The oil price

Recoil

Painful though it is, this oil shock will eventually spur huge change. Beware the hunt for scapegoats

IN THE early 1970s a fourfold rise in the price of oil almost brought the world to a standstill. The shock of the Arab embargo left a deep mark in many countries: America subjected its cars to fuel-efficiency standards, France embraced nuclear power—though sadly shoene rukku, or “energy-conscious fashion”, the inspiration for Japan's fetching short-sleeved business suit, was ahead of its time.

Thirty-five years on, oil prices have quadrupled again, briefly soaring to a peak of just over $135 a barrel. But, so far, this has been a slow-motion oil shock. If the Arab oil-weapon felt like a hammer-blow, this time stagnant oil output and growing emerging-market demand have squeezed the oil market like a vice. For almost five years a growing world shrugged it off. Only now is it recoiling in pain.

This week French fishermen clogged up the port of Dunkirk and British lorry-drivers choked roads into London and Cardiff. Nicolas Sarkozy, France's president, suggested subsidising the worst affected and curbing taxes on petrol; Britain's beleaguered government is being pressed to forgo its tax increases on motorists. In America falling house prices have left consumers resentful—and short of money. Congress and presidential candidates have been drafting schemes and gas-tax holidays like so many campaign leaflets.

Gordon Brown, Britain's prime minister, thinks the big oil producers can be persuaded to come to the rescue. But only Saudi Arabia shows any enthusiasm for that. Elsewhere, output is growing agonisingly slowly. That is causing hardship and recrimination. But it could also come to represent an opportunity. The slow-motion shock seems irresistible today, but in time it will give rise to an equally unstoppable and more positive slow-motion reaction (see article).

Action replay

It is clear that high oil prices are hurting many economies—especially in the rich world. Goldman Sachs reckons consumers are handing over $1.8 trillion a year to oil producers. The wage-price spiral of the 1970s has been avoided, but the income shock is painful. Beset by scarce credit, falling asset prices and costly food, developed-country households are hardly well-equipped to foot the oil bill. America's emergency tax rebate, voted this year to help people cope with the credit crunch, has in effect been taken right away again.

Stuck for answers, politicians have been looking for scapegoats. Top of the list are the speculators profiting from other people's hardship. Some $260 billion is invested in commodity funds, 20 times the level of 2003. Surely all that hot money has supercharged the demand for oil? But that is plain wrong. Such speculators do not own real oil. Every barrel they buy in the futures markets they sell back again before the contract ends. That may raise the price of “paper barrels”, but not of the black stuff refiners turn into petrol. It is true that high futures prices could lead someone to hoard oil today in the hope of a higher price tomorrow. But inventories are not especially full just now and there are few signs of hoarding.

If the speculators are not to blame, what about the oil companies, which have failed to increase output in spite of record profits? Profiteering, say some. However, that accusation doesn't stand up to much scrutiny either. The oil price is set in a market. For Shell, Exxon et al to hoard oil underground would be to leave billions of dollars of investment languishing unused. Others fear that oil is pricey because it is running out. But there is little evidence to support the doctrine of “peak oil” in its extreme form. The Middle East still seems to contain a sea of the stuff. Even if new finds elsewhere have been rarer and less accessible than in the past, vast quantities of oil could now be profitably stripped from tar sands and shale.

The truth is more prosaic. Finding and developing new oil fields is an expensive and time-consuming business. The giant new fields in the deep water off Brazil are unlikely to produce oil for a decade or more. Furthermore, oil is perverse. When prices are low, oil-rich countries welcome the low-cost, high-tech and well-capitalised oil firms. When prices are high, countries like Russia and Venezuela kick them out again. Likewise the engineers, survey ships and seismic rigs that oil firms need to find and produce new deposits are expensive right now. The costs of finding oil have, temporarily, doubled precisely because everybody wants to give them work.

Hope at the bottom of the barrel

So the oil shock will take time to abate. Some greens may welcome that, seeing three-figure oil as a way of limiting greenhouse emissions. Conservation will indeed increase. But everything high prices achieve could be done better by sensible carbon taxes. As well as curbing oil use, high prices have put tar sands in business which create far more carbon dioxide than conventional oil. Profits are going to ugly oil-fed regimes, not Western exchequers. And the wild unpredictability of prices will blunt the effect of dear oil on people's behaviour.

From this perspective, governments should speed up the adjustment—or at least stop delaying it. Half the world's people are sheltered from fuel prices by subsidies—which, perversely, have boosted demand and mostly benefited the better off. Now countries like Indonesia, Taiwan and Sri Lanka have begun to realise that they can ill afford this. Cutting fuel taxes in the rich world makes no sense either (see article). There are better ways to return cash to struggling voters.

The 1970s showed how demand and supply, inelastic in the short run, eventually give rise to conservation and new production. When all those new fields are on-stream, when the SUVs have been sold and the boilers replaced, the downcycle will take hold. By then the slow-motion oil shock could have catalysed momentous change. Right now motorists have no substitute for oil. But it is no coincidence that car companies are suddenly accelerating their plans to sell electric hybrids that are far cheaper to run than petrol or diesel cars at these prices. The first two oil shocks banished oil from power generation. How fitting if the third finished the job and began to free transport from oil's century-long monopoly.

McCain Bid to Save Reformer Role May Falter Amid Lobbyist Ties

May 30 (Bloomberg) -- John McCain became livid when he learned that two top campaign officials had worked as lobbyists for the military dictatorship in Myanmar. He banished them and ordered up ``the most comprehensive and most transparent'' guidelines governing lobbyists in a presidential campaign.

``I didn't like it,'' McCain told reporters. ``Saw a problem; fixed it.''

Not without real costs. McCain has lost five top aides amid suggestions that his campaign was dominated by lobbyists, a shakeup that's created tension among remaining staffers; his image as a crusader against ``special interests'' has been tarnished; and his response to the first rough patch of his general-election race leaves him vulnerable to further attacks, because lobbyists and former lobbyists continue to help his candidacy, including as fundraisers.

``While McCain is probably in the 20 percent or so of members of Congress most concerned about ethics and cracking down on lobbyists' influence, virtually no member is as clean as he claims to be,'' said political analyst Charlie Cook.

McCain, 71, says he isn't worried, even though his top two remaining aides -- manager Rick Davis and strategist Charlie Black -- are former lobbyists whose clients included dictators.

``They've been out of that business,'' said the Arizona senator and presumptive Republican presidential nominee.

`Everybody's in Compliance'

McCain's May 15 guidelines ban all registered lobbyists and foreign agents from the campaign.

Lobbyists may serve as part-time volunteers on advisory committees. They are barred from lobbying McCain or his staff during the campaign and from any role in policy-making on matters related to their registered field of lobbying. ``Everybody's in compliance with the policy,'' said spokesman Brian Rogers.

Still, the issue continues to plague the campaign.

In a sign of the heightened sensitivity toward lobbying ties, McCain's usually chatty senior staffers, including Black, refuse to discuss the matter, referring questions to Jill Hazelbaker, the communications director.

McCain is also keeping a distance from his traveling press corps, whom he once playfully described as ``my base.''

Since mid-May, when the controversy flared, McCain has often barred reporters from joining him in the back of his ``Straight Talk Express'' bus -- as they used to do, sometimes for hours at a time. On a May 21 cross-country flight, he never ventured near the back of his jet, where reporters sit.

`Transparent Policy'

During a May 19 press conference, when asked repeatedly why he hadn't shown concern sooner about the influence of lobbyists, McCain looked ahead and delivered virtually the same words: ``We have enacted the most comprehensive and transparent policy of any presidential campaign in history.'' He challenged Democratic presidential front-runner Barack Obama to ``adopt the same policy.'' During McCain's third repetition, most reporters stopped taking notes.

To be sure, lobbyists understand how to work the levers of power -- an asset to presidents. Dealing with them presents a balancing act between using their expertise and looking compromised.

``We took that into consideration when we drafted the guidelines,'' Hazelbaker said. ``Lobbyists are not bad people; they have a constitutional right to lobby the government.''

Obama has had his own snags in dealing with lobbyists. Earlier this week, the Washington Post reported that the Illinois senator's campaign co-director in Puerto Rico is a federal lobbyist. A campaign spokesman said Francisco Pavia is a volunteer, so his presence doesn't violate Obama's guidelines, which ban lobbyists from working on staff.

Lobbying for Junta

McCain issued his rules after Newsweek magazine on May 10 revealed that Doug Goodyear, hired to manage the Republican convention this summer, is chief executive officer of DCI Group, a consultancy that earned $348,000 in 2002 representing Myanmar's junta. At the same time, Doug Davenport, a regional campaign director, was ousted because of his work for that country.

Three other aides have departed, most notably former Texas Representative Tom Loeffler, the campaign's national finance co- chairman, whose lobbying firm had represented Saudi Arabia.

Many lobbyists continue to promote McCain's election. Among them are seven fundraisers who have each brought in at least $250,000 for the campaign, including Stanton Anderson, senior counsel to the CEO of the U.S. Chamber of Commerce.

Phil Gramm, Lobbyist

Until recently, former Texas Senator Phil Gramm, a vice chairman of UBS Securities LLC, was registered to lobby for the bank while advising McCain. He's no longer a registered lobbyist.

Black retired from his lobbying firm, BKSH & Associates, to remain with McCain's campaign. His previous clients included former Philippines dictator Ferdinand Marcos and Zaire strongman Mobuto Sese Seko.

Davis remains an owner of Davis Manafort Inc., which has represented the government of Nigeria. He also represented companies such as BellSouth Corp. and Verizon Communications Inc., even as McCain headed the Senate Commerce Committee.

McCain's lobbying policy ``misses the mark,'' said David Donnelly, director of nonpartisan Public Campaign Action Fund's Campaign Money Watch.

``If he depends on those who will lobby his administration for raising money,'' Donnelly said, ``he will owe them favors.''

Black, in a May 19 airplane conversation before campaign aides began stiff-arming the press on the issue, dismissed such talk as ``complete inside-the-Beltway nonsense.''

U.S. Economy: Consumer Spending Growth Slowed to 0.2% in April

May 30 (Bloomberg) -- U.S. personal spending slowed in April after record fuel costs, a slump in home values and a deteriorating job market hammered consumer confidence.

The 0.2 percent gain in spending followed a 0.4 percent increase in March, the Commerce Department said today in Washington. Incomes grew 0.2 percent, bolstered in part by the government's tax rebates. Separate reports showed business activity dropped for a fourth month in May and consumer sentiment decreased to the lowest level since 1980.

Retailing stocks slumped after the figures reinforced forecasts for spending growth to slow this quarter to the weakest pace since 1991. J.Crew Group Inc., the casual-clothing retailer, reduced its earnings forecast late yesterday, citing a nationwide drop in the number of shoppers visiting its stores.

``Consumers are spending cautiously,'' said Michael Moran, chief economist at Daiwa Securities America Inc. in New York, who correctly forecast the gain in spending. ``The economy is in a grey area between recession and slow growth.''

Treasuries rallied, sending benchmark 10-year note yields down to 4.03 percent at 9:55 a.m. in New York, from 4.08 percent late yesterday. The Standard & Poor's 500 retailing index dropped 0.8 percent to 401.27.

The Federal Reserve's preferred measure of inflation, which excludes food and fuel costs, slowed in April, today's Commerce report showed. The gauge rose 0.1 percent, compared with a 0.2 percent increase the previous month.

The Reuters/University of Michigan final index of consumer sentiment decreased to 59.8, the lowest level since June 1980, from 62.6 in April. The measure averaged 85.6 in 2007.

Spending Forecast

Deteriorating confidence indicates that government tax rebates may only provide a temporary boost to economic growth in coming months. Economists forecast consumer spending gains will slow to a 0.5 percent annual pace this quarter, the weakest since 1991, from a 1 percent pace in the first three months of the year.

``Consumers are really very downbeat,'' Richard Iley, senior economist at BNP Paribas SA in New York, said in an interview with Bloomberg Television.

Economists forecast spending would rise 0.2 percent, according to the median of 73 estimates in a Bloomberg News survey.

Incomes were forecast to rise 0.1 percent, according to the survey. The increase masked the first drop in employee compensation since April 2007.

Inflation Eases

The central bankers' preferred gauge of prices was up 2.1 percent from April 2007, matching the 12-month increase in March.

Adjusted for inflation, the figures used in calculated gross domestic product, spending was unchanged after a 0.1 percent gain the prior month, the report showed.

Disposable income, or the money left over after taxes, increased 0.2 percent, after increasing 0.3 percent the previous month.

The economy grew at a 0.9 percent annual rate in the first quarter, more than previously estimated, as the trade deficit shrank to a five-year low, revised Commerce figures showed yesterday. Consumer spending rose at a 1 percent pace last quarter, the smallest gain since the 2001 recession.

The surge in food and fuel expenses is causing Americans to become more budget conscious. Wyndham Worldwide Corp., the franchiser of Ramada and Super 8 hotels, said customers are taking advantage of discounts.

``People are probably wary of the economy, wary of food and gas prices being higher, and looking to economize,'' Chief Executive Officer Stephen Holmes said in a Bloomberg Television interview last week.

Autos, Furniture

Inflation-adjusted spending on durable goods, such as autos, furniture and other long-lasting items, dropped 0.2 percent after decreasing 1.3 percent. Purchases of non-durable goods fell 0.2 percent after increasing 0.5 percent.

Spending on services, which account for almost 60 percent of all outlays, increased 0.1 percent for the second month.

The government is counting on its economic stimulus initiative to revive growth. The Treasury last week said it sent $4.9 billion in tax rebates in the fourth week of the program, raising the total distributed so far to $45.7 billion.

The extra money may not bring much relief. Households will spend about $90 billion more this year on gasoline if fuel prices remain at current levels, according to a forecast by economists at Credit Suisse Holdings in New York. That will consume about 80 percent of the more than $110 billion in rebate checks being sent.

Tiffany Outlook

Tiffany & Co., the world's second-largest luxury-jewelry retailer, today forecast full-year earnings that may beat analysts' estimates on a surge in jewelry sales abroad and foreign-tourist spending in the U.S.

First-quarter sales at U.S. stores open at least 12 months were unchanged from a year earlier, with a 4 percent decline at its locations outside the main store in New York. Chief Executive Officer Michael Kowalski said in a statement that conditions were ``challenging'' in the U.S. and that he didn't expect an improvement until later this year.

Other companies, while seeing no indication of a rebound in spending, are also not seeing any further deterioration.

Estee Lauder Cos., the maker of Clinique and Bobbi Brown cosmetics, said its full-year earnings will be higher than it estimated in February.

``We see no indication at the moment that consumer spending is improving, but we don't see anything that it's getting worse,'' Chief Executive Officer William Lauder said in a May 6 phone interview.

Brown's Labour Party Slumps to Record in U.K. Poll (Update2)

May 30 (Bloomberg) -- Prime Minister Gordon Brown's Labour Party is more unpopular than it's ever been since polling began in the U.K. in 1943, YouGov Plc said.

Support for the ruling party fell 2 points from a month ago to 23 percent, compared with 47 percent for the Conservative opposition, a survey by the London-based researcher showed. The reading is the lowest ever recorded by a pollster for Labour.

Brown's popularity is evaporating as the economy slows and food and fuel prices rise. In the 11 months since taking over from Tony Blair, Brown has angered voters by proposing higher taxes on gasoline and cars and eliminating the lowest income tax band, forcing 5.3 million of the poorest households to pay more.

``The economy is huge, but it's also that Brown lacks the ability to get over problems as they come up,'' said Anthony Wells, a polling analyst at YouGov. ``He doesn't have the easy charm Blair has, the ability to laugh them off.''

The closest any post-war Labour leader has come to Brown's current rating is Michael Foot, who led the party in opposition against Margaret Thatcher's government in the early 1980s. Gallup polls show backing for both Foot and Thatcher fell to just above 23 percent in 1981 after Labour lawmakers left the party to form an alliance with Liberals.

Economic Slowdown

Britain's economy may grow at the slowest pace this year since the last recession ended in 1991, according to the International Monetary Fund. Consumer confidence dropped in May to the lowest level since Thatcher was ousted from office in 1990 as people worried about the prospect of a recession, another poll by GfK NOP Ltd. showed today.

``There is a mood about that the U.K. is very gloomy,'' Rachael Jolley of the Fabian Society, which helped found the Labour Party in 1900, said in a Bloomberg Television interview. ``When you're in a downturn it's easy for everyone else to turn against you.''

Jolley said the Labour Party is ``at least 12 months away'' from taking action to replace Brown if his poll ratings don't improve. She said lawmakers are looking for Brown to ``come out of his cave'' and to communicate better with voters.

Historic Parallel

In the months before the Conservative Party ousted Thatcher in 1990, her lowest poll rating was 28 percent. John Major, her successor, recovered and went on to win the 1992 election. His support dipped to 20.4 percent in December 1994. When the election came 2 1/2 years later, Blair won by a landslide.

The best comparison for Brown may be James Callaghan, the Labour prime minister who inherited office from Harold Wilson and went on to govern through three years of economic turmoil.

Callaghan's backing sank to 33 percent in February 1979 as strikes buffeted the economy and The Sun newspaper portrayed him as out of touch. On his return from a conference in the Caribbean, the newspaper put a tanned Callaghan on the front page with the headline ``Crisis? What Crisis?'' In May that year he lost the only election he fought as party leader to Thatcher.

A week ago, Labour lost a parliamentary seat in a constituency it has held since World War II. On May 1, it placed third in elections for local government seats in England and Wales, trailing the Conservatives and Liberal Democrats.

Labour lawmakers hoping to keep their own seats will discuss ways to revive the government at their next routine meeting on June 2. Brown is not planning to attend.

Brown's Stewardship

Voters are questioning the way Brown has handled the economic turbulence. In his last budget as chancellor in March 2007, Brown eliminated the lowest band of income tax, forcing the poorest earners to pay more. Chancellor of the Exchequer Alistair Darling proposed ways to soften that impact this month.

The Treasury also plans to raise fuel duties in line with inflation and to double the annual tax on some of the most polluting cars. At least 35 Labour lawmakers have signed a petition objecting to that move.

``There are 23 million motorists out there, and they'll break their attachment to politicians before they break their attachment to the motor car,'' Labour lawmaker Stephen Ladyman said today on BBC Radio 4. ``If we're going to win them over to our side, we have to be a bit more canny about it than we have in the past.''

Three quarters of the 2,240 voters surveyed by YouGov said they were dissatisfied with the government. The portion saying the Labour Party is likely to run the economy well has dropped to 22 percent from 49 percent in 2005.

When asked who would make the best prime minister, 39 percent of those surveyed named Conservative Party leader David Cameron, an increase of 7 points in the last month. The portion answering Gordon Brown fell 2 points to 17 percent. YouGov conducted its survey between May 27 and May 29. No margin of error was given.

S&P 500 Rises, Led by Technology, Energy Shares; Dell Climbs

May 30 (Bloomberg) -- U.S. stocks rose, sending the Standard & Poor's 500 Index to its second straight monthly advance, after better-than-forecast earnings at Dell Inc. and a rebound in oil prices led technology and energy shares higher.

Dell, the second-largest maker of personal computers, rallied the most since November 2006. Exxon Mobil Corp. and ConocoPhillips climbed as crude increased following its biggest drop since March. Gains were limited as higher energy prices and weaker consumer spending dragged down retailers and transportation shares.

The S&P 500 added 4.25, or 0.3 percent, to 1,402.51 at 10:39 a.m. in New York, bringing its return for the week to 1.9 percent. The Dow Jones Industrial Average climbed 29.23 to 12,675.45. The Nasdaq Composite Index rose 14.5, or 0.6 percent, to 2,522.82. About the same number of stocks gained as fell on the New York Stock Exchange.

``We like energy stocks, the demand and supply dynamics over the long term are very favorable,'' said Alan Gayle, the Richmond, Virginia-based senior investment strategist at RidgeWorth Capital Management, which oversees $74 billion.

The S&P 500 extended its May advance to 1.2 percent, adding to a 4.8 percent gain in April that followed five straight months of declines. The Dow average added 1.6 percent this week, paring its monthly retreat to 1.1 percent. The Nasdaq increased 3.3 percent in the week and 4.7 percent in May.

Dell Rally

Dell soared 8.9 percent to $23.76. Profit was 38 cents a share, exceeding the 33-cent average of estimates compiled by Bloomberg. Revenue from Asia climbed 19 percent and 15 percent in Europe, the Middle East and Africa, pushing total sales to $16.1 billion.

Merrill Lynch raised its recommendation to ``buy'' from ``neutral.'' Goldman Sachs Group Inc. lifted its price estimate on the stock 13 percent to $26, while Bank of America Corp. increased its projection 21 percent to $29.

Marvell Technology Group Ltd. rallied 23 percent to $17.34. The maker of telecommunications chips for the BlackBerry and Apple Inc.'s iPhone reported first-quarter profit and sales that beat analysts' estimates.

Technology stocks in the S&P 500 climbed 0.9 percent and contributed the most to the market's gains.

Energy shares rose 0.6 percent as a group. Exxon Mobil, the biggest U.S. oil producer, climbed 27 cents to $89.62. ConocoPhillips, the No. 3, added $1.36 to $92.32.

Bruce McCain, the Cleveland-based head of investment strategy at Key Private Bank, which oversees about $30 billion, said in an interview on Bloomberg Television that he is investing in technology companies, which had the second-highest first- quarter earnings growth after energy firms.

`Less Defensive'

He's avoiding health-care and consumer staples companies in ``an effort to be less defensive as we look forward to the end of the year and the prospect of an improving economy.''

The 468 companies in the S&P 500 that have reported quarterly results since April 7 have posted an 18 percent average decline in earnings, dragged down by an 88 percent retreat in profits at financial companies. Excluding financial firms, earnings gained 7.7 percent, boosted by a 26 percent climb by energy companies and an 11 percent gain for technology stocks.

American International Group Inc., the world's largest insurer, climbed 3 percent to $36.42 after Morgan Stanley upgraded the stock to ``overweight'' from ``equal-weight.''

``While it is clear AIG continues to face several challenges, the recent stock-price decline looks overdone,'' analysts including New York-based Nigel Dally wrote in a note to clients today. AIG shares have fallen 28 percent since May 2.