’t give direct answers to any questions.

“As far as I see they never told as anything about it,” said Curran, who lives just east of Elk Point.

Kim Hall said she was thinking about jobs when she cast her “yes” vote in downtown Jefferson Tuesday afternoon.

She said a project of that size would bring not just refinery and construction jobs but also would spawn new positions for teachers, police and other professionals. Teens graduating high school in Union County need good-paying jobs if they’re going to settle in the area, she said.

“Everybody leaves, and it would be nice to have something for them to put to use their degrees and stay in the area,” Hall said.

Elk Point Mayor Isabel Trobaugh said it was odd to have such a spotlight cast on her small town, but she said she was impressed with the high voter turnout.

“We’re just a quiet little town,” she said. “This is really exciting.”

Trobaugh said the refinery would bring needed jobs to the county and that she didn’t think it would harm the environment.

She said she talked to the mayors of Ponca City, Okla., and El Dorado, Kan. — both towns with oil refineries — and both assured her their communities had clean air and water.

The refinery is proposed for land just east of Interstate 29 between state highways 48 and 50.

Company executives said it would help the United States reduce its dependence on overseas oil. The refinery would process 400,000 barrels of thick Canadian crude a day,

The company petitioned to put the issue on the ballot after the Union County Commission approved the rezoning in March.

Supporters cited economic development benefits from the refinery. Hyperion officials said the project would mean 1,800 permanent jobs and another 4,500 construction jobs over a four-year period.

Hyperion called it a “green refinery” and said it would produce ultra-low sulfur gasoline and diesel and be among the cleanest and most environmentally friendly in the world.

Opponents raised environmental and quality-of-life concerns, but one project executive said the refinery will have the lowest emission levels of any U.S. refinery and will improve the quality of life for the area.

According to an air quality permit application filed with the state, the center each year would emit nearly 2,000 tons of carbon monoxide, 773 tons of nitrogen oxides, more than 1,000 tons of particulate matter, 863 tons of sulfur dioxide and 473 tons of volatile organic compounds. It would also generate 17.2 million metric tons of carbon dioxide each year.

The South Dakota governor’s office has supported the proposal.

Opponents have noted the high-level support and the backing from economic development groups but said the local people would be the ones deciding the rezoning.

Critics of the proposal hit hard on the quality of life issue, saying an oil refinery would produce millions of pounds of toxins during its lifetime. They also said it seemed as if the state and local governments allied themselves with Hyperion and had not asked critical questions.

Plans called for construction to begin in 2010 and last about four years.

India concedes in battle to keep oil price down

“Economists said that the move could derail economic growth in the region, stoke inflation and influence Indian elections. “

http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article4076099.ece

The Times

June 6, 2008

Rhys Blakely in Bombay

India is the latest Asian country to admit defeat in its battle to shield its population from rising oil prices.

The Indian Government raised petrol prices by 11 per cent to stem losses, running at an estimated £50 million a day, suffered by the country’s state-owned petrol companies. The price of diesel was increased by 9per cent and cooking gas 17 per cent.

Economists said that the move could derail economic growth in the region, stoke inflation and influence Indian elections.

Caps on petrol prices have crumbled in countries including Indonesia – which raised fuel prices by nearly a third last month – Taiwan, Pakistan and Sri Lanka. China is considering lifting the oil price threshold at which oil companies pay windfall taxes,which could lift some pressure on what consumers pay for fuel.

Oil fell below $123 a barrel on Wednesday, to its lowest in nearly three weeks, after strong US inventory figures and the expectation that Asian fuel price rises will curb demand.

India’s price rises will increase pressure on the country’s ruling coalition, led by the Congress Party, which has suffered local election defeats ahead of a general election that must be held before May 2009.

Manmohan Singh, the Indian Prime Minister, said the move was inevitable: “Our oil companies cannot go on incurring losses. They will have no money to import crude oil from abroad.”

Economists at Lehman Brothers said higher petrol costs would help to lift India’s wholesale rate of inflation to 8.5 per cent, a 13-year high, and well above policy makers’ 5 per cent comfort threshold.

Sonal Varma, the Lehman economist, said: “Higher fuel prices are negative for growth, weakening consumer demand, squeezing producer margins and increasing costs.”

The main opposition Bharatiya Janata Party said: “If fuel price increases are inevitable, then the exit of the Prime Minister and his Government is inevitable as well.”

 

supporting the region’s hard dollar exchange-rate pegs, while the Bush administration simultaneously blasts Asian countries for not letting their currencies appreciate faster against the dollar?

http://www.dailystar.com.lb/article.asp?edition_id=1&categ_id=5&article_id=92746

It’s no time for oil currency hypocrisy from the US
By Kenneth Rogoff
Commentary by
Thursday, June 05, 2008

Does it make sense for US Treasury Secretary Hank Paulson to be touring the Middle East supporting the region’s hard dollar exchange-rate pegs, while the Bush administration simultaneously blasts Asian countries for not letting their currencies appreciate faster against the dollar? Unfortunately, this blatant inconsistency stems from the United States’ continuing economic and financial vulnerability rather than reflecting any compelling economic logic. Instead of promoting dollar pegs, as Paulson is, the US should be supporting the International Monetary Fund’s behind-the-scenes efforts to promote de-linking of oil currencies and the dollar.

Perhaps the Bush administration worries that if oil countries abandoned the dollar standard, today’s dollar weakness would turn into a rout. But the US should be far more worried about promoting faster adjustment of its still-gaping trade deficit, which in many ways lies at the root of the recent sub-prime mortgage crisis. The administration’s multi-pronged effort to postpone pain to US consumers, including super easy monetary and fiscal policy, only risks a greater crisis in the not-too-distant future. It is not at all hard to imagine the whole strategy boomeranging in early 2009, soon after the next US president takes office.

Of course, a strengthening of the oil currencies (including not only the Gulf states, but also other Middle East countries and Russia) would not turn around the US trade balance overnight. But oil countries do account for a large share of the world’s trade surpluses, and a weaker dollar would help promote US exports to some degree, even in the short run.

More importantly, it is imperative for US policies to be consistent across regions. How can the US Treasury, on the one hand, periodically flirt with labeling China a “currency manipulator” and, on the other hand, condone a similar strategy in oil-exporting countries?

Of course, one can imagine other reasons for US supplication to the oil states. Perhaps the administration worries that it cannot simultaneously beg for lower dollar oil prices and help promote a weaker dollar. But, contrary to popular opinion, the two actually have little to do with each other. Oil prices are set in a world market and depend mainly on the quantities demanded and supplied by different regions, not the currency of payment. It is not at all clear that the dollar price of oil would evolve any differently if the euro, rather than the dollar, were the reference currency.

Paulson has emphasized that the US is “open for business” from sovereign wealth funds. One can hope that his confidence is justified. There is no cause for the US to place any significant new restrictions on sovereign investments in the US beyond those that it already has on trade. Besides, the US needs these investments to help re-capitalize its badly weakened financial system. However, even if we can agree on keeping the US open to sovereign wealth fund investments, that is no reason for promoting exchange-rate policies that exacerbate the very trade imbalances that are driving the whole sovereign wealth fund phenomenon in the first place.

 

Then again, perhaps the Bush administration is worried that if the oil currencies strengthen too much against the dollar, it will start becoming too expensive for the US to scale up its military operations in the Middle East. This, too, is wrong-headed. If a cheaper dollar leads to an invasion of US exports to the Middle East and rising living standards in the region, all parties will be far better served.

What about the interests of the oil countries themselves? Are they right to fear potentially catastrophic results from abandoning the dollar?

As with China, these concerns are overblown. Even with the prevalence of dollar indexation across the region, exchange-rate appreciation would still help promote cheaper imports and higher living standards. Moreover, as public confidence in the de-linked oil currencies increases over time, dollar indexation of private contracts will diminish, and currency movements will have a greater impact on overall prices.

More immediately, inflation across the oil states is soaring today, with CPI inflation in the Middle East averaging more than 6 percent after years of relative stability. If this inflation is allowed to continue and deepen, it is likely to have effects easily as pernicious as the exchange-rate appreciation the region’s leaders are striving so hard to avoid.

Perhaps the most important positive effect of exchange-rate appreciation would be to help promote the development of domestically-oriented industries such as health care, education, and banking, thereby alleviating some of the region’s mass underemployment.

To be sure, there are important differences between the oil exporters and the Asian economies. With world energy prices at record highs, it makes sense for oil economies to run surpluses, thereby saving for when oil supplies eventually peter out. But flexible exchange rates are still the right way for the region to develop a more balanced economic and financial base. As for the US, it makes little sense to support dollar currency pegs in any large emerging market, at least until its trade balance normalizes.  This is no time for oil currency hypocrisy.

 

Kenneth Rogoff is a professor of economics and public policy at Harvard University, and was formerly chief economist at the International Monetary Fund. THE DAILY STAR publishes this commentary in collaboration with Project Syndicate (c) (www.project-syndicate.org).